Monday, November 28, 2011

Want To Make A Quick $200,000? Not so fast...

Our daily paper from Sarasota led this week's real estate “buzz” page with a item on flipping homes. The headline read “Investor Makes A Quick $262,200. Not bad—I know you will agree—heck, I'd like to make a quick $200K. And if he can do it, you and I can do it too—don't you think?

Looking a little closer at his transactions, Ed Thornburg bought a house in Bradenton, for $160,500. He bought a condo in Sarasota for $22,100; he bought a house in Palmetto for $26, 100; and he bought another house in Palmetto for $98,800; and finally, he bought a house in Bradenton for $269,900

His purchases add up to $577,400, and he has since sold three of them for $262,200 more than he paid. (I think the ones he still owns are the one in Bradenton and one of the Palmetto houses. So even if he sits on these two homes through the balance of the year, he's only sitting on an investment which cost him $186,600.

But hold on a second, investors rarely pay cash for the homes they buy, maybe 20% down is all they lay out. On the return trip however, when they sell the homes, they get 100%. To make a simple example, if an investor buys a $100,000 house, he will have 20% down, plus some expenses of closing, insurance fix-up and the like, so think $20,000+/-. But when he sells the house for, let's say $150,000, he will have a net profit of $50,000 (and get his $20,000 back as well). So the guy who had $20,000 in July when he bought the house, now has $70,000. This of course ignores carrying costs, and other fees, including Realtor commissions, but in general you see why people think this is a great idea.

I would caution you about the late-night ads that will suggest you can make as much money on flipping one house as you have in the last year at your job. These TV gurus don't look or sound any smarter than you are and they say they're raking in the cash. Remember, they're selling books, not flipping homes.

Well, trust me--it's not as easy as it looks on TV. The price run-up of the past few years led thousands of people to reach the conclusion that flipping homes will make money for them. There is a boatload of competition out there, which means that the obvious deals (call them sugar plums) are gone in a heartbeat. The pros will tell you that they make their money on the front end by buying properties for at least 30% below market value. Finding those houses takes time and once you find them, you'll need to move fast. And no matter what the late-night gurus say about doing this with no money down, it just never works that way. That means you'll need access to cash to do the deal, not to mention the rehab.

Remember Richard C. Davis, owner of Charleston-based Trademark Properties, and creator and star of A&E's reality show, "Flip This House"? He says no one can watch his show and get the impression that this is an easy way to make a living. The show is now canceled—maybe it'll come back but flipping is not something that the public at large ought to do. In his original video series, Davis told the viewers not to try this at home. It's for trained professionals. You will lose money.

And there's a ton to learn:
  1. You'll need adequate savings to pay all the bills.
  2. Your hair will go gray while money is flying out the door for cabinetry, plumbers and plants.
  3. Keep track of your contract to purchase, if you don't close in a timely fashion, the sellers can keep your deposit money,
  4. Remember to pay the insurance, the utilities and the maintenance.
  5. Oh, and contractors won't renovate a house for free.
  6. You'll probably need to hold on to the house for at least three months because of Federal Housing Administration (FHA) anti-flipping regulations. Houses sold less than 90 days after they were purchased aren't eligible for FHA mortgage insurance; those sold between 91 and 180 days are OK but require an additional, independent appraisal to make sure the sales price is justified.
  7. Every day you own the house costs you money in interest, utilities, taxes and insurance.
  8. Taxes. Oh right! As far as the IRS is concerned, buying and selling real estate as an investment strategy and doing it as a business are two very different things. If you buy a house, fix it up and resell it while you're working another full-time job that provides the bulk of your income, that's an investment and the proceeds will be taxed as capital gains. So talk to a CPA.

So before you get “flipping-envy” remember guys like Edward Thornburg are few and far between—that's why his making any money flipping homes this year is news-worthy.

Dane Hahn is a real estate professional practicing in Florida and New Hampshire. You can reach him via or

Saturday, November 19, 2011

What Did You Learn From the Real Estate Meltdown?

I just finished reading Reckless Endangerment, by Gretchen Morgenson and Joshua Rosner. The authors make a strong case that the recession and real estate melt-down was a simple case of greed at many levels, and they feel that most of the really bad guys are still known to us and today are very rich.

They trace the beginnings of our real estate collapse to the mid-1990s, beginning when the Clinton administration called for a partnership between the private sector and Fannie and Freddie to encourage home buying. The governmental support was in fact a subsidy to increase home ownership, which enriched Fannie and it's C.E.O., James A. Johnson. So far so good but then the Congressional Budget Office found that Fannie pocketed about a third of the subsidy rather than passing it on to homeowners. And over his nine years heading Fannie, Johnson personally took home roughly $100 million. His successor, Franklin D. Raines, was treated just as lavishly.

To entrench Fannie’s privileged position, Johnson and Raines didn't keep all the largesse, they channeled some off to members of Congress—contributing to campaigns and handing out patronage positions to relatives and former staff members. Fannie paid academics to do research showing the benefits of its activities and playing down the risks, and shrewdly organized bankers, real estate brokers and housing advocacy groups to lobby on its behalf.

American taxpayers were unknowingly handing Fannie billions of dollars each year. Countrywide Financial (now a failed division of Bank of America) became Fannie’s single largest provider of home loans and the nation’s largest mortgage lender. Countrywide abandoned most traditional lending standards altogether, and even doctored loans to make applicants look creditworthy, while generating a fortune for its founders.
Meanwhile, Wall Street banks received fat fees underwriting the securities issued by Fannie and Freddie, and even more money providing lenders like Countrywide with lines of credit to expand their risky lending and then bundling the mortgages into securities they peddled to their clients. Wall Street loved the charade because it was so profitable. Later as the market dumped, Goldman Sachs bet against the bundles — making huge profits off the losses of its own clients on the very securities it had marketed to them. Eventually, of course, everything came crashing down.

Robert Rubin, when he was the Treasury Secretary, pushed for repeal of the Depression-era act that had separated commercial from investment banking—a move that Sanford Weill, the chief executive of Travelers Group had long sought so that Travelers could merge with Citibank. Then after leaving the Treasury, Rubin became Citigroup’s vice chairman, and over the following decade pocketed more than $100,000,000 as the bank sank deeper and deeper into a risky morass of its own design.

With Rubin’s protégé Timothy F. Geithner as its head, the New York Federal Reserve Bank cut back its oversight of Wall Street operations. That same year Henry M. Paulson Jr. became the head of Goldman and was in charge when that firm created many of its most disastrous securities.

As the Treasury secretary under George W. Bush, Paulson would oversee the taxpayer bailout of Fannie Mae, Freddie Mac, Goldman, Citigroup, other banks and the giant insurer American International Group (A.I.G), on which Goldman had relied. As head of the New York Fed, and then as the Treasury secretary, Geithner would also oversee the bailout, which just to Fannie and Freddie has cost the American Taxpayer $141 Billion. ($141,000,000,000)

Today James Johnson is a rich and respected member of Washington’s political establishment (although he was forced to resign from President-elect Obama’s advisory team after the press got wind of his cut-rate personal loans from Countrywide). Franklin Raines retired from Fannie with a generous bonus. Henry Paulson became a fellow at Johns Hopkins. Robert Rubin is affiliated with the Brookings Institution. And Timothy Geithner remains Obama's Treasury secretary.

All told, it appears we have learned remarkably little from the real estate meltdown. Fannie and Freddie, are now wards of the state, currently back more than half of all new mortgages, and their executives are still pocketing fortunes. Wall Street’s biggest banks are larger today than they were when they got into trouble, and the executive pay packages are just as generous.

But the rest of us have paid dearly.

Dane Hahn is a real estate professional practicing in Florida and New Hampshire. Reach him at: or at

Thursday, November 17, 2011

Want To Buy a Vacation Place in Cuba?

Recently I have been thinking about “bucket list” travel and one of the places on my list is Cuba. I know I can go there now. There are lots of “shady ways” to get into the country. Whenever I bring up the subject of going there people say, “Oh, just fly up to Canada, and change planes for Havana—tell 'em you're a Canadian, that always works.”

Or others say, “If you sign up for a college class, you can take a field trip to Cuba and see lots of the country by bus”, that might work, although the bus part is not so appealing. Then there are my more adventurous friends who say, “just fly to the Bahamas and take a ferry over.”

I don't know, maybe I'm more conservative than I used to be, but I want to be able to get into the country legally on my own passport and more importantly, come back to the USA when I'm ready. I'm not looking for any surprises, and I don't want to see the inside of a Cuban prison.

But more and more the Castro Regime has begun to loosen the rules that were put in place 50+ years ago. I noted just this week that Cuba will allow her citizens and permanent residents to buy and sell real estate—starting November 10th. Well my friends, there's a new game in town, and we call it home ownership.

This change in real estate ownership is huge. Back in the day, when Fidel Castro was a young man and he had just unseated Batista, (for you younger sprouts, this would have been in the pre-JFK years) he nationalized all the land, homes, farms and—well all the private property. What happened then is that Cuban people got to use—let's say, have the right to live in—a home that now belonged to the government. As I unbderstand it, the more the Party liked you, the better your “free home”. So for more than a half century, there has been no private ownership of homes in Cuba. But come Thursday, that will be history.

Recently, if you lived in Havana as a Citizen or permanent resident and wanted to change dwellings or move to a new locale, you couldn't go out an buy a house, you would involve yourself in a complex bartering system. As I understand it, you would be transferring your “right to occupy” your old property for another, and you may have had to pay a fee or two, and a bonus to the citizen whose “right to occupy” you were acquiring. I would like to hear from my readers who can share the Cuban real estate model with me. I would love to hear Marco Rubio discuss this topic.

Cuban officials are telling each other that this is not all that much of a move away from Socialism, but—they say--it is necessary for social and economic reform. In the real estate regulations that I read, the property ownership plan will limit an owner to two homes, (a residence and a vacation property). And all financing will have to funnel through Cuba's central bank, which will charge fees. It's not clear what fees will be due if property is purchased for cash, but there are taxes due at closing--Cuba will charge 8%, split between the buyer and the seller.

Presumably the first cycle of property sales will be deeds from the country of Cuba to the present resident/occupant, and then the resales will be between two individuals.

What would I expect next? Well I would think that Cuban-Americans will funnel free cash to family members to buy homes and vacation homes. I would expect to see some serious confusion in this market over the first few years, but as with any confusion of this type, I would guess a few people will make a lot of money.

Dane Hahn is a real estate professional practicing in Englewood, Florida and New Hampshire. Reach him at or see him on the web at

We Seem to be the Only Country with an MLS

Recently around the office we've been talking about the differences between real estate business here and in other countries. For example, in Australia, there is no multiple listing service, you call the agent whose sign you see on the property and go see the house with that person. This is a huge hassle for the buyers who have to contact a number of different Realtors if they want to see what's for sale in a given area.

I noticed the same thing in Scotland a few years ago. There was a street of Realtors (although there they are called “estate agents”) and you shop for a house the way you would shop for a new suit, you go from agent to agent to see what they have, and when you find one that has something you'd like to try on, you go inside and make arrangements to go see the property.

I have noted this week that it's also just that way in Italy and also in Turkey.

And speaking of the way things are done differently in other countries, there was a story in the International edition of the Wall Street Journal that in Ireland the foreclosure rate is very low. The story went on to say that a mortgage in Ireland had more standing that in the US. In Ireland if your f you get a mortgage was foreclosed upon, whatever you owed was NOT forgiven, the bank took the house and billed you for the difference, even a bankruptcy—which in Ireland takes 5 years to execute—would not clear that debt.

So if you were unable or unwilling to make your home payments, you would lose your house and the bad credit you would incur would “dog” you for at least 5 years maybe more. In Ireland, this has resulted in people staying in homes in spite of the fact they are “underwater”. In other words, walking away from what appears to be a bad investment is not an option. I must say the Irish don't give mortgages to every Mike, Pat and Sean, so for all the people who have home mortgages, they actually qualified when they go them—and most put 20% down--that's different than here in the US too.

The other option that the Irish banks offer is a foreclosure with a rental back to the foreclosed family. The rationale is that there is no benefit to the bank to have an empty house, nor is there a benefit to the family to have to move. So they will—as I understand it—allow the family to return the deed, but stay in the house as a tenant. There was no information on how much the rent would be, but I would assume it would be less than the mortgage payment.

In Turkey, homes—and I mean nice homes--are selling in the $35,000 range along the Mediterranean Sea. The buyers are Germans and English—same as Florida. And of course the business elite and executives from Ankora and Istanbul as well. Of course the prices go up from there, but in Kusadasi $200,000 US will buy you a mansion.

Naturally in Istanbul, along the Bosphorus, homes on the water start in the million dollar range and run up to (the most expensive one sold last year) a whopping $140,000,000 US. But the cheap ones are still pretty nice, and the boats tied up out front are spectacular. So the prices vary and the laws vary, but a house is shelter and we all need at least a place to live.

That's what makes real estate (as a business) so interesting and—for me at least—so much fun.

Dane Hahn is a real estate professional practicing in NH and Florida. You can reach him at 941-681-0312. Or see him on the web at

H A R P: Refinancing For Shaky Loans

Here we go again.

With the blessing of our present administration, we taxpayers are about to offer band-aids for all the shaky loans that are still out there. You will soon be able to refinance your old loan even if you are unemployed, and the value of the house has gone over the edge.

Our government feels that people with little or even negative equity in their homes should immediately refinance their mortgages at what are now historically low rates—the theory being that if they have been making their house payments when the rates were onerous, they deserve an opportunity to stay in their homes at the lowest rates in history.

This initiative, known as the Home Affordable Refinance Program, or HARP, hinges on lenders voluntarily writing new loans for borrowers hard-hit by declining home prices.

The HARP program is open to borrowers who have negative equity in their homes as long as they are making timely payments and their loans are now guaranteed by Fannie Mae and Freddie Mac--which back about half of all U.S. residential loans.

The Federal Housing Finance Agency, said it would relax the representations and warranties participating lenders have to abide by as part of its revamp of the program. So even the lenders who were worried that they could be forced to buy back refinanced loans if defects with the initial mortgage are found, can relax.

As part of the revamp, FHFA said it would scrap a cap that prevented borrowers whose mortgages exceed 125 percent of the value of their homes from participating in the program.

About 3.1 million loans are eligible for the program, and 894,000 borrowers have used HARP to refinance. FHFA said the changes could double that number, though that would still fall far short of the 5 million homeowners the Obama administration had hoped to reach when the program was unveiled in 2009.

In order to be eligible for the HARP program, the present loan must have been written prior to June 1, 2009 and be backed by Fannie Mar or Freddie Mac. FHA and USDA (or jumbos) are not eligible.

All homes, regardless of how “underwater” they are are eligible, there is no loan to value restriction so long as the newly written loan is a fixed rate, and of 15-30 year duration. There will likely be no appraisal since all homes (that are standing) will qualify.

Any HARP lender can refinance your home, you do not need to go to the bank or mortgage company you used originally. If you had PMI, you may still need it, but the rate will stay the same even though the principle of the loan has increased.

The conforming limit is $417,000; but there are some cities where the cap is set at $625,500. And there can be no cash out when rewriting the loan. Only rate and terms can be modified.
You can refinance more than one home, a second home or investment properties can also qualify.

While borrowers may move through the refinancing process at a faster rate under the re-tooled initiative, the breadth of the waivers on representations and warranties will largely determine the degree to which lenders and mortgage servicers are willing to make these riskier loans.

Those originating the loans have been skittish about refinancing higher-risk borrowers with the possibility a loan's government guarantees could be stripped if it sours or it is deemed defective. This is another plan from Washington—this time it's one which may actually help Americans. Seems like a long time coming, and it's not for everyone, but if you qualify get going ASAP.

Dane Hahn is a real estate professional in Florida and New Hampshire. Reach him at or by email at