‘The Accidental Economist’ with Jack Kern: Sunbelt Denizens Creating Rental Units

A gambler with a System must be, to a greater or lesser extent, insane.
– George Augustus Sala (1828-1895), English Writer and Journalist

Sun and fun, how can you possibly get that wrong? Of all the places you can go to get away from it all, two are now bringing it with them. Both perennial favorites of the rental cognoscenti, Florida and Nevada, made the news again for having big gains in foreclosure activity. Foreclosures are becoming synonymous with accidentally creating rental units. It works something like this: House originally bought for $350,000, great neighborhood, nice area… except the over-extended buyer can’t afford it. House goes into foreclosure (Notice of Default sent) and the homeowner then has a choice. Number one, open the envelope, number two, start packing, number three, stick it out with an attorney who promises they can string this along for years and last but not least, number four, agree to a short sale. A short sale is, when the stars are aligned that the owner, the bank and the outstanding creditors on the property all agree the owner was never able to afford the home in the first place and selling it fast is the best solution. So now the transfer (sale, really) of the deed in lieu of foreclosure means that the $350,000 home might end up costing some lucky buyer 20 percent less, or $280,000, which pleases the OCC but upsets the neighbors, who stuck it out with big mortgages and dropping values. So where can you take advantage of this surf and sand miracle? Why Florida and Nevada of course. (Funny you don’t see that in the tourism brochures.)

According to recent reports, Nevada foreclosures are up an astounding 81 percent on a year over year basis and Florida, everyone’s poster child for sun tan lotion and waxed surfers was up 20 percent from last month and 12 percent from a year ago.

In many communities, the ability to acquire properties at substantial discounts (up to 50 percent off in some places) is much less likely now than it was even a year ago. Currently the average discount (also known as the “sucker premium”) is only something close to 15 percent. What does happen with alarming regularity is that many of the foreclosures are being rented out based on the investor’s perspective that the home is really worth much more and they’ll sell when the time is right. So the fundamental difference between speculating on foreclosures and gambling becomes pretty clear to me. At least a gambler understands the risks.

Jack Kern is the research editor for Multi-Housing News and  Commercial Property Executive. He has covered foreclosure issues since 2007 when it was discovered that the vast majority of homes sold during the equity investment boom were bought by speculators (gamblers) who had some cash, not a lot of common sense, occasionally sold out of their properties profitably and then not learning their lesson bought again and lost it all. As Jack said, “statistically speaking, these are my people.”

You can reach Jack at [email protected] with any witty repartee, clever anecdotes about apartments or an offer to attend a party.