Escape From Pianosa

I grew up naïve. I believed that everyone was decent. More importantly, I believed that people meant what they said. I mean, why would you say something if you didn’t mean it? It just doesn’t make sense to me.

I realized that my model of the world was askew when I entered real estate and I started meeting a new class of people…

People who swear up and down that they are ready to buy today, but clearly have no idea what they’re doing.

Like the lady who said she was ready to buy. Today. All cash. Just have to see the property… and estimated its repairs at $300,000.

I said “really? $300,000? For the ugly half of a 900 square foot duplex? How did you come up with that number?” She told me that she spent $40,000 to renovate her garage, so ya know, just extrapolating.

Or the contractors who rob people blind.

Or the people who sign contracts and then disappear (even after giving you a large deposit).

Or the tenants who seem normal at first and then spiral off into increasingly erratic and bizarre behavior (like the tenant in this story).

Why are relationships so important in business? (I don’t know Mr. Trump, why don’t you tell us?) Because it’s so hard to find people you can trust. Yeah I know it’s trite, but all the flakes, hucksters and time-wasters can cost you so much time and money that the trustworthy, conscientious people are worth that much more.

The problem is obvious—it’s too easy to get away with craziness or dishonesty.

What we need is a rating system, like eBay—with everyone’s rating hovering over their head like a halo. Every time you do good, you get a green plus sign. Every time you screw someone over, you get a big red minus sign.

Until then, find people you can trust, and hold onto them!

In my last post, I linked to the now quasi-famous Casey Serin, a young investor in California that got in way over his head. At age 24 he bought 8 houses in 8 months with no money down and proceeded to make a whole lot of mistakes. Being leveraged to the hilt is never safe, and can end in disaster when the market sours.

What fascinates me though, is the attitude and the general nastiness of the commenters on his blog. I often see the same attitude on real estate “bubble blogs” that track the decline in the real estate market. Why is it that some people seem to take so much pleasure when prices decline? Why are some people so happy to see others lose their shirt?

Casey obviously made some major mistakes, which he freely admits, and there’s no doubt that he’s going to pay dearly for those mistakes, most likely through bankruptcy. I hate to think that some people would look at his experience and say “see, investing is too risky.” Yes, it is when you’re reckless. Driving a car at 120mph blindfolded is risky too, but that doesn’t mean you shouldn’t drive.

Rents are up around the U.S.:

In the quarter ended Sept. 30, the average advertised rent reached $978, up 3.9 percent over the year-ago period, according to an analysis of 75 markets by real estate research firm Reis Inc. in New York…

Meanwhile, the nationwide vacancy rate for rental housing dropped to 5.4 percent during the quarter from 6.7 percent in the same period of 2004.

The ‘traditional’ model of building wealth through real estate is based on buying properties that have good cash flow, building equity as you pay off the mortgage, and gradually increasing the size of your portfolio. The current market will only get better for those types of investors as prices fall and rents rise.

On the other hand, investors who only have one strategy for making money, i.e. rehabbing and selling, will have to adjust quickly and learn new strategies. The ones that refuse to see the light or the ones that don’t have enough cash to weather the changes in the market might end up like this guy.

HT: The Real Estate Bloggers.

Prices in Baltimore have gone up to record levels recently but the city is still a great deal for Washington, DC workers who want to enjoy the vibrancy and culture of a large city without paying a king’s ransom for a house.

This article in the Examiner highlights some DC workers who have made the move to Baltimore and shows the gaping difference in home prices between the two cities:

“In the first nine months of 2005, the average sale price for a home in Washington, D.C., was $517,743, based on Metropolitan Regional Information Systems data.

In Baltimore, the average sale price was $154,064.”

Pretty big difference. Now if only they could get this Maglev built, the commute would be only 20 minutes…

This sentence sums up why the idea of ‘affordable housing’ in affluent communities will never be anything more than an empty buzzword in the political game:

“Affordable housing is a tough sell among some residents who say it brings down property values… said Sherman Howell, a member of the county’s affordable housing task force.”

That quote comes from yesterday’s Baltimore Examiner article about affordable housing in my hometown, Columbia, MD.

You see, there’s this inconvenient reality known as supply and demand. If you want housing to become cheaper, you have to increase the supply or lower the demand. Now with the great public schools in Howard County and the proximity to Washington and Baltimore, we all know that the demand isn’t going anywhere.

On the other hand, supply could go up… And really, it’s very simple. All you have to do is build more houses. Or more apartments. Or whatever. As the supply goes up, prices will fall and thus housing will become more affordable.

But wait—-did you say prices will fall? Does that mean that my $600,000 colonial will go down in value!?

By now you’ve probably figured it out-—people who already own houses in Howard County sure as hell don’t want their values to go down. And can you really blame them? Nobody wants their biggest asset to lose value. So when faced with a choice between affordable housing for others, and maintaining their property values, it’s easy to see why people will always choose the latter.

Nevertheless, such a choice can create the occasional pang of guilt.

And politicians are the greatest entrepreneurs when it comes to filling gaps in the conscience market.

That’s why we have buzzwords like inclusionary zoning, which are ostensibly indended to force developers into creating affordable housing for middle or lower-income residents.

The genius of inclusionary zoning is that it helps everyone to feel better about themselves (“look at these laws we made to help the working poor!”), while actually making it more difficult to develop new housing.

The specially designated affordable units have to be sold below market prices, meaning less profit for developers, meaning developers look elsewhere to build, and ultimately the community ends up with less housing.

Voilá! Homeowners feel better about themselves, home values continue to rise, and politicians get reelected.

I don’t know what’s funnier– the idea that he specialized in selling indoor pot farms or the fact that his name is Dick Hung.

Today’s Baltimore Sun has an article on the resurgence of Patterson Park:

“The revival that Rutkowski’s group helped create in a then-rapidly declining swath of Southeast Baltimore runs so counter to prevailing trends that even experienced revitalization leaders were taken aback. It had all the signs of relentless decline: white and middle-class flight, prostitutes, drug dealers, shady investors, derelict homes spreading like a virus.

Now, vacancies are dwindling; crime has dropped. Home prices have shot up at least fivefold. Restored brick facades are multiplying. It’s not a problem-free neighborhood, but there’s general agreement that it’s far better than it was a decade ago.”

I agree, it’s far better than even two years ago. The only thing I disagree with is Rutkowski’s stipulation that the growth in Canton didn’t have much to do with the growth in Patterson Park. To me it’s pretty obvious that there are a lot of people that wanted to live in Canton but couldn’t afford it and so they decided that hey, at least I’ll be living close to the park and within short driving distance of the Canton nightlife.

Of course, the renaissance has only spread to the blocks that are within two streets of the park. North of Fayette St., it’s “block-to-block” like so much of Baltimore. And if you talk to rehabbers in the area, you’ll probably find that they’re competing with a lot of inventory.

Still, I’m putting my money (literally) on the continued growth of development northward, as the Hopkins Biotech Project pushes the wave of development towards the south.

Me: “So, are you ready to get this deal done?”

Buyer: “Well… we were, but I drove by the house yesterday with my partner and we witnessed a drug deal right in front.”

Me: “Like, right in front of the house, or on the corner?”

Buyer: “No, right in front of the house. The guy pulled up in a car, handed over some money, and another guy ran over and gave him the drugs.”

Me: “Well, you see, that’s the funny thing about Baltimore.. Some neighborhoods… Really, it’s normal; I wouldn’t worry about it too much.”

Buyer: “We’re gonna pass on this one.”

Me: “Is there a better price that would work for you?”

Buyer: “Yeah. Zero.”

At some point, every landlord has to set the rent, and finding rental comparables or comps can be so difficult. Usually it involves looking through the classified section of a newspaper or searching CraigsList to see what other landlords are charging for their properties.

RentoMeter.com is the first website I’ve seen that provides this type of information in a one-stop shop. It’s a great little service, but I suspect that it has the same problem as other methods, which is that you can’t see what houses are actually rented for; you can only see the advertised rent.

HT to biggerpockets.