Reid’s Investment Plan
by Tony Chavira
A talented software developer and programmer, Reid is not the kind of person who’s easily intimidated by things that seem daunting to others. Companies he’s worked for constantly make him better offers to come back and work for them, and over the past few years, despite the economy, he’s mostly seen his salary rise. Between programming for popular social networking sites, online media and the higher end real estate industry, Reid was comfortable enough with his earnings to begin hunting for the kind of property he felt would be a good investment. It didn’t need to be something that he would necessarily “fall in love with,” but it would have to fit these criteria:
- It would increase in value a lot over a short period of time.
- It would be manageable and a space he could live in for a while.
- It could serve as an investment, to leverage for other properties (preferably up north in the Bay area).
So despite working in Monrovia, Reid decided to cast his net very wide. In fact, he cast it throughout Los Angeles County.
Reid had no illusions about his situation. Unlike many others around his (relatively young) age, he has the disposable income to be able to focus on investing in property. He’s smart, thorough, savvy, well-paid and single (so he can be as frugal as he feels he needs to be). On top of all that, he had investments from a very young age and the ability to save immensely over the course of several years while debt free. Clearly, ideal circumstances.
And young enough to begin negotiating some serious risks. He originally began looking at homes in 2007, back when we were all unsure about what was going to happen to the economy. While prices were inflated and we were only in the first round of national foreclosures, Reid kept his options opened, kept saving and kept telling himself that he would one day be able to find that perfect deal. By 2008 the foreclosure rate had skyrocketed, and Reid noticed that prices on homes began to correspondingly drop. He would watch as the duplexes he was interested in would, slowly but surely, drop by percentage points. If he could purchase one at a good price, he figured, he could live in one unit and rent out the other. Then, eventually, rent out both and get the heck out of Los Angeles.
After a lot of thorough research, he determined how much he wanted to spend and got his prequalification letter ready to roll. But by the end of 2008, simply from making several serious offers, his credit score began to drop. Each time a bank seller ran his credit score, Reid’s credit dropped by roughly five points. Why was his credit score getting checked so often in such a short period of time? Because Reid was only making offers on bank-owned properties. Remember: back in 2007/2008, there were still relatively few foreclosed homes, so many banks were willing to sell the properties, take the loss and move on quickly. Today, there are so many homes in foreclosure that there are no reasons for banks to take such big losses (since banks need to post their losses once a property is sold).
Guided by websites like Zillow, Reid ended up bidding against a large pool of other people also trying to meet his first criterion: buy low, sell high. The bank tried to sell the Miracle Mile property Reid ultimately purchased for $950,000. Reid counter-offered with $600,000. The bank said $850,000 and Reid walked away. After a few months in which the property didn’t sell, the bank came back with an offer of $650,000. It’s amazing what only a short period of recession can do to move the property closer to your price range.
But he lost out on a few other properties. In fact, he suspected that several banks (which shall go unnamed for now) were making shady inside deals. In one case, Reid offered $650,000 on a property which had 15 other bidders. After the property was listed as “sold” for $500,000, it was placed back on the market in just a few weeks. But two weeks after its return to the market, the property sold for $750,000. It may be that someone had a friend at the bank, or it may be that the bank was in on the first deal. Either way, this furiously paced game of turnaround both excited and unnerved Reid, as he put down one failed offer after another.
The Miracle Mile property he ultimately bought was foreclosed on at $1.3 million (which obviously wasn’t what it was worth). As he bought it for about half that price, Reid felt justified in his purchase and perfectly comfortable managing his mortgage payments at that price. Until, at closing, he noticed what his taxes were going to be. Although the bank sold him the property for half the foreclosure price, the taxes were going to reflect the $1.3 million “value” of the house at its peak. The bank’s response? “Hey, $1.3 million’s what it was listed at ... Sorry!” This last minute revelation cost Reid $20,000, and not even his mortgage agent knew he would have to pay it. Even though it was just about all he had left, he dished out the $20,000 in cash and signed the deal. His money was refunded a year later, but if he hadn’t had the cash on hand at the time his deal would have ended right then and there.
His tax problems didn’t end there, though. Once he finally owned the home, Reid refinanced his loan in October. His new taxes would be due in November, and because it was so close to the deadline, Reid was forced to pay taxes on a home that was valued at $1.3 million instead of $650,000.
But Reid still got the best possible deal. And wouldn’t you want the same thing? Those taxes (which he got back) were not an issue compared to getting an amazing price on a bank-owned property. It may have required bidding against other hungry investors, but Reid wasn’t interested in being nice or fair. In fact, he openly admits that he wasn’t being fair and deliberately bid far below the value of the homes he saw. If the banks needed to sell these homes, he would be waiting with cash on hand. They just needed to be willing to take a huge loss. Anyway, what was his incentive to play fair? The banks weren’t being fair by approving stupid loans, and the original owners weren’t being fair by trying to get too much credit from the banks with no risk involved. Why should Reid have been fair with the banks and negotiated on the price he offered them?
Reid knew that the economy crashed. We all did. He offered $650,000 and stayed there because he knew that, after a few months passed, the property would be worth it. There was no reason to play a negotiation game with bank representatives. They would either settle for his price or they wouldn’t, and he’d move on to bid unfairly on another property. In fact, Reid offered $650,000 while they stayed at $900,000, and when the bank re-approached him in six months for his offer of $650,000, Reid counter-offered at $620,000. As he saw it, the house would be worth $620,000 in a few months anyway.
Apparently, so did the bank.
Reid feels like he owns his home, in the way a landlord owns a property. No warm or fuzzy feelings involved. He only cares that the place is livable and well-maintained. He rents out some of the house to another person and really just uses his room. It’s far more space than he needs and it’s far more house than he cares to use. To him, his first homebuying experience was a straight-up negotiation for a commodity. He did a ton of research, he had financial reserves, he knew what he could afford, he beefed up on his knowledge of the market, he knew what kinds of homes were out there and constantly kept his eyes peeled. He went into the process aggressively, offered boldly and came out of it content that he did the best he could with what he had. And his next home purchase—which will be in the Bay Area—will be no less assertive.
The shift in the economy played an important role in Reid’s story. If the foreclosure rate had been any worse, he wouldn’t have been able to bid so low, and if the homes hadn’t been valued so low, he wouldn’t have gotten the price he wanted.
Next week, we will step out of the Los Angeles area and focus on how the global economy affected a homebuyer in London, England, UK as he (like Rick) dealt with purchasing a brand new loft in a brand new development early in his professional career.