Market Conditions: March Foreclosures Drop 8% in Illinois YOY
RealtyTrac released the March nationwide foreclosure numbers yesterday and Illinois came in 10th in the nation for foreclosures in March and 9th in the nation for the first quarter.
March actually saw an 8% decrease year over year in the number of foreclosures, the first such year over year decrease since November 2008.
Before breaking out the party hats, it should be pointed out that foreclosures actually jumped 17.5% for the quarter, compared to the first quarter of 2009.
RealtyTrac doesn’t believe the downward trend in foreclosures, such as we saw in March, will hold.
From the Daily Herald:
Illinois had 14,199 properties with foreclosure filings during March and 45,780 for the first quarter.
While the first-time homebuyer stimulus credit helped, another federal program came into play. The short-sale incentive program had an impact in Illinois, Blomquist said.
“I say this because the decrease in Illinois numbers comes all in the first two stages of foreclosure (default and scheduled auctions), and it is during those two stages that a short sale might occur,” he said. “Defaults were down 5 percent from March 2009, and scheduled auctions were down 42 percent from 2009, while bank repossessions were up 34 percent from March 2009.”
From the Chicago Tribune:
In January, nearly 6,000 Illinois homes became classified as real-estate owned, or bank-owned. That compares with 2,641 in January 2009. In February, it was nearly 5,000 properties, compared with nearly 3,000 homes in the same month a year ago. Last month, it was another 4,424 properties, compared with about 3,300 homes in March 2009.
HAMP, detailed a year ago, was implemented to slow foreclosures. In the Chicago area in March, 39,914 homeowners were in active trial modifications and another 11,333 homeowners had received permanently modified loans since the program’s start, according to Wednesday’s Treasury report. But although the number of homeowners whose trial plans were made permanent increased 40 percent in a month’s time, the number of consumers was down from 43,215 in February. A drop in active trial modifications was expected nationally. Beginning June 1, the government said consumers applying for a trial modification would have to provide full documentation of their income, but many lenders began applying that requirement in March.
Illinois bank-owned foreclosures double in first quarter [Chicago Tribune, Mary Ellen Podmolik, Apr 15, 2010]
Illinois foreclosures dip; but don’t expect it to last [Daily Herald, Anna Marie Kukec, Apr 15, 2010]
The flood of foreclosures hitting the market, along with the expiration of the $8,000 tax credit is going to be a low blow to the already beat up housing market. My condolences to those who bought during the bubble.
So there was a 19% drop in March year over year for Chicago. I’m starting to track this data: http://www.chicagonow.com/blogs/chicago-real-estate-getting-real/2010/04/chicago-foreclosures-drop-19-in-march.html
Some of the loop areas had above average foreclosure rates.
I do think that the HAFA program will cut the number of foreclosures.
Thanks for the Chicago data Gary. I couldn’t find it myself last night.
RealtyTrac doesn’t believe this March downturn will hold. It did this last year and the next few months were worse, not better.
Personally, I’m seeing way more short sales being attempted than foreclosures coming on the market in the neighborhoods covered by this blog. It takes years for those short sales to work through the system (if they don’t sell). Look at how long it took that condo at 1330 N. LaSalle to finally be bank owned? Over 2 years. And it came back on the market quickly- which isn’t normal either. Usually the banks are waiting months to relist once they take possession.
So it can be up to 3 to 4 years for the distressed homeowner who doesn’t sell the property in short sale to actually sell the property after it becomes bank owned. It’s a slow bleed for the Chicago housing market with prices just slowing declining.
I know you believe we’ve hit the bottom but I’m not seeing any evidence of that in the neighborhoods I cover.
I have this growing suspicion that short sales can represent really good deals right now. A lot of buyer’s agents are avoiding them like the plague, forcing listing agents like me to cut the price lower than I would otherwise. I’ve got a listing right now that has been flagged by over 25 buyers but only a fraction of those have actually seen it. Of course, it could be that these buyers are looking to get the credit right now and that may not be realistic with the deadline looming.
There so much movement in the realtytrac data that it makes me suspicious that there is something about the process by which the data are generated and collected that is driving a big part of the month to mnth changes. This isn’t to say that the data are not useful, but you have to be cautious about month over month or other comparisons (as Gary notes in his blog).
Gary, do you do short sales as a buyer’s agent?
Funny, the record high DQ rate in the Chicago area was 7.71 percent in the last three months of 2009; yet last fall’s DQ’s should be turning into foreclosures in the Jan/Feb/March 2010 data – and they’re not. are the owners reinstating or selling? Not likely.
Looks to me like there is more pressure building behind the dam.
I read the other day that nationally it takes an average of 410 days to go from DQ to bank owned REO. Only the banks know the time it takes to go from REO to put on the market.
For DQ, are we assuming 90 days late on a payment?
I think DQ is usually 60
DZ,
Yes I do represent buyers on short sales PROVIDED that the buyer knows what they are getting into and the listing agent seems competent.
Gary, how lowball will you go with offers on short sales? b/c it’s not really the owner accepting the offer – it’s the bank….
I’m not a short sale expert. But doesn’t the seller have to accept the offer and then the bank has to accept it too? The seller has some interests in the price because it could dictate how much they will bring to the table on closing.
Sort of. The seller doesn’t have any money to bring to the table, that’s why they’re short selling. If they had the money to bring to the table they would just sell to the bank to short sale.
Sometimes the banks want deficiencies in short sales i.e. they want the seller to sign a note promising to pay the difference between the mortgage and selling price. However, this varies bank by bank and second lenders tend to be far more aggressive than first mortgages.
In most cases I’ve seen the seller is trying to avoid a foreclosure judgment and sale on their credit report and they’re trying to get the bank to forgive the deficiency.
So what I’m saying is that in some cases I’ve seen somebody put in a lowball offer to the seller during the foreclosure process so that the seller can get the property off their hands. It’s ultimately up to the bank. sometimes the bank may be willing to take a substantial discount today rather than sit on the property for months and months. Again, it all depends.
“GLS on April 16th, 2010 at 12:25 pm
I’m not a short sale expert. But doesn’t the seller have to accept the offer and then the bank has to accept it too? The seller has some interests in the price because it could dictate how much they will bring to the table on closing.”
sorry, typo, if the seller had the money to bring to the table they would just bring it to the table. since they don’t, they short sell.
homedelete,
How low I go all depends on a number of things. I’ve seen situations where you have to come in above list and pretty close to “appraised” value because the property is desirable in some sense. Then there are other cases where 80% of appraised value is sufficient. Of course, the buyer doesn’t know what the appraised value is but the listing agent might send you signals or you can guess at it.
Gary,
What if list on a property was $450k a year ago and today’s it’s listed at $350k and still languishing, would be it be obscene to make a bid to the seller (or circuitously to the now bankrupt mortgage holder) for, say, 66% of list, or in the mid-$200’s? The property is in foreclosure.
Appraisal value, is unknown because it’s at $350k down from $450k and still not selling, and that was even before it was a ‘short sale’. I’d guess the ‘appraisal’ value is in mid to high $200’s.
Gary, i’m asking because i’ve heard anecdotal stories of lowball shortsales but i’m not a lawyer who does any short sales so i’m just trying to get a feel of what realtors are seeing out there
“i’ve heard anecdotal stories of lowball shortsales”
You mean of lowball offers being accepted? I would be certain that there are, but the question is if unconnected people are having their lowball offers accepted.
As to making them, I subscribe to the concept of “if you don’t ask, you already have your answer”, so, if there is a place that you would like, but only if you could get it for $225k, what’s the harm in submitting an offer at $225k? If you don’t do submit an offer, you for sure aren’t going get it for that price.
I agree, if there’s a price you feel comfortable with (or would kick yourself if someone else got it at that price), go ahead. Make an offer, HD!
It’s a small sample but I think I’m seeing increasing numbers of recent sales (not short sales) that appear to have closed for a substantial percentage off the last list, 15-20 percent, which I’m assuming is in what people would call lowball territory. If we were a little more settled on where we wanted to live, I would make some lowball offers. Also toying with idea of trying to buy a short sale since we have a lot of flexibility on timing.
Homedelete,
This is where the conversation with the listing agent is really important – or you could just throw the offer out there and see what happens. However, I prefer to talk to the listing agent first to get their perspective on what has been going on. Has the property been appraised and where is it listed relative to appraised value? Why does the listing agent not think it’s selling? How did the listing agent come up with the list price? Why do you think it’s not selling? You can also check the listing history and see if it’s been under contract before and then find out what has happened. But if you think the fair market value is in the mid 200s and can prove that very convincingly then you can submit an offer even as low as 80% of that.
Go out and make that offer and see what they say. If they don’t accept and receive no other offers, that’s their own fault.
Who cares if you offend them with the low offer – they are the one who are sitting on an underwater property. You should be attempting to go to the table with an offer you think is fair, not what the seller would think is fair, because you have more of the power here. Buyers need to realize they have power, and can take advantage of the situation more because of the market.
thanks for the advice everybody; there’s an property i have my eye on that if I could get for a short sale I could get it for about the 1999 price and it’s been significantly updated since then. I’ve always said that when the time was right for me I would buy and i’m considering an offer, my SO and I are thinking about it.
HD: Congrats! I’m thinking that it will be time to move in another 1-2 years myself, and am starting to look at the REO / short sale process as well. I’ve got no real pressures (ie kids or job) that would push for better timing, and I’d haircut my condo to move it if one of my offers fell my way.
But for now, I’m going to enjoy the weather.
I’ve got no time pressures either, so, I’m very interested a home that I could probably bid as a short sale at 1999/2000 pricing; which might be a bit optimistic, but, I’d probably be willing to pay slightly more than that because it looks like the previous $130k HELOC was plowed back into the house. Just for S&G I did a ccrd search of the neighbor with the lexus SUV parked in the driveway and the pool in the backyard … He bought his house in 1998 for the mid 100’s and as of 2007 the last refi was for $640k! Somebody’s going to be really ticked if this short sale goes through!
I really don’t worry about the “offending” sellers. I’ve always thought that was a concept made up by real estate agents to discourage crazy offers. What I do worry about is buyers bidding well below what they think a property is worth and well below what the seller is willing to accept only because I think it will hurt the credibility of the buyer. If the seller thinks that the buyer has no concept of the value of the property or that the buyer is out there looking for a steal then as a seller I’m hesitant to work with them because if the buyer falls in one of those two categories and I strike a deal then maybe I’ve been taken advantage of.
In particular, for sellers who took out HELOC’s and used the money to fund their lives/vacations/BMW’s, I have no problem seeing them suffer. They claim they are offended for buyers bidding below what they paid for the property, when the market has truly changed in the past 2-3 years. I would have no problem offering a really low figure if it’s somewhat close to market value.
On the other hand, I have a friend who preys on sellers who are desperate. He can pay all cash and goes in and tries to steal the places. He can close in just a few days and can drive a hard bargain if the people want to bail and the bank isn’t an issue.
I submitted an offer for short sale yesterday, with earnest money.
The seller will sign as it is a short sale and they have no assets for go after by the bank. Property sold for 400k in 4/05 and currently has single lien out for 407k. The BPO is for 170k. I put an offer in for 120k. This is humboldt Park. Is there anyway this could go thru? I expect the bank to reject my offer. They may even hold out for above 200k but I will not be paying over 150k for this place.
The SO and I too decided we didn’t like the short sale we looked at. Even if we could get it at a low price it would still require some upgrades to make it worthwhile and quite frankly i’m not looking to buy a house that needs another $70k to make it livable. and if the SO isn’t on board then the whole deal is dead.
humboldt: $120k for a 3 flat in Humboldt is probably a good deal if the bank takes it and you don’t need to put another 120k into it.
I was browsing over on Redfin in the Kedzie and Armitage area for foreclosures. Some real deals to be had over there, although it’s still a risky area. There’s a 4 flat (illegally 5) that’s listing at like $179k. Some other really crazy stuff over there…
Gary Lucido, homedelete, anon (tfo), et. al.,
Do cash-buyers of real estate enjoy a meaningful price advantage over those who require financing?
Listing prices get lots of attention. But my question is: Can the price of a home be significantly lower if one pays cash for it?
In your experience, what has that (I presume) discount off list price amounted to: 10%, 20%, more?
Btw, I am looking to finance this thing with 20 to 25 percent down. I do,kt think a cash buyer has much advantage over a guy like me who is preapproved though there may be more closing costs.
I brought my contractor out with me to examine the place. It is in better shape than the building I have. We still need to go on top and check out the roof but saw no issues apart from a couple of small lentels that will need to be replaced in the next 5-10 years and a few loose bricks that just need some tuckpointing. The place is also fully leased for 2600 per month. I don’t think it will go for 120k but should go for between 150k and 170k. I expect prices on buildings like these to drop as lower comps start coming in over the next 6 months.
I also expect this sale to take 6-12 months with it being a short sale. All I did was basically take it off the market (seller signed off today and bank will have chance to take my offer on Mon). Do you guys think I will be able to get taxes reduced (3500 now, so not bad) with low purchase price? I am thinking not.
Cash buyers snap up the cheap properties that can’t be financed. Cash gets a discount only because due to the condition of the property it cannot be financed to some greater fool. Most of the super cheap sub-$100k deals you see are investors buying with cash.
Speaking of cash: There’s plenty of investor money on the sidelines still willing to throw their lot into real estate and out bid other buyers.
See today’s trib article. http://www.chicagotribune.com/classified/realestate/ct-biz-mack-industries–20100419,0,1023394.story
Some investor calls himself a ‘redeveloper’ b/c he buys properties, fixes them up, and rents them out and in the process makes very little money.
The money quote from the article: “Our model is long-term appreciation,” said McClelland, sitting in his office behind a large desk covered with contracts and property listings. “You need deep pockets to do this business, deep, deep pockets. This is not a business for instant gratification. It’s not a cash-flow basis. The profit is the equity.”
So he’s not making any money in cash flow, he freely admits that he’s losing money every month but because real estate always goes up! – he believes he’s “…banking on the appreciation of the homes over a decade or more.”
“Some day you’ll get rich, but you have to pay your dues,” – and by paying dues, he means losing money with his real estate investments.
Then he goes on to say that he bought a foreclosure for $70k and rents it out to tenants .. “half of whom receive government assistance.” aka Section 8 – but he thinks this same home in “Country Club Hills .. would be worth at least $150,000 in pristine shape.”
And just who is going to pay $150k for his home in Country Club hills? Section 8 tenants?
Even the hardest hit areas on the south side and southern suburbs aren’t at the bottom – ‘redevelopers’ like these are going to be trickling overpriced properties back into the market for years and years to come. Because you know – he’s counting on that equity – years from now – to make his money.
Good luck with that, Mack.
Great article homedelete. I had missed it.
Best quote:
McClelland said he frequently is asked by would-be investors how he got started and how they can build a business like his.
His advice: “Don’t quit your day job. Let it percolate 10 to 15 years. Buy your real estate and clip your coupons.”
But what happens if real estate just trades sideways for a decade or more? Or he never gets the appreciation he thinks he’ll get?
He’s playing the OLD game- where real estate goes up fairly quickly. Not the new one (the one that is, essentially, the NASDAQ). Yes- he thinks he’s getting it low enough and that it MUST go up in 10 or 15 years. In the meantime, he could simply put his money into dividend paying stocks and wait it out as well.
Oh boy- these articles are truly scary.
People are still drinking the housing kool-aid.
Did we read the same article? Money (real money) quote:
“In the meantime, Mack nets about $300 per month per property, which helps fund the business.”
I know two dozen guys who played out a similar strategy over the long term into a net worth in the 10s of millions and, in several cases, well over $100M.
Even if real estate just trades sideways for a decade or two Mack’s strategy will make him a wealthy man.
joe , he says the 300 dollars helps fund the business, not that it covers his costs – he admits his business is cash flow negative. Joe your age is showing, you’re still thinking yesterdays re game. Cash flow does matter.
Joe, also, if it were so simple, every land baron I know would be a millionaire and they’re all broke.
dedalus,
To add on to the previous response regarding the value of a cash offer, if a property can be financed then the cash offer has little value. I have clients all the time making cash offers and the response, correctly, from the listing agent is along the lines of “I can just as easily accept a higher offer from a well qualified borrower”. It might be worth a small discount because of the greater certainty of the deal closing but I don’t think it’s worth much in these cases.
I had a client out in Aurora and Elgin (J Schoppe) who had net worth of 50MM in 2005 with 700 single family homes. The bank had an equity line to the guy for 7MM just so he could buy properties when he pleased. I did not bring this guy into the bank nor did I manage the relationship.
He is now broke and is literally millions underwater and the bank is out of luck. I guess he can now fall back on his orthodontist license (both he and his 80 year old father are licensed still, though J only practiced for 1 year).
I am sure there are plenty other stories like this guy who in 2-3 years lost 40 years of wealth building.
Net means after costs.
Something tells me he isn’t going broke renting 70k properties for $1500 a month.
homedelete on April 19th, 2010 at 6:24 am
joe , he says the 300 dollars helps fund the business, not that it covers his costs – he admits his business is cash flow negative. Joe your age is showing, you’re still thinking yesterdays re game. Cash flow does matter.
Again, reading comprehension is a very important skill.
Mack says that he buys for $70k, puts an ‘average’ of $50k into the property, then rents them out, 50% of whom are section 8 tenants.
He also says, and I quote, again, “It’s not a cash-flow basis. The profit is the equity.”
So, something tells me that either Mack is a liar or he’s losing money on every property.
Furthermore, again, he says that the $300 a month *helps* fund the business. It doesn’t say that it FUNDS the business, it merely HELPS fund the business. So this statement is not inconsistent with his previous comment that his properties are not a ‘cash flow basis.’
He thinks he’s going to be a land baron by trickling out properties on to the market over years.
“Burt Cooper on April 19th, 2010 at 7:28 am
Net means after costs.
Something tells me he isn’t going broke renting 70k properties for $1500 a month.”
He has 100 employees!
He’s admitting in the article that he’s cash flow negative. Who invests like that? WHY would you invest like that?
You are betting on future appreciation. Pure and simple. Given the bubble we just experienced (and history of bubbles) you’re not going to get it for a long, long time. Why would you tie up your money in a losing investment like that for 15 to 20 years?
Exactly Sabrina, it shows that investors aka redevelopers are buying up the foreclosure properties with the intention of selling them for future appreciation. No cash flow, losing money every month, with the intention of selling at a later point in the future for lots of profit! Sound familiar? The only difference is that this time is doesn’t involve investor mortgages – but concept is still the same. Very little has changed, this bust is going to take longer than anyone imagined. 10 years from now Mack will be releasing his properties back into the market for profit – and guess what – every other investor is thinking of doing the same thing.
Indeed it is. He rents them out for up to $1500 a month. What’s the nut on a $120k mortgage?
homedelete on April 19th, 2010 at 7:38 am
Again, reading comprehension is a very important skill.
Mack says that he buys for $70k, puts an ‘average’ of $50k into the property, then rents them out, 50% of whom are section 8 tenants.
My guess is this guy is a liar who is losing money.
Nowhere does Mack say that his overall operation is cash-flow negative. When he says “helps fund the business” you really have no idea what that implies.
I don’t know Mack, but I do know many like him. They’ll never tell you they’re making money, and they’ll poor mouth like crazy to keep rookies from jumping in and bidding up the price of what they want to buy.
CCers seem to see only what they want to see.
Despite being a credit-worthy businesses, Mack’s greatest challenge today is obtaining bank financing, says McClelland: “We’re a dream client to any bank. We have excellent credit, strong cash flow and a unique market niche. We are growing but we could grow much faster. Yet the banks remain in risk-averse mode. Our growth relies on bank credit and that has been shrinking dramatically over the past two years.”
http://www.mackcompanies.net/content/readMore1/infobox/news/template/default/active_id/7
Cashflow is the only thing keeping my 2006 3-flat purchase from eating me alive. It is worth literally less than half of what I paid for it in 2006, yet it is a break-even cashflow every month. Add back the tax breaks and I even make a few bucks.
We will see if I get this next purchase for $120K. My contractor guy says it is a buy up to $150-160K. My guess is I get it for around $140K-150K, but we will see how flexible the bank is. Again, all I am out is $1K earnest money and can just sit on this thing until the bank and I reach a point where they are willing to settle for a certain price that I will pay. I don’t care if this takes a year or more. I will wait.
Love this conversation.
We bought a short sale recently, and you can bid whatever you like, but chances are the bank has set a price, either explicitly or secretly, which it will not drop below.
“But nobody will buy the property at their price,” you say. “The bank would be better off accepting my offer than waiting 9 months and eventually accepting a lower offer”
Yes, that is true.
But banks are not operating in their own best interests, so try not to think so logically. I learned from my short sale that banks re-appraise their properties periodically ( every 3 to 6 months) and that sets their price.
So the secret, HD, is timing.
I had been watching a property for 8 or 9 months, the price dropped 100k during that time, it went off the market for a while and then it came back. I happened to be touring the property and mulling over an offer when my agent told me to wait a few days til the bank re-appraised.
Lo and behold, the bank came down 70k, to below what I would have offered. (which is good, because the rehab is going to cost a lot) I made a full price offer before they even had time to change the price on the MLS.
Turned out the bank could have sold it for 70k more months ago if it had not dragged its feet.
So joe, what you’re implying is that Mack is a liar?
“So joe, what you’re implying is that Mack is a liar?”
You believe everything you read in a newspaper?
“helps fund the business” can easily be read (ie, I read it this way) to mean that it “helps provide liquidity to buy the next property”.
And “The profit is the equity.” can (and usually does) mean that you get the return that justifies the risk and effort on the equity–3%/year (hell, 7%/year) doesn’t justify that sort of operation.
homedelete you seem like a relatively smart guy but you seem way to naïve in your response to this article. Everyone I know (family) who owns their own business claims to make at least ½ of what they actually make and always cry poor when they obviously make very good money. Do the math on this guy’s investments and the math works. If he has 100 employees he must be doing something right.
By locking in earnest money, I basically remove the property from the market as it will be listed as “pending” now, and in 3-6 months in this declining market the bank will re-appraise and realize that it is worth less then. I don’t expect the bank to take me up on my first offer. I just wanted to lock down the property so that others cannot look at it. When I see “pending” it personally discourages me from looking at a place. I don’t think I am alone in this thinking.
BPO is at $170K (down from $185K 2 weeks ago) and I expect it to drop further as very little is selling in Humboldt Park right now. This place needs $5-10K in repairs max and is livable with tenants.
Humboldt1 – I think that is a very solid strategy, thanks for sharing. I agree that when I see something is pending I pass over it. When you think what your $1,000 would get you in a six-month CD your strategy is costing you around $6 over six-months. Seems like a good play to me.
And when you lie and say you’re really make 1/2 of what you really make then your tax returns better be 100% accurate. Otherwise it’s or else he’s cheating his taxes aka stealing money from the business and when they get caught they end up in jail or paying fines. Yes there is some selective enforcement of the IRS laws but then this guy better be careful if he’s saying that his business isn’t cash-flow positive if he’s driving a nice car and living a nice home; he better be careful shooting his mouth off like that. Having 100 employees, if that’s even true, which it may not be, does’nt mean anything. I can name thousands of companies that had way more employees that have gone out of business in the last few years. I wouldnt say I’m naive, I’d say I’m way skeptical of this guy, his business model, his figures, the number of employees. We’ve already proven the guy is a liar.
Obviously the guy is making something; enough to get by and he’s probably taking depreciation on his buildings. However, if he thinks that he’s going to miraculously turn around and sell his Section 8 properties for top dollar within the next decade he is severely mistaken.
“#B on April 19th, 2010 at 10:38 am
homedelete you seem like a relatively smart guy but you seem way to naïve in your response to this article. Everyone I know (family) who owns their own business claims to make at least ½ of what they actually make and always cry poor when they obviously make very good money. Do the math on this guy’s investments and the math works. If he has 100 employees he must be doing something right.”
“And when you lie and say you’re really make 1/2 of what you really make then your tax returns better be 100% accurate.”
Why is that different than when you lie and say you make 1/10 of what you really make or 10x what you really make, or 1.1x what you really make? Your returns better be 100% accurate if you get audited, and one is *MUCH* more likely to get audited if you’re in the press claiming to be doing very well and reporting $30k AGI than if you are in the press saying your breaking even and then reporting $300k AGI.
Your hatred for flippers is leaving you blinkered, HD.
Not quite my hatred for flippers, anon(tfo), but I had a tax fraud case roll across my desk just last Wednesday actually, a guy owned a local business with dozens of employees and yet he complained he lost so much money but he lived a very fancy lifestyle. When it came time to sell the business the IRS posed as buyers of the business and the tax cheat (unknowingly) admitted that he skimmed 50% of the profits off the top and that he kept two sets of books. Let’s just say that he’s in jail now doing 18 months. So that’s why it’s so poignant, he’s a guy shouting off his mouth on the trib about how much money he’s losing yet most posters here are saying that he’s really a liar making bank – according to Joe, possibly millions. It smells. Regardless, the whole point of the article and my commentary was that this guy claims his business model is to lose money every month but sell later in the decade for a huge payoff. To which I wished him good luck.
“So that’s why it’s so poignant, he’s a guy shouting off his mouth on the trib about how much money he’s losing”
My nose-count has more people reading it the opposite of the way you read it (ie, NOT saying that he’s losing money), but you might be right. But lying to a reporter is *VERY* different from lying on tax returns–last I checked, it’s perfectly legal to lie to a reporter.
“But lying to a reporter is *VERY* different from lying on tax returns–last I checked, it’s perfectly legal to lie to a reporter.”
In most instances you don’t go to jail for either. Your client went to jail because 1) he admitted his fraud openly to others and 2) he was greedy and tried to monetize the cash flows of his fraud into the valuation of his business via a sale.
The tax code is so complicated in many instances its easy to lower your tax liability and have a defense of plausible deniability.
My favorite contribution from StevO on this site shows his worksheet where he starts with a tax liability of zero and works upwards to get there.
We’re all reading the same thing but making different interpretations of what it means:
“Our model is long-term appreciation,” said McClelland, sitting in his office behind a large desk covered with contracts and property listings. “You need deep pockets to do this business, deep, deep pockets. This is not a business for instant gratification. It’s not a cash-flow basis. The profit is the equity.”
I’m taking him literally and calling him a fool because his business plan won’t work if he’s counting on long term appreciation from section 8 rental housing in the south suburbs.
Other readers are assuming that he means the exact opposite of what he actually said, in effect, calling him a liar.
I am on the same page with home delete. I agree that headcount means very little, just more overhead. This is why I got out of small business lending, too many liars with family employees that cheat on their taxes. Please note this mack has his son working for him too. Not all family businesses cheat, but a lot do. They have few incentives apart from getting caught to pay.
I used to tell business owners that what they pay in taxes is between them and uncle Sam but the bank needs to see enough profit to make the loan payment times 1.25X.
Also, you end up being advisor and part-time Cfo to these small businesses and attending chamber stuff which takes away from business development.
Bob, btw, he wasn’t my client, not even the client of my firm. I saw the pre-sentencing report that was filed with his criminal case because it is loosely related to another issue in another case that we have for someone unrelated to the tax cheat.
For the record, I specifically noted I don’t know Mack and am not calling him a liar. Just reporting my very consdierable experience with similar real estate investors. Mack said nothing that strikes me as dishonest.
What none of you are noting – and it’s hugely important in a business like Mack’s – is that “equity” to many real estate investors of this type means equity from mortgage paydown rather than from appreciation.
Ten or twenty years in a lot of equity is built on a property whether or not there’s any appreciation.
“What none of you are noting – and it’s hugely important in a business like Mack’s – is that “equity” to many real estate investors of this type means equity from mortgage paydown rather than from appreciation. ”
Everyone ignores that, Joe, even when it gets brought up. I don’t bother anymore.
It’s not a cash-flow basis != negative cash flow.
The article plainly states he is netting $300 a property. Using that to fund your business is called reinvesting your profits. Banks aren’t accepting hopes and dreams as a downpayment anymore. You need cash.
Joe, if he’s banking on the equity from paying down the mortgage then that’s not really profit – all things being equal, he could stick his money under his matrress and 10 years from now have the same amount of money.
Plenty of people make money in RE and I personally know plenty; but they usually say that they get property cheap, rent it out on a cash flow basis, take depreciation, and when the mortgage is fully paid off, they’re just sitting pretty with cash flow every month. The only problem is when they go to sell they have to pay tax on the depreciation and the capital appreciation, so in effect, the real money is made from monthly rents and deprecation. This is not unusual or uncommon and I too have at least one client who made millions doing this very same thing.
However, when I read this article, I hear some guy say that he’s overpaying for foreclosures, losing money on the section 8 rents! and that he wants sell for capital appreciation in the future. That’s not a recipe for success.
I told you all I talked to a guy who buys foreclosures in Harvey or Dolton for $20k, puts $15k in them and rents them for $900 bucks a month, all the while cash-flowing and depreciating the property as he goes along.
That’s how you make money in real estate, you can’t lose money every month.
I have a file on my shelf. The guy has 6 properties on the south side, he breaks even every month yet he’s upside down by hundreds of thousands of dollars. If a tenant doesn’t pay one month he’s making up the payment out of his pocket. he doesn’t practice depreciation on his tax returns and he’s not making any money on rent. When he bought he thought he was going to sell for double the price he paid. He even drives a BMW 745. Yet he’s upside down on the car too and he’s filing BK. Go figure.
Burt Cooper:
You’re right, not only does he need cash to fund his business, but according to him, you also need very, very, deep pockets. You would think this guy is Google trying to build a high speed fiber optic network. But he’s buying $70k foreclosures and renting them out section 8.
If business is so good, he should be self-financing, not going back to the banks. Something stinks here.
“If business is so good, he should be self-financing, not going back to the banks. Something stinks here.”
“We are growing but we could grow much faster. Yet the banks remain in risk-averse mode. Our growth relies on bank credit and that has been shrinking dramatically over the past two years.”
Poor Mack can’t empire build as fast as he wants to because bank’s are hesitant. Boohoo. But yes I do remember from a real estate class the only way to hit home runs in RE is levering up the equity a ton. Sounds like sour grapes that the banks aren’t allowing him to lever up to the extent he wants in order to go for the fences.
homedelete,
You have a client, a friend, a co-worker or a relative to illustrate every point you want to make. I find that remarkable, and wonder how many of them are named Harvey.
You say: “when I read this article, I hear some guy say that he’s overpaying for foreclosures, losing money on the section 8 rents! and that he wants sell for capital appreciation in the future. That’s not a recipe for success.”
That’s not a recipe for success – nor is it remotely akin to Mack’s recipe. Are you deliberately misrepresenting his approach or simply failing to understand it?
Here’s a simple primer on what you need to know about depreciation and taxes on sale, but apparently don’t.
Depreciation gives you a deduction at ordinary income rates. You, rather than the government, have the use of the tax money saved – and a return on that money – until sale. At that time you pay tax on the amount of the deduction at capital gains rates.
You and I apparently travel in very different circles. Everyone I know would rather pay taxes at a 15% rate years down the road than pay at a 38% rate today. But then, I’m sure you have a Harvey who sees it differently.
Bob,
You need to take a remedial real estate course.
Typo: 35%, for now.
Another typo, on the recapture rate: generally, 25%. Not one of my better days.
Joe, I’m going to ask you nicely to please stop responding to my comments. From this day forth on I’m going to encourage everyone to ostracize you from cribchatter – until you can learn to play nice.
Yes – you’re entitled to freedom of speech and you can basically say whatever you want on the internet, but just like the Westboro Baptist Church, your offensive bitter and unrelenting vitriol towards other posters make you a complete and utter a$$hole and everyone’s life here is worse off because you are part of it. Yes, my life has been worse since you have become part of it for which I’m sure you derive great pleasure, because that’s the kind of guy you are. Now please, go away. Good bye.
homedelete,
I’ve never stooped to calling anyone any of the foul names you’ve used in referring to me time after time.
I’ll refrain, in the future, from participating here unless one of my clients is unfairly attacked or I’m attacked.
Enjoy!
The Big Lebowski (1998):
Walter Sobchak: Am I wrong?
The Dude: No you’re not wrong.
Walter Sobchak: Am I wrong?
The Dude: You’re not wrong Walter. You’re just an asshole.
Walter Sobchak: Okay then.
Humboldt1,
I’m a little confused-
How can you be pending when making a lowball offer.
Sometimes the banks reserve the right to entertain any offer even if you are contingent.
Joe Zekas,
Perhaps you should take a remedial course in business. If the banks aren’t willing to lend Mack the desired level to grow his business at the desired level and he can’t find alternate financing at a rate that keeps it profitable, its because on a risk adjusted basis it doesn’t make sense to.
Boohoo people can’t speculate with other people’s money at rock bottom rates anymore. Lets work on starting crying that river for Mack, shall we?
Its such a travesty that the banks aren’t throwing money around anymore. Its such an unfair world.
homedelete,
I appreciate you sharing your thoughts.
Per the realtor it will be listed as pending tomorrow. Expect 2-3 weeks for the bank to respond back, either way.
Again, no 2nd lien, so this greatly helps. Ironically, refi was used to put in central ac and heat, not to pull out equity for cash. Owner lives in naperville and just wants out. She signed off on my offer today.
On sat, realtor called her and she was at a party and too wasted to talk (at 2pm). I am sure she will be happy to put this behind her.
Others may be still able to look at the place but I am personally discouraged from looking at properties pending or contigent.
Why am I not surprised somebody willing to pay 400k for a Humboldt Park property in 2005 that is now worth 120k is also the kind of person that would be drunk at 2pm on a Saturday afternoon.
This is what happens when anyone can get a mortgage with no or minimal downpayment: the punchdrunk show up in droves and are willing to pay any price for a shot at the real estate as a means to riches game.
Good for you Humboldt1. It sounds like a great deal given the condition of the building and the rents you could get from it. This is what I like to see in this real estate market. Something that makes sense for a landlord to buy and where it could turn into a good investment down the road.
Let us know how things go.
On a side note about the Tribune article which was posted in this thread, didn’t he already own over 200 properties (and was adding a bunch more?) When did he buy those other properties? If it was in the last few years isn’t he underwater by at least 15% to 20% (maybe more- depending on location?)
How long to break even on those? I think of this just because Humboldt1 mentioned that he is down 50% on his building in Humboldt Park since 2006. How long until those just return to break even? 20 years? 30 years? Longer?
Seems to me that many of the investors that bought in the last 5 years are just barely hanging on- especially on the expensive north side of the city where rents don’t come close to covering costs.
Sabrina you’re exactly right about rents not covering the ownership costs for those who bought in the past few years.
I have a group of friends moving to Lakeview in a non-updated 2/2. Its basically the whole house except the maintenance guys unit which is unoccupied on the ground floor. The previous renters were paying $1,700. My friends are paying $1,350.
Just to recap…
Humboldt1 buying a foreclosure in Humboldt Park = good investment.
Mack buying 100s of foreclosures in affordable communities with strong village infrastructure over the past 13 years, rehabbing and renting them out long term = liar, tax cheat, sooo underwater the banks have no choice but to keep lending to him.
Yes- rents are falling. I’m seeing it with my friends as well. Even in Lakeview and Lincoln Park.
@ Dedalus:
“Do cash-buyers of real estate enjoy a meaningful price advantage over those who require financing? Listing prices get lots of attention. But my question is: Can the price of a home be significantly lower if one pays cash for it? In your experience, what has that (I presume) discount off list price amounted to: 10%, 20%, more?”
The answer is yes. Cash buyers definitely have an advantage over those who require financing because due to the credit markets drying up it is still very difficult to obtain a mortgage even if you are a qualified buyer.
So for a seller who is under some pressure, it would make sense to take a lower full cash offer than a higher offer with financing. If they take the higher financed offer, chances are they will wait much longer for the buyer to be approved and underwritten – (that is if they are sucessful in securing a mortgage at all) – and have to pay all the carrying costs for the property in the meantime.
Don’t listen to the real estate agents. They will always try to bid you up. My advice is to look at recent comps and then put in a low-ball offer. Put all shame aside. Seriously. It’s business. It’s money. It’s nothing personal. The worst that can happen is the seller will say “no”. In my experience however, they always make some sort of counter-offer to which you can counter again.
“Humboldt1 buying a foreclosure in Humboldt Park = good investment.
Mack buying 100s of foreclosures in affordable communities with strong village infrastructure over the past 13 years, rehabbing and renting them out long term = liar, tax cheat, sooo underwater the banks have no choice but to keep lending to him.”
Humboldt1 is cash flow positive. Maybe I’m missing something but isn’t that the whole point of investing in real estate?
“Humboldt1 is cash flow positive. ”
No, he must be lying, just like Mack, who’s quoted saying he’s cashflow positive on each property (albeit by small amounts). Humboldt1 is also using debt, while Mack is (apparently) 100% equity–meaning he needs a *much* lower rental return to be cashflow positive. Why is one plausible, but the other soooo obviously lying?
Anon,
Here are my actual numbers. I pay $1,910 per month in P&I and taxes. My utilities are $350 per month. This nets out to $2,250 per month. I take rents of $900, $800, and $650, which is $2,350. I make $100 per month. This is for my 2006 purchase in Chicago, which costs $360K (sucks now).
For my 2003 purchase in Itasca, I get $1,500 per month in rent. My P&I and taxes are $1,330 per month and I pay $150 per month for assesments. $1500-1,480 = $20 profit per month.
I am not claiming these are good investments. I would have made more sticking the money in interest-bearing checking account. I have $43K in down payment on Itasca and $72K in down payment for Chicago. $115K in a CD at 2% would earn more money with far less risk and headaches.
For my next purchase, at say full value, $170K, I will get minimum of $1800 per month in rent, possibly $2,600. I will not be paying utilities apart from water at say $100 per month. P&I and taxes will net out to approximately $1,050 per month on 30 year note, $1,360 on 15 year note.
At $120K, it is an even better deal, $830 + 100 (water) = $930/mth.
$2600-930 = $1670 per month positive cashflow.
Not renting out basement = $870 per month positive cashflow (utilities for basement are actually paid by first floor renter as condition of getting washer/dyer in basement).
Humboldt1:
I didn’t mean to pick on you. I just think it’s absurd to assume that the dude in the paper *must* be lying and you *must* be telling the truth.
And your two existing properties are *less* cashflow positive than Mack claimed–but he’s a fool and a tax cheat and a liar. Either you both are or you both aren’t–I’d go with you both aren’t–the only real difference is that Mack’s going big, which may be foolish but doesn’t make him a cheat or a liar (any more than your properties make you one). Just (perhaps) someone who will lose a lot of his and (in Mack’s case) others’ money.
I suspect the bank will reject Humboldt1’s offer as he suspects. But I will give him kudos on a very solid strategy that I had never thought about before.
Previously I had wondered why some properties sit at pending for months on end, only available to be viewed on certain real estate sites (like Redfin) but not others (ie: Ziprealty).
I appreciate his insights as an aspiring serious landlord. His opinion I value much moreso than the accidental or mini-landlords who think having someone living in the other unit of their 2-flat on a building they paid 500k for and paying 1k/month is helping them cover the mortgage and somehow a good deal. Those people are very stupid at math and quite funny, although not very informative.
“$115K in a CD at 2% would earn more money with far less risk and headaches.”
You can earn up to 5% in rewards checking accounts. The catch is these are capped at 20 or 25k and have the headaches of requiring a certain number of transactions per month and a billpay and direct deposit.
Sure it would be annoying to make sure these things are done each month in five different rewards checking accounts, but depending on whether you prefer desk-jockey paperwork to more hands-on work it might not be a bad alternative.
The one thing you have going for you is when the economy bounces back so will rents. Any rent escalation is just positive cashflow to you at this point.
Bob,
I am not accidental landlord, but certainly not a seasoned veteran yet. I am somewhere in between.
I am actually thinking about maybe putting in other offers as I am able to finance at least one more property. I am a frugal guy who has reserves, no kids, no other loans apart from real estate.
I could buy this place in cash, but that would deplete my reserves, so borrowing is my solution.
Putting $1K down to reserve a property in a declining market is not the worst thing. We will see how this one plays out. Even at $170K it is a deal in my mind.
Understand, however, I have developed a unique skillset in this area and this is not for everyone. I have contractors to do the work and possible tenants lined up from 4 years of being a “good guy” landlord. I have reserves for when rents are late and you really need to speak Spanish and be decent with dealing with people as you get all sorts.
I know the block from living there and the people. I doubt this property has as much value to others or will be appreciated by many as it is not in a sexy area. I gave up on buying sexy as sexy does not cashflow.
“I gave up on buying sexy as sexy does not cashflow.”
That’s likely why I’ll never be a landlord in Chicago. Doesn’t make sense in areas I want to live as valuations on multi’s are bid up by Chads so they can brag at keg parties they’re a landlord, even if they don’t cashflow. Doesn’t make sense as an absentee landlord either for reasons you understand.