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Maria

AI– First, I *love* your comments. You’ve always got so much insight into both the situation investment-wise as well as the human factor.

And I totally agree with everything you wrote– in my head I think the thing to do is proceed very slowly with extreme caution. We may never get from A to Z. But as long as we don’t over-extend we should be fine although there’s certainly no guarantee of success.

I’m loving your insight into (what amounts to) multiple exit strategies– i.e. being prepared to rent these homes for a few years if necessary. We’re certainly set up for that, but it hadn’t crossed my mind.

Terry–What are you’re thoughts on this type of transaction? I know things are much different in Arizona than Texas, but I’d love to know if you’ve had any experience with this type of thing.

Specifically– if we’re severely limiting the rehab budget, what would you focus on? Roof and paint? Making the house habitable (electric, plumbing?)?

Like you, I think we are “in for it” in a big way. The banking system appears to be on the verge of collapse, we are pouring money into Iraq (not a political comment, just a financial one), and as individals and as a nation we have no spending or investment discipline. 2008 could be a repeat of 1929, and we could be in for a depression, not a recession.

Today the problem is that employed people that do not have excellent credit and a good down payment cannot buy. But the unemployment, vacancy and house price deflation that accompany a recession or depression have not happened yet. I’m pretty sure that they are coming - we are starting to see the job losses in the company announcements headlined in the newspapers and in the labor statistics.

I don’t think I want to be the lender for people that are very likely to lose their jobs in the next two years. Even if my buyer/borrowers don’t lose their jobs, house prices are likely to go down and lending standards and interest rates are likely to go up. There is an excellent chance these people may not be able to refinance and if values go down significantly, they may walk away, leaving you the devalued house.

These are the reasons for thinking you are too early. The reasons for thinking you are too late have to do with some fundamental shifts in our society.

I’m not sure how you define your target “working class” market. To me, what was “working class” in 1980 has all but disappeared. All the manufacturing jobs with stability and benefits are gone. What’s left are unstable, low paying service jobs with minimal benefits. Not what you as a lender want to see on a loan application.

The other changes are social. Successful home ownership to a large extent is tied to family stability. There is a lot less of that than there was in 1980. In addition, there seems to be a change in how people value committment and honoring their obligations. Bad behavior is rationalized and excused, not considered unacceptable. Not a good trend if you are loaning money.

Because of these changes, I would have to study my market carefully before moving forward with this project. My objective would be to see if the pool of qualified potential buyers was large enough to make this endeavor feasible. I would look at my tenants to see if I would feel comfortable being their lender instead of their landlord. I would evaluate everyone that called asking about buying instead of renting. I would look at everyone in the financial position of my target market I encountered at work and at church - two places I would know people well enough to have an opinion about them as borrowers.

Unless I concluded that there was a solid market for my houses and my loans, I would not consider moving forward with the “buy to sell” plan. Eviction is cheaper and faster than foreclosure, and there are fewer consequences for all parties.

If I did conclude that there was a market niche for what I wanted to do, I might consider buying some of these $20,000 houses with limited improvement budgets if I could rent them profitably for several years in a severe recession. As we work our way through this difficult period, I would consider selling the houses on terms once employment stabilized.

Right now, I am more focused on the preservation of capital than on making new investments. That 3 percent return on cash may not look bad in a few years and it provides a big fluffy cushion should things get much worse. Where it’s feasible to pay off a mortgage, that could be a better investment as well. It increases your cash flow today and reduces your risk in the period of reduced rents and high vacancy that may be coming.

Any other ruminators out there?

Is this something you’ve done before or are just considering?

You may want to do this with 1 or 2 homes, just as a test and see what the results are. Who knows? This could really blossom into something big!

From my standpoint, I don’t want to consider “owner financing” because the equity is needed to roll into larger projects.