## Tuesday, May 29, 2007

### Condo Conversion Cash Drain

The following was written in 2003. It's a shame so many chose not to listen:

"A lesson in deflationary economics…

Stage 1
You buy a Condo as rental property for \$200,000 with 10% down at 5% Interest for 20 years. \$180,000 is what you owe and your payments are \$1187.92/month condo fees are \$100/month and Property taxes are \$100/month = 1387.92/month to “own it” and you rent it out for \$1500. Let’s say real estate takes a 5% hit. At first this is how it looks: Your condo is worth 190,000 but to sell it the fees are 7% Let’s say so… It is worth only \$176,700… you just lost \$23,300 and you owe \$177,344.96 after 6 months.

Stage 2
The renter moves out… and you eat a month payment for \$1387.92 and have to drop the rent by \$100 to attract another renter. Loss so far is \$24,487.92

Stage 3
Property taxes are not bringing in enough and are raised by \$25 a month. New payment to “own it” is \$1412.92 renter is paying \$1400…House prices drop another 5%... The condo is worth \$180,500 but to sell it the fees are 7% let’s say so…It is worth only \$167,865… you just lost \$33,625.44 and you owe \$174,622.86 after 12 months…

Stage 4
The owners of the rental properties that were bought 5 years previously drop their rents to \$1200/month and your renter moves out again and you take 2 months to “figure it out”. Loss now = \$36,401.28 + 187.92/month every month after that…
It will cost you \$4,622.86 just to escape if you could sell it in 24 hours for \$170,000… Then factor in “small print penalties” and your total loss could be \$40,000.

(It doesn't matter what figures you put in - down is down - higher figures and the problem is worse…)

Because you were living on credit you have to declare bankruptcy as this investment was enough to finish you…

When residential real estate “Cracks” it will be a blood bath… The person that originally sold it to you for \$200,000 comes in at the bottom and buys it back for \$120,000 and since he had the \$186,000 in silver and it went to \$10 an ounce from \$5 now he owns a condo that generates \$900 a month and has \$252,000 in the bank and you are living in it...Imagine the millions soon to be caught in the American dream scheme…

How many millions of people have bought substandard or second hand money pits with only 0%,5%,10% down? Quite a few... Once the cold grim realities of being a landlord or homeowner/buyer set in, in an environment of dropping prices then we'll see what happens...

The process is somewhat slow but it will crack straight across the board within 24 months [Cheryl-Lynné: the real estate market topped in July 2005] or wages straight across the board will rise up to meet the cost of rent or mortgages that have to keep increasing forever...Unemployment needs to be reversed drastically also... Debt deflation will work its magic...

The home builders, real estate agents, and lenders don't care about providing families with houses… they just need suckers to sign the dotted line and take long-term responsibility for the short-term debt (construction loan)... The profits are just invested in more speculation and marketing to get the next round of suckers...
The bottom of the barrel is getting scraped and soon the dotted line signing ceremony is going to start to disappear unless prices drop, interest rates drop, unemployment is stopped or wages rise drastically."

HT was generous with his figures, the negative cash flow and price depreciation most real estate investors are suffering is much worse. One of the many hazards of failing in the due diligence department. One example - someone I know bought a Florida investment condo conversion in 2006 for \$156k which one year later appraises at \$110k; at the \$110k purchase price the negative cash flow is still \$500 per month. Mmm...investments are supposed to make money.