Author Topic: Real Estate Speculation  (Read 5275 times)

HairyUpperLip

  • Pencil Stache
  • ****
  • Posts: 896
Real Estate Speculation
« on: May 12, 2014, 09:52:50 AM »
I know this is going to earn face punches, but before I get too bloody please note I'm only asking for thoughts on this and not really planning on doing it.

On my commute to work there is several brand new neighborhoods that are popping up. They are in more affluent areas and the houses start at "low 400's". I think the actual average purchase price is around $500k.

I currently live rent/mortgage free. I had wondered about doing a FHA 3.5% down situation on any of the houses in the 400 range. I can easily float the $22-2400 a month mortgage payment. I would not live in the home or even care to ever set foot in it.

Since all the neighborhoods are in Phase 1, I believe there is a real possibility these houses will increase by over 100k within the year. It's all guess work numbers. The moment the house would be worth $100k+ I would be happy to list it on the market.

Basically - what I'm asking/thinking - Do you think speculation risk is worth a possibility of coming home with over $100k in cash? Just asking to see what others think on a more financially minded forum.

Again, I already got a nose bleed from the thought of it, so not too many punches please. Just asking a hypothetical question.

GrayGhost

  • Bristles
  • ***
  • Posts: 389
  • Location: USA
Re: Real Estate Speculation
« Reply #1 on: May 12, 2014, 10:07:12 AM »
I don't think I'd do it. At least, I'd think very, very long and hard before getting a house at full price with the intent of selling it without improvement for 20% profit, within a year.

You could be right, of course, but speculation is pretty risky. I don't think I'd do what you have in mind, unless there's another exit plan available? For example, do theses houses meet the 50% rule of mortgage vs rent? In that case, you could rent out a house if it doesn't appreciate as expected.

It might be much wiser to search for foreclosures, REO deals, and other deals in the area if you really want to go for it. Buying a home at full price so that you can sell it for 20% more after a year, without doing any improvements... it sounds way too hopeful.

HairyUpperLip

  • Pencil Stache
  • ****
  • Posts: 896
Re: Real Estate Speculation
« Reply #2 on: May 12, 2014, 10:25:27 AM »
I would totally agree if I didn't know the area.

The only thing that makes me think it's realistic is all the improvements they are making in this already affluent area. They only keep building more and more homes that are very pricey.

I believe the house could be rented if it needed to be, but I don't think I'd make more than chump change if I buy with a FHA situation.

I know it's very risky and I'm only thinking about it and just thought it would be good to hear some opinions from people with more experience.


I learned from some other REI that buying in Phase 1 is like gold because values usually rise before phase 2 or 3 is completed or sometimes even started.


Another Reader

  • Walrus Stache
  • *******
  • Posts: 5158
Re: Real Estate Speculation
« Reply #3 on: May 12, 2014, 11:04:18 AM »
It can work but it's very risky.  A lot of condos in Las Vegas were sold this way during the bubble.  People bought off the plans and sold when the unit was completed a year or more later.  Overseas investors have done a lot of this in California.  In 1991, at the beginning of a downturn in values here, my subdivision was advertised in a magazine published in Taiwan.  I still have that magazine, although I can't read it.  Lots of overseas investors bought in a subdivision of McMansions nearby at the same time.  The houses had utilities and gardeners, and sold in the next upswing as new, never lived in houses.

However, real estate is cyclical, and the person buying at or after the cycle turns is going to get badly hurt.  So it's very, very risky.
« Last Edit: May 12, 2014, 12:30:39 PM by Another Reader »

Poorman

  • Bristles
  • ***
  • Posts: 260
  • Age: 42
  • Location: Orange County, CA
Re: Real Estate Speculation
« Reply #4 on: May 12, 2014, 12:07:53 PM »
I currently live rent/mortgage free. I had wondered about doing a FHA 3.5% down situation on any of the houses in the 400 range. I can easily float the $22-2400 a month mortgage payment. I would not live in the home or even care to ever set foot in it.

FHA only lends on owner-occupied housing (with some limited exceptions), so for you to do this would require lying about the occupancy on the mortgage application, which is fraud.  There are other ways, but I'm not sure your thinking on this is very clear.  Basically, you are banking on a 20% price increase in one year for this scheme to work.

HairyUpperLip

  • Pencil Stache
  • ****
  • Posts: 896
Re: Real Estate Speculation
« Reply #5 on: May 12, 2014, 12:10:58 PM »
I currently live rent/mortgage free. I had wondered about doing a FHA 3.5% down situation on any of the houses in the 400 range. I can easily float the $22-2400 a month mortgage payment. I would not live in the home or even care to ever set foot in it.

FHA only lends on owner-occupied housing (with some limited exceptions), so for you to do this would require lying about the occupancy on the mortgage application, which is fraud.  There are other ways, but I'm not sure your thinking on this is very clear.  Basically, you are banking on a 20% price increase in one year for this scheme to work.

Yeah, it's not very clear as it's not a solid plan -- just wanted to discuss the possibility and risks. There is a 0.1% chance I will actually do this.

I'm younger, so just looking for more for advice/thoughts/opinions from more experienced REI people. :)


waltworks

  • Magnum Stache
  • ******
  • Posts: 3511
Re: Real Estate Speculation
« Reply #6 on: May 12, 2014, 12:18:03 PM »
Well, don't forget transaction costs (closing will cost $15k or something when you buy, selling will cost $20-30k probably if you use an agent) and capital gains. Even if you're right and the house sells for $600k next year, you'll have spent:
-$15k in closing costs.
-$25k or so in P&I/taxes/insurance, plus presumably some token amount of maintenance. You could presumably cut this down by renting it but that will add to maintenance costs and make it harder to sell later to some extent.
-$20k (I'll assume you find a super cheap agent to sell the place) in costs to sell.

So we're at $40k of profit, on which you'll pay $6k in taxes. Total $34k, using VERY optimistic numbers. Not shabby for a year's investment but considering the risk... ugh.

Actually, come to think of it, if I start seeing more posts like this I'll sell my rentals on the assumption it's a bubble...

-W

HairyUpperLip

  • Pencil Stache
  • ****
  • Posts: 896
Re: Real Estate Speculation
« Reply #7 on: May 12, 2014, 12:31:51 PM »
Well, don't forget transaction costs (closing will cost $15k or something when you buy, selling will cost $20-30k probably if you use an agent) and capital gains. Even if you're right and the house sells for $600k next year, you'll have spent:
-$15k in closing costs.
-$25k or so in P&I/taxes/insurance, plus presumably some token amount of maintenance. You could presumably cut this down by renting it but that will add to maintenance costs and make it harder to sell later to some extent.
-$20k (I'll assume you find a super cheap agent to sell the place) in costs to sell.

So we're at $40k of profit, on which you'll pay $6k in taxes. Total $34k, using VERY optimistic numbers. Not shabby for a year's investment but considering the risk... ugh.

Actually, come to think of it, if I start seeing more posts like this I'll sell my rentals on the assumption it's a bubble...

-W

Ironically enough I feel like there is another bubble happening. I've seen all the house prices drastically inflate again in my area.

My initial plan was to try and get a rental property, but I'm seeing there is TOO many rentals available (empty) in my area. Houses are going up and up in price - I no longer see myself being able to get a cash flowing rental property.

For what it's worth, I'm a regular on BiggerPockets and I attend the REIA meetings in my area. So I'm not completely ignorant as my post might lead everyone to believe.


I have a FIL for a realtor, so I would have minimal fee's on anything I do as far as purchasing or selling.

GrayGhost

  • Bristles
  • ***
  • Posts: 389
  • Location: USA
Re: Real Estate Speculation
« Reply #8 on: May 12, 2014, 02:29:12 PM »
The thing is that experience and expertise doesn't insulate you from the possibility that your area is simply seeing a short term bubble that may pop at any time. There's just so much at play here that you can't control, and you're banking on your ability to look at the value of homes a year into the future.

You could make very good money on this, there's no doubt about that. But this is very risky indeed, and even if you do take the plunge and come out better because of it, I feel like it might induce you to get into other high risk real estate situations in the future.

HairyUpperLip

  • Pencil Stache
  • ****
  • Posts: 896
Re: Real Estate Speculation
« Reply #9 on: May 12, 2014, 02:54:12 PM »
FHA only lends on owner-occupied housing (with some limited exceptions), so for you to do this would require lying about the occupancy on the mortgage application, which is fraud. 

I was thinking about this comment... is it fraud if I own it but don't physically occupy it, but also don't rent it? Basically, what if I own it and just leave it empty? Isn't it my house at that point? I'm not looking for anything illegal as I don't ever intentionally the laws or my own morals.

HairyUpperLip

  • Pencil Stache
  • ****
  • Posts: 896
Re: Real Estate Speculation
« Reply #10 on: May 12, 2014, 02:57:40 PM »
The thing is that experience and expertise doesn't insulate you from the possibility that your area is simply seeing a short term bubble that may pop at any time. There's just so much at play here that you can't control, and you're banking on your ability to look at the value of homes a year into the future.

You could make very good money on this, there's no doubt about that. But this is very risky indeed, and even if you do take the plunge and come out better because of it, I feel like it might induce you to get into other high risk real estate situations in the future.

Yeah, I may have to do a little market research to see if it's worth the gamble. And worst case scenario, I just end up living in it for a couple years and pay the mortgage. Ideally not, but I can "afford" something on this level... I just don't care because I think it's too much money for strict HOA's and cocky neighbors. I want land over community pools and golf courses.


No reward without some risk, right? lol - I don't think I'd ever try to duplicate this type of a situation ever again. I also believe it's just some type of a bubble happening in my community.

The city is newer itself. The residents earn an average of $82k+ per year. The schools are considered some of the best in the state for sure, maybe even country. Families are FLOCKING to this city - especially East and South Asian families.

Poorman

  • Bristles
  • ***
  • Posts: 260
  • Age: 42
  • Location: Orange County, CA
Re: Real Estate Speculation
« Reply #11 on: May 12, 2014, 05:21:36 PM »
FHA only lends on owner-occupied housing (with some limited exceptions), so for you to do this would require lying about the occupancy on the mortgage application, which is fraud. 

I was thinking about this comment... is it fraud if I own it but don't physically occupy it, but also don't rent it? Basically, what if I own it and just leave it empty? Isn't it my house at that point? I'm not looking for anything illegal as I don't ever intentionally the laws or my own morals.

You'll be signing an affidavit stating that you will occupy the property within 60 days of closing, and live there for a full 12 months after moving in.  There's also an owner-occupancy clause in the FHA mortgage note listing out the penalties under Federal law, so you need to realize that there's no gray area here.  It's defrauding a government housing program.

totoro

  • Handlebar Stache
  • *****
  • Posts: 2103
Re: Real Estate Speculation
« Reply #12 on: May 13, 2014, 06:44:24 AM »

I have a FIL for a realtor, so I would have minimal fee's on anything I do as far as purchasing or selling.

You don't usually have any realtor costs as a purchaser.  You do have property transfer tax and other fees that your FIL will not be able to help with.

The FIL will likely only save you the listing realtor commission if he is willing to show for no cost and if his brokerage agrees to this deal - often they will not - but maybe he is independent so that does not matter as much?

You'll still have to deal with the buyer's realtor if they have one and you may need to discount the price for the amount of the commission they are on the hook for with him or her if you are not planning on paying them the normal commission.  You may find this impedes your sale.

As for speculative properties, I've never done it.  I wouldn't do it under your circumstances where you are looking at a black hole of expenses until sold.  That said, a lot of people have made - and sometimes lost - a lot of money on this type of deal. 

AccidentalMiser

  • Pencil Stache
  • ****
  • Posts: 661
  • Age: 52
  • Location: SE Tenn
Re: Real Estate Speculation
« Reply #13 on: May 14, 2014, 07:33:43 PM »
NO. FREAKING. WAY.

The ONLY way I would consider doing something like this is if I was OK with moving into one if things didn't work out the way I planned.

Real estate speculation is a dangerous game with ugly/rehab/flip properties.  Real estate speculation in new subdivision home sounds like an invitation to lose one's shirt.

Why would someone buy from you for 500k when they can buy new from the builder for less?

golfer44

  • Stubble
  • **
  • Posts: 195
Re: Real Estate Speculation
« Reply #14 on: May 14, 2014, 09:49:49 PM »
Yeah, I may have to do a little market research to see if it's worth the gamble.

A little?

Ya think?

HairyUpperLip

  • Pencil Stache
  • ****
  • Posts: 896
Re: Real Estate Speculation
« Reply #15 on: May 15, 2014, 07:56:05 AM »

The ONLY way I would consider doing something like this is if I was OK with moving into one if things didn't work out the way I planned.

Real estate speculation is a dangerous game with ugly/rehab/flip properties.  Real estate speculation in new subdivision home sounds like an invitation to lose one's shirt.

Why would someone buy from you for 500k when they can buy new from the builder for less?

But I can afford too. That's why I said that. I'm setting aside $3350 a month right now to save for a house.

Yeah, of course it's super dangerous/risky. Again, just wanted people's personal experiences more than anything.

Because the new builds will get sold quickly. I've already seen it with the other neighborhoods in the area. They don't last very long because there is super high demand to move into this area.

HairyUpperLip

  • Pencil Stache
  • ****
  • Posts: 896
Re: Real Estate Speculation
« Reply #16 on: May 15, 2014, 07:58:08 AM »

You'll be signing an affidavit stating that you will occupy the property within 60 days of closing, and live there for a full 12 months after moving in.  There's also an owner-occupancy clause in the FHA mortgage note listing out the penalties under Federal law, so you need to realize that there's no gray area here.  It's defrauding a government housing program.

Thanks. I wouldn't care to break any laws over this.


HairyUpperLip

  • Pencil Stache
  • ****
  • Posts: 896
Re: Real Estate Speculation
« Reply #17 on: May 15, 2014, 07:58:55 AM »
Yeah, I may have to do a little market research to see if it's worth the gamble.

A little?

Ya think?

Thanks for the input

pantherchams

  • 5 O'Clock Shadow
  • *
  • Posts: 24
Re: Real Estate Speculation
« Reply #18 on: May 15, 2014, 10:20:15 AM »
To me it is really tough to give anything more than general input, as the housing market is so location specific.

If I had the cash to do this in my area 2 years ago, I would have done it.  And it probably would have worked great, although I would have most likely kept as a rental rather than cashed in.  I have the cash to do it today, and I am not going to do it.  The market here (Northern CA) has rebounded too much, and I feel like we are close to getting above a sustainable property value/income ratio for the area.

I'd say do your own research and do it if you think it the reward/risk sits well with you, and you can afford some loss should it happen.

Ben


waltworks

  • Magnum Stache
  • ******
  • Posts: 3511
Re: Real Estate Speculation
« Reply #19 on: May 15, 2014, 12:10:03 PM »
Dump your $40k a year of spare cash in index funds of whatever flavor you like. Much lower risk, no extra work, pretty much a slam dunk if you're on a longish time horizon.

Pigs get slaughtered.

-W

But I can afford too. That's why I said that. I'm setting aside $3350 a month right now to save for a house.

Yeah, of course it's super dangerous/risky. Again, just wanted people's personal experiences more than anything.

Because the new builds will get sold quickly. I've already seen it with the other neighborhoods in the area. They don't last very long because there is super high demand to move into this area.