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Sunday, January 6, 2008

Lessons Learned

See the old house on the right? It was one of four buildings that had been assembled into a 23 unit apartment complex near downtown Denver. I bought it in August 1980 with a guy I worked with in Denver, and we had a contract to flip it in December 1980 for more than a 100% profit. The deal blew up, we sued the buyer for specific performance, and our Realtor disobeyed our specific written instructions not to return the earnest money deposit to the buyer. The settlement we reached with the buyer was nothing compared to the loss we incurred when the market disappeared. And my co-worker "friend" stopped paying his half of the mortgage. The short term flip turned into a 13 year learning lesson.

The Denver market had been on an up-tick for several years and the area where the property was located was being purchased for redevelopment by lots of folks. I was doing commercial loan workouts for the largest bank in Denver so I was very familiar with what was happening in the market. The Denver residential and commercial real estate markets were skyrocketing. My own house appreciated 253% between 1977 and 1982 when I sold it. But my experience was typical, not an aberration.

But when the oil market tumbled in Colorado, the whole economy farted. The housing market didn't just go limp, it went south. Properties across the board depreciated in value. Homeowners walked away from homes that they had recently purchased that had mortgages higher than the their worth.

The logic was simple. If homeowner owed $100,000 on a house only worth $75,000 the homeowner would just walk away from the house and let the bank deal with the property. So what if the homeowner had to file bankruptcy, the bank should have been more careful in the first place. Besides lots of other people were doing the exact same thing. There is no shame in having been taken by a bank.

But the banks lost as well. They had loaned millions on new office buildings, shopping centers, strip malls, etc. The problem was the banks did not always know how many other and usually similar other projects were being built. As a result Denver ended up with a huge over supply of downtown office space, shopping centers, and one gazillion strip malls.

And as for me, I bought out my co-worker so that my credit would not get impaired. But instead of selling the building and going forward, I decided to wait for the market to return so that I could make the profit I wanted. I did, sort of. But it took 13 years.

I'm sure you have heard of the "bigger fool theory". GO HERE to read about the bigger fool theory. In an up real estate market there is always going to be someone willing to buy at a price higher than the present owner paid. But when the market turns south, even stupid people get smart and stop buying. It seems that just about everyone decides not to buy until it is safe. And everyone has their own theory on what the market will do and how long it will take.

Well, it took me 13 years to get out, and I should have known better. I let that little ego-maniac in my brain rule my thought processes. I should have sold and gone on to do other things.

And the banks that made the stupid loans should have learned not to do that again. They didn't. But I did. The banks and savings & loans took a whipping in the late 1980s and early 1990s. And the banks (and this time investment banking firms as well) are getting hammered over bad home loans. Homeowners are doing what they did in Denver in the 1980s and that is walk away from their homes and mortgages.

There is a slew of inventory on the market and few buyers with the nerve to buy it for fear (or expectation) that the market will continue to fall further.

There are a few parts of Key West real estate that are hitting the skids big time: the Key West Golf Club, Seaside, and many homes in New Town that were damaged during Hurricane Wilma. The cheap units at the Golf Club that sold in 2005 for over $500,000 are now priced around $300,000 +/-. That is scary. But the prices there may fall more. Homes in New Town that were built in the late 50s and early 60s that sold in 2005 in the $750,000 + range are now available in the mid $500,000 range +/-.

During this past week in Key West there were 48 new residential listings,43 residential price reductions, 13 contracts that went contingent or pending and 3 sales. This is selling season, so it is not surprising to see all the new listings. But the price reductions (especially the drastic ones) indicate a market in turmoil.

There is a house I have written about here several times that just got listed by another real estate company. The prior listing agent did her customer a huge disservice by listing the property way too high for this market. I personally had written an offer on the property but then decided not to submit it because I thought the listing agent would not convey the offer in a positive tone. We are not supposed to speak evil of other Realtors. I would like to tell you what I think of that woman. But I can't.

I will stop writing now, but I do think there are buying opportunities. Good properties will sell and the rest is going to grow weeds and the paint will peel.

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Gary Thomas in a Nutshell

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Key West, Florida, United States
I first read about Key West in a magazine called "After Dark" sometime in the mid 1970's. But it wasn't until March 1984 that I made my first visit to the island that would become my home. I had two weeks for a vacation and reserved a room at Colours Guesthouse (now Marrero's Guest House) for one week. I thought that if I didn't like Key West, I could always go back to Miami or Ft. Lauderdale for the rest of my trip. But after a couple of days in Key West, that was no longer a consideration. But when I wanted to extend my stay for the extra week I found there was no room at the inn. The guesthouse owner did find me a room at LaTeDa, the infamous guesthouse/restaurant. That's a story I'll write another day. But those two weeks in Key West gave me the realization that I had found Paradise. Key West has been my home since 1993 and my only regret is that it took me so long to get here. I am a full time Realtor at Preferred Properties CRI. Let me help you find your new home or business in Paradise. Living in Paradise is not a slogan, it's a way of life.