I Keep on Singing the Same Song

"What's your profit going to be? Who will it come from, and how much will you see?" is the chorus of the song I keep singing to my clients. In counterpoint they croon a different tune: "Houses are cheap, that's what they say, if I don't buy now I'll rue the day."

While I am not actually performing the role of the real estate attorney in my own personal operetta, I am increasingly making a pest of myself to the other players on this stage. I frustrate clients and irritate colleagues by singing the same showstopper at every performance: "What's the plan for the profits you seek? How will you make money in a market that's weak?"

When one colleague boasts that he's busy with clients buying up empty condos or chunks of blighted neighborhoods, I ask with genuine curiosity how and when these investors are planning to recoup their outlay and turn a profit. In reply I get a shrug and a "who knows?" When I inquire of another attorney retained by speculating buyers how these 2009 investors intend to avoid getting burnt like those currently in foreclosure, I am told "with prices like these, the deals are too hot to pass up".

I don't want to see the mistakes of the past repeated by those I have been hired to protect, so I regularly sing my song to those gathered around my conference table. These clients have already extricated $150,000 or so from the rapidly diminishing equity in their homes, and their plot lines rarely vary: they want to use the funds to buy houses in the low $100s that sold for at least twice that amount a few years ago. Some clients want to transform totally trashed houses, turning a profit "when the market rebounds." I see how uneasy they get as I ask what they've budgeted for materials (and labor if they're not handy) and how much of their savings they'll have to deplete while the houses sit unsold. Do they realize that the very market that made it easy for them to find such "cheap" houses might very well continue to drive prices down, or at least hold things so steady that any substantial gain on their investment might be many years away?

Others seeking my representation are confident they can refurbish a pile of rubbish (barely) surrounded by four walls and a roof and yield a monthly profit by renting it out. Do they have the funds to fix-up the fixer-uppers without further dipping into their first home's equity? Have they calculated the costs of being on-call caretakers to tenants with no cares or concerns about what gets flushed down the toilet or goes up in smoke in the fireplace? Are they not deterred by the glut of unsold houses and condos shifting into the rental market, driving down monthly returns from those lucky enough to find credit-worthy tenants? And for those desiring government-backed leases, have they considered how fast cash starved administrations are cutting out aid for the poorest?

I can both see and smell the flop sweat by the time my catastrophic caterwauling is concluded, so I quickly break the mood. I tell them that I am absolutely not trying to dampen their enthusiastic plans to make the most of their money, but as their counselor I just don't see how borrowing cash from their current abodes to plunge into sinkholes disguised as houses will have a profitable ending. To those clients undeterred by my gloomy crooning, I then offer them reassurance: you don't need your attorney to be a visionary; if the current wave of speculators transform into the smart investors of the future by yanking the real estate market out of the doldrums and re-establishing it as a business yielding realistic returns, I'll be very happy to change my tune. And when my audience stands (rarely for an ovation, but merely to leave), I conclude on an up-note: "I hope I'm wrong! I truly do! I need to pay my mortgage too!"

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Comments

[Sundialsvc4]

Lita, you are a very wise woman. Do not change your tune. You are entirely correct in your prognostications for the foreseeable future.

But y'know, you yourself might wish to shift your own client-base to those with deeper and more lasting pockets ... to men and women who share your wisdom, who will listen to it and not fear it. The people who you are speaking to now are facing ruin but do not know it. But there are others, of much greater means, who know that they will be the ones who bring about true recovery when it finally comes. They will need all the wisdom they can find, as well as the clear ability to speak, which clearly you have. Such people do not seek headlines for themselves, but having read this post I am sure that they will seek you out.

You are correct. And a very great many of us know it. Katrina ... is here.

[Lita Smith-Mines - Huffpost Blogger]

Thanks for your thoughtful comments.

I truly like my client base, but it is truly hard to earn a living talking people out of hiring me!

[sonoffestus]

Our "house rules"....­..........­..........­..........­..........­...
Rule # 1..............Your house is your home.
#2 ..............Buy a home you can afford.
#3........­.......You­r home is NOT a "investment."
#4........­.......Liv­e in your home, enjoy your home, raise your family in your home.
#5........­.......One day you will sell your home. If you are lucky you will have made some money, but not the money you think you have made. Human nature forgets all that you put into your home over the years, and never tallys the "labours of love" you put into it.
#6............When you retire, downsize. Do not build a large "dream" home thinking your kids and grand kids will come and visit. They won't, they'll be too busy. Rather visit them, and raid their fridge. They've been sponging off of you way to long.

My wife and I have always viewed our residences as homes. We never bought into the investment hype, but we always enjoyed living in our homes. We did however see the bubble and sold out and downsized in 2005. (Phew....good call!) We're in an apartment now and loving it. Four or 5 years from now we may want a small house again. We'll search for a "home" when we get there, until then we'll just enjoy where we are. All said, if your looking for a HOME, this could be a good time to buy.

[Lita Smith-Mines - Huffpost Blogger]

If I knew how to cross-stitch, I'd make a sampler with your rules for my office. I am especially entranced by #6, though I may be overstepping my role as an attorney to counsel clients to raid their kids' fridges!

[sonoffestus]

Hi Lita...........feel free to print up a copy for your wall or for handouts for your clients.
And feel free to edit rule #6!

[Halsey]

I've come to deplore "speculative" (I mean REALLY speculative)..real estate investments..that is really what made homes double in price in a year....some got very lucky..make BIG bucks..and got out...before the bottom fell out...but what "they" do, besides putting themselves at great risk..is create a smoke and mirrors value for homes in disrepair...all copper wiring pilfered by whomever, etc etc...

They do themselves AND our sad country no favors. You are trying...I'll give you that...guess we need, not more attornies..but more attornies like YOU :-).. for me, and many many americans...there will be no home ownership in my future..(and I'm 54...missed the 'boat)...even in this horrid market..no way could I afford even a terrible home in Southern California where I live... I know CD's don't pay much these days..but by gosh..you know in 6 months what you'll have...

[Lita Smith-Mines - Huffpost Blogger]

In six months you'll know what you have in your CD, but in that time span I am uncertain that there won't be more anguish among the majority of unprepared real estate speculators just jumping in because the prices are "cheap".

I tell my clients that they hire me for my knowledge AND my gut, and right now, my gut is all about advising those that don't have to buy or sell to wait until the dust settles.

I wouldn't worry about missing the boat on real estate: lots of people get sea-sick but are perfectly happy on land!

[ImmanuelGoldstein]

Those people plowing their last bucks into housing are screwed. We are STILL in a bubble environment in terms of housing prices and will be until housing prices fall to historic norms which we haven't yet reached.
There is absolutely NO economic basis for the belief that housing is at a bottom or that it will appreciate at all for the forseeable future.
Not with the job market still cratering
Not with banks returning to historic norms for house house lending
Not with a gigantic shadow market of houses being held by banks that they must eventually liquidate in order to get some real cash
Not with housing inventories overall at historic highs and builders still building more.
Not with the tendency for asset prices tending to UNDERSHOOT historic norms during crashes.
Not with the gen-XY cohort completely lacking the money to pay $1million for a $300k house
Not with the Option-adjusted ARM tidal wave just beginning.
These people have been head-faked because they thing that since prices have fallen from the peak of a historically unprecedented price boom that prices are actually "cheap'.
They aren't, it cannot be stressed enough that we are still in a bubble environment and the shakeout it still ongoing.
For a more detailed analysis of this issue I suggest you read here:
http://www.oftwominds.com/blogapr09/housing04-09.html

[Lita Smith-Mines - Huffpost Blogger]

The shakeout is indeed still continuing, which is why I counsel would-be buyers looking to make a windfall in real estate that there are many safer ways to proceed. Some will indeed get very lucky and turn a profit, but many of those gambling all their cash on being a land baron would have a lot more fun and better memories blowing it all in Las Vegas or Monte Carlo.

[yappnmutt]

to sum it up- don't try to catch a falling knife.....­especially in an illiquid investment like real estate. there will be plenty of time and a lot of opportunity when the knife finally hits the ground.

[Lita Smith-Mines - Huffpost Blogger]

Well put, but the drumbeats of "good time to buy, good time to buy" are beating all around, deafening some people to any other advice.

It's a great time for some to buy, but in my opinion, a really bad time for many others to buy.

[grateful4thedead]

A very well written article and it seems that you are offering your clients prudent advice.

[Lita Smith-Mines - Huffpost Blogger]

I know that some potential clients I lecture seek other representation, and I truly hope they don't get burnt. But I have a sneaking suspicion they will...

Thanks for the compliment.