I've said it many times before; in a real estate bust you want to be the third guy in, not the second.  The second is just the next sucker to buy an overpriced property.  Yesterday, a good friend of mine, an attorney, called me up to ask my advice.  He has a lot of cash on hand as a result of being frugal over the years and now is in a position to invest and make some money.  He has another friend, who together with a few partners, decided a great way to  make money would be to buy foreclosed homes, fix them up, and resell them.  They just needed capital.  My friend the attorney, lent them $125,000 at 15% interest secured by the house they bought out of foreclosure. They used it to buy the property and replace the ripped up plumbing and cabinets that are a common result of the old "owner" doing damage before they are foreclosed upon.

The house was originally bought for $330,000 - at the top of the market - and so these guys figured that they could simply resell the fixed-up property for $185,000 based upon "comps" (comparable sales in the area) at that price.  All of that sounds good until you do the math.  First of all, the comparable sales, probably given to them by a realtor, are a lot of nonsense.  The comparable value per square foot of any house is that of the lowest in the neighborhood, which is usually another foreclosure.  Therefore, based upon this house's square footage and the most recent foreclosure at $80 per square foot, the house is worth $136,000.  So these guys need a stupid new buyer with an even dumber realtor to buy the house at $185,000 - for the deal to even work.  You see, that price is only cheap if you compare it to the all time high of $330,000 - which is now all but irrelevant.  That was just a price and price as opposed to value are two entirely different things. 

So, why would a new buyer pay any more to these suckers than what they did?  Do you really think a little plumbing, some new cabinets and a little paint is worth a $50,000 premium?  Couldn't a new buyer just buy a foreclosure or short sale property in the same neighborhood (there is no shortage) for what these guys paid or less and do the same thing for him or herself?  Why yes!

Therefore I told my attorney buddy not to lend any more money to these guys and that he would be lucky to get back what he already had lent.  The moral of the story is that this is NOT the time to be buying real estate and that a good deal is only a good deal if you do the math.

There is no such thing as easy money.  Why do so many people never learn?