“There is no calamity that does not offer the opportunity for some persons to thrive on the misfortune of others.”
You needn’t look hard today to find people in financial trouble. The problems are everywhere: a family with a home in foreclosure, a once-employed worker whose unemployment payments are about to run out, or a newly created pedestrian who just lost an auto through repossession.
Our nation is experiencing a severe recession, with some claiming that a depression is not far away. Couples caught in the maelstrom must work their way through their problems. It will take a combination of thrift, luck and time to weather this storm.
For those with the good fortune to have remained somewhat unscathed, and particularly those with available cash to invest, the time is ripe to put those dollars to work. The question becomes: Where can money be placed most effectively in an unsettled economy to garner profits? With interest rates at an all-time low, neither money market accounts nor certificates of deposit can do much for you. Both stocks and bonds are tied to corporate America, which, as investors you possess the ability to observe the gyrations and little more.
This gets us down to the one investment over which you and your spouse can exercise control: real estate.
In reality, real estate investment is about opportunity and how we each react to it. An entrepreneurial attitude together with a good working knowledge of the area in which you’re operating is the key to success. Let me offer a few thoughts, not as a set of suggestions, but rather in the form of a testimonial describing what worked for my wife and I.
With the Chapter Nine bankruptcy filing by Orange County, California, in December 1994, the area became regarded as an economic basket case, with dire predictions for recovery. As expected, buyers and sellers lost confidence in the local real estate, and prices dropped.
Perception is not always reality. Despite gross malfeasance by some local public officials and a temporary budget problem for the bureaucrats, the county remained as fine as ever, with an exquisite climate, sunny beaches, prosperous businesses, low unemployment and a strong infrastructure. All appeared well in paradise. With these factors in mind, it seemed an ideal time to acquire residences, hold them for a few years as rentals, and then dispose of them at a handsome profit. There was, however, another fly in the ointment. During this time the State of California engineered a controversy with the insurance industry by its requirement that earthquake insurance be offered with every fire policy. In response, the insurance companies abandoned the California market, so that newly acquired houses became ineligible for coverage. In several instances we held uninsured houses acquired through foreclosure?not a comfortable feeling. But condominiums avoided the problem as blanket policies covered each group. Upon acquisition of a condo, it simply slipped into the blanket.
In collaboration with a real estate agent long active in the local condominium market, we selected half-dozen projects from which to cull properties?all in Santa Ana, California the county’s largest city. Each contained several hundred units, mostly fifteen to twenty years old, in areas described as lower middle income. In May 1995 we began acquisition.
We concentrated our efforts on units held either by government agencies such as the VA and FHA, or by commercial banks and mortgage insurance companies, acquired by prior foreclosures. Clearly, these hapless owners wanted quick and unfettered disposal. We designed our proposals to meet that requirement: purchase price all cash; property condition “as is;” no contingencies; and escrow to close in fifteen days. In the sealed-bid auctions, our bids often won out over competing bids that offered more cash to the seller.
Our program played out as expected. During the interval extending through the end of 1997, as the media portrayed the county as slipping into the Pacific, sellers remained motivated while serious buyers all but disappeared. Over that period we acquired nearly fifty units at prices about 60 percent of then current value. As the escrows closed, we quickly renovated each property and, thanks to a brisk rental market, made them income producing with an annual 12 to 15 percent cash flow generated. Regardless of future appreciation, these properties met all the criteria for sound investment.
As the calm inevitably follows the storm, 1998 ushered in an era of recognized prosperity. With the bankruptcy now a distant memory, the media discovered a revitalized economy, and by the spring of that year, Orange County became?to paraphrase former Vice President Al Gore?reinvented. Property values rose as buyers and sellers reacted, at last, to market reality. And with the advent of a healthy sales climate, we wasted little time in selecting units for profitable disposal. In all, we enjoyed a successful undertaking.
I’ll conclude with a final thought. What might a skeptic conclude in the aftermath where a handful of persons profited from circumstances that saw fortunes lost, political careers destroyed, properties seized and seemingly innocent families evicted from their homes? Perhaps nothing more than a reinforcement of the ancient adage: It’s an ill wind that blows no good.
Al Jacobs
Al Jacobs is a financial expert and is the author of "The Road to Prosperity."
