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Lessons from the 1980’s
Cycle
Dear CCIA Members and friends,
“Nothing is selling!” Have
you heard this statement lately? Well, frankly, it isn’t
true. Sales activity is slower than it was a few years ago,
but properties are still selling. In any market, there are
people whose life circumstances dictate a move. And, there
are at least a few people who recognize that it is a good
time to buy now that prices have come down and interest
rates are still low. Between these two groups, there is
a market for property. In addition to buyers, there are
renters. The rental market is healthier than it has been
in quite a while.
Ideal buying conditions, and ideal
renting conditions, yet I still hear investors singing the
blues. They have a variety of reasons for their distress.
But, what they need to do is wake up, and smell the roses.
There are opportunities in every market, and this one offers
lots of opportunities for investors.
I want to tell you a little story from
my past, in the hopes that you can learn some lessons from
the past, and apply them to the present.
Back in fall of 1979 my husband and
I bought a lakefront condo for $56,810. It was our first
purchase. We were just getting out of graduate school and
taking teaching jobs at Loyola. Moving from student housing,
and student stipends, we had very little money, and needed
a place to live. We found this condo, and structured a deal
with a $10 down payment. The purchase price was no deal,
but the financing was something we could afford.
We rehabbed the condo and lived in
it for a few years, and then kept it as a rental when we
moved out in 1983. It had appreciated a little, but interest
rates in the early 1980’s were 12% - $17% and up,
so the market was slow. By about 1987, the condo’s
value had climbed to $75,000. I was still renting it out
when the tax reform act precipitated the savings and loan
crisis. In the midst of that disaster, a number of condos
in the same building went on the market for $22,000. They
were bank owned foreclosures. I grumbled about it at the
time for two reasons. Now I had new competitors in my rental
market that had lower costs than I did. And, the value of
my property had just suffered a dramatic loss. But, despite
the fact that I owed more than the property was worth, the
tenant kept paying rent, and I kept making payments. Property
values quickly jumped back to pre-S&L Crisis levels.
It is now 2008, and a tenant is still paying rent to me
on this same condo. I have only a vague idea of value, but
it is something like $145,000.
What did I learn from this? First,
I made a major mistake. I should have bought the other condos.
Second, time heals most wounds in real estate. Third, changes
in market value don’t really matter much when you
are holding something as a rental. Fourth, distressed property
sales only have a temporary effect on values. Most homeowners
won’t sell for less than they owe, unless life circumstances
force a move.
Happy bargain hunting! – Jane Garvey
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