Vultures Are Circling Over Distressed Properties

This was a headline in Saturday’s Washington Post.

Like the New York Times, you can always count on the ol’ Post to get things exactly 180 degrees wrong.

Vultures? Really??

I don’t know about you, but that description sounds pretty bad. Even a bit sinister. Maybe a touch evil. They like to make ma and pa out to be victims of the big bad mortgage companies, and they make it sound like those of us that invest in distressed real estate are gleefully kicking ma and pa off the farm they have lived on for 60 years into a homeless shelter, all while we sit by a cozy fire sipping Cognac and lighting our $20 cigars with $100 bills.

I often wonder what color the sky is in the alternate reality occupied by the Washington Post.

Let’s take a few minutes and look at true reality, shall we?

Now – using the term “vulture” implies both a victim and a predator. Let’s look at the whole victim thing first; an area, by the way, where we as a country excel.

The foreclosure tidal waves in both Florida and Las Vegas are the direct, appropriate and TOTALLY predictable result of oversupply. An oversupply that was driven not by any type of rational market force. No. It was driven completely by real estate speculators looking to make a profit. The first ones in did make a ton of money. The ones that jumped in at the end are now holding the bag.

Are these real estate speculators victims? Absolutely not. Investing is obviously risky, and anyone that jumped in should have done their due diligence. I doubt very seriously that any of the speculators had a gun pointed to their head as they wrote deposit checks on multiple condo units that wouldn’t be built for several years.

Do these speculators deserve our sympathy? No. Their greatest value is that they should serve as warning and a case study for the rest of us, a la the dot com crash, on how investing in ANYTHING when the fundamentals aren’t there is a really stupid thing to do. Yes I said stupid.

Victim count – 0.

Here in Michigan the situation is quite a bit different as we are heavily weighted toward adjustable rate subprime mortgages.

Adjustable rate mortgages were obviously popular over the last few years when rates were low. They allowed people to maximize their monthly payments to buy homes that they could not otherwise afford. Subprime adjustables then became a well-used vehicle that allowed poor credit borrowers to buy homes.

This however, was a double-edged sword, as most of the people that took on these subprime adjustable rate mortgages never expected them to actually adjust and therefore never thought about what would happen if they did.

The upside was that a huge number of people had the opportunity to experience home ownership. The downside is that most were not the least bit prepared for them to adjust.

Are there “victims” here? Probably in some cases, but not nearly as many as the media would like you to think. Most subprime loans were taken on with zero out of pocket costs, so these borrowers didn’t lose any real money. Their credit suffered by having a foreclosure added, but they had subprime credit in the first place.

Victim count – low.

So – despite what you’ve heard, there really aren’t many true “victims” in this mess. Most people in both the scenarios are reaping what they have sown; they’re simply lying in the bed that they made for themselves.

Now let’s look at the “predator” angle.

What exactly are investors doing in these down markets?

Here in Michigan, investors like me are buying homes that have sat on the market for months, some longer than a year. Most are vacant, have had the utilities turned off, and are not being maintained at all. And the grass is only cut when someone complains. They are eyesores and a blight on the neighborhoods.

So what are we doing with them once we buy them? We fix them and rent or sell them.

Let me reiterate.

We’re buying homes that wouldn’t otherwise be bought.

We use our own money to rehab them. We take ALL the risk.

Then we rent them or sell them to people that want to live there.

This is a bad thing? This is predatory?

The truth is, we are helping to improve these neighborhoods, one house at a time.

And somehow, since we make a profit in doing this, we’re called vultures by Those That Know Better at the Washington Post.

You know what? I’ll take it. I’ll take it but I’ll ignore it.

Why? Because of what happened at the last house that I rehabbed.

You see, when I’m rehabbing a property I wait until I’m nearly finished with the rehab to put in new landscaping. On this particular house, the guys that did the landscaping put in a very long last day to get done, and I went by after work to check it out and pay them. When I pulled up to the house I saw almost a dozen neighbors and kids on the sidewalk looking at the nearly finished work. Landscaping always makes a big difference, but this job turned out exceptionally well.

When I got out of my truck and walked up to the house the neighbors applauded. No joke. Not only that, but each of them individually thanked me for taking the crappiest and most rundown house on the block and making it beautiful.

The applause on this one was a surprise and a first. But the appreciation wasn’t. No. On EVERY rehab that I have done, the neighbors have been just as appreciative of the work that I’ve done, and every investor that I know gets the same response on every house.

It’s just what us vultures do.