Oy, The Croc's Got My Leg!

The Housing Bubble blog has excerpted an interesting investment column:

Several readers sent in this article for discussion. “All over the U.S. there are stories of a rise in real estate foreclosures. Many people who took those exotic mortgages are struggling to make their payments, and some aren’t making it. Also, a glut of new property supply, especially condominiums, is coming on line.”

“A friend of mine, a very seasoned real estate investor, says in San Diego County, once one of the hottest real estate markets in the country, thousands of new condominiums are getting ready to come to market, just as the market softens. He estimates that over 12,000 new units are coming on line, and the market, at the best of times, can only absorb about 1,000 condominiums a year. If he’s correct, that means 12 years of supply will be ready for market in the next year.”

“The people who are in the most trouble are flippers. Many were buying condominiums off the plans, which means the projects were yet to be built, in the hopes that when the homes were completed, they would sell for a tidy profit. The trouble is many of these flippers, lured into the market by stories of people making a huge killing earlier with a similar strategy, are now the ones to be slaughtered.”

“Now, they either lose their deposit or have to cough up the money for the purchase in the hopes there’s a greater fool than they were somewhere out there real estate. If you recall, the same thing happened around the year 2000 as amateurs jumped into the stock market.”

“In the coming months, I predict we’ll see an increase in people dumping real estate they can’t afford. They’ll be forced to sell because they’ll be eaten alive by a phenomenon known as negative cash flow. Investment properties that you have to feed money to every month are fondly known as alligators, if you can’t afford to feed the property every month, it eats you.”

“I know of one so-called real estate investor (and I prefer to call people like him speculators rather than investors) who has three homes he thought he could flip for a profit, but he priced them too high. Now, $7,500 comes out of his pocket every month to feed the negative-cash-flow alligators.”

“The problem is, he and his wife don’t earn that much a month. Their three alligators are literally eating them out of house and home, consuming the profits they made from other flips, and their savings.”

“To add more pain to the misery, they still have to pay the capital-gain taxes they made from their previous successful flips. They’re toast. The alligators are eating them alive. They can’t afford to feed them, and they can’t afford to sell them because the prices they paid for these alligators are more than they’re worth today. And this is only one story.”

“Now that the market is cooling down, sellers are a little bit more humble. You have more time and can do your due diligence carefully. You can negotiate better terms and make a better deal, especially if the seller has his leg inside an alligator’s jaws. But don’t be in too much of a hurry.”

“A year ago, I sent out a warning to investors, especially flippers, to cash out quickly. I received a lot of irate e-mails from people who thought I was turning on them. They thought I was spreading bad news. Little did they know that by forecasting a real estate downturn, I was spreading good news, good news for real investors and bad news for amateur alligator wrestlers.”