By Dr. Steve Sjuggerud
"Hey Steve, how do you feel about the stock market now?"
Fred, my fitness trainer, asked me this yesterday. He told me he had just bought some stock for his son.
"Did you ever buy a house?" I asked.
"No," he said. "My wife and I took your advice. We've been renting."
"Great! You saved yourself a hundred grand! Now's your chance," I told him. "Here's the way to think about it..."
A house that was $250,000 a year ago might be fairly priced today at $200,000. Undoubtedly, one of the thousands of homeowners trying to sell a house for $200,000 these days is desperate... and would take $150,000. Their place has been on the market for six months or more, without a single offer.
Fred is in an ideal situation to take advantage of desperate sellers. He doesn't have much debt... and he doesn't have to worry about selling his house. The hard part is going to be convincing the family to go along with the plan. Because the plan is not to find THE perfect house, but a great deal on a house that's pretty close to what you want.
If you can convince your family it's a good idea to start making a few "lowball" offers, you could do really well... you could get a $200,000 house for $150,000 and sell it for a $50,000 profit in two years.
And, if inflation heats up like it could in the next few years, you could also get some home-price appreciation. I wouldn't bank on that though...
I don't expect residential real estate prices to soar. The "old" way of buying, slapping on a fresh coat of paint, and making $50,000 is over. Instead of planning on selling high, the new plan is to buy really low.
Let's say you're able to buy a $200,000 house at $150,000, move in, and sell at $200,000 in two years. Not counting transaction fees, you could pocket a gain of $50,000, TAX-FREE. (The government lets you keep the profits from your primary residence up to $500,000 if you live there for at least two years.)
If you buy at least 25% below a conservative estimate of the "market" price, and don't take on much debt, then you're in good shape. You're set up for a 33% profit (from 75 cents on the dollar to a sale around a dollar) if the market simply stabilizes.
And we have a "floor" in place... courtesy of guys by the names of Obama and Bernanke. They simply won't let housing prices keep falling. They're "juicing" the system as much as possible, cutting interest rates, pumping money in, and making all kinds of incentives for homebuyers and homeowners.
But today's "unfair deals" – where you can buy at 25% below market price or lower – won't last. As of this week, the home price index is up for the first time since July 2006. So you've got to get those "lowball" bids in.
Your downside is limited, thanks to Obama and Bernanke. Your upside is 33% (not counting fees) if nothing at all happens. If the market goes up at all (which you should NOT include in your return estimates), it's icing on the cake.
The thing is, this window of opportunity will close soon. The distressed sellers willing to give away their house at a 25% discount will be rooted out by other bold investors.
If you're in the position to act, get on it... now!
Good investing,
Steve.
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