Greetings everyone, I have been reading posts on this forum and have also read several REI books and one thing that I see repeated is to buy RE at .50 on the dollar. Can anyone explain what this means and how to calculate this. Thanks
In a nutshell, paying only half what the property is worth is buying for 50¢ on the dollar.
You pay 50 cents for every dollar that it is worth.
If you look at what every other house just like the one you are looking at in the same neighborhood sold for in he last 6 months that is the retail price of the house you are looking at. If you buy that house for half that retail price that is 50 cents on the dollar.
These are all excellent explanations for buying a property at 50 cents on the dollar.
Once you’ve got that down pat, another thing you’ll want to consider is how hyper-inflated the real estate pricing has/has not been in your local market for the past 3 to 5 years.
In other words, if the median home sale price in your area had been at something like the $150,000 mark but in recent years the median home sale price soared to $215,000, this is something that you definately want to take into consideration.
We just came through an amazing boom time in real estate growth in the US.
Take a look at this historical stock chart for Centex, (which is a major US builder of new homes):
While this is just one home builder’s stock growth pattern…it does at least show you that some unprecedented growth occurred in some parts of the country.
If your area was one of hyper growth…be very leary.
That means that current home pricing can still be overinflated and while you think you may be buying at 50 cents on the dollar…when the dust settles 9 months from now you may see that you only bought at 65 cents.
Studying a longer term trend line of median home prices in your area is a good hedge against getting fooled by the fallacy of the recent boom.
-Mike
There’s going to be a time within the next 1 to 2 years were those stocks are going to be so beat down that buying them is going to be a no brainer. When Toll Bros. and Centex drop into the single digits that’s a SCREAMING buy. We’re not there yet, and you better have a 3 to 5 year holding term in mind. But man…there are going to be some real bargains in that industry!!!
Of course, the question is – who in their right mind would sell you something for half of what it’s worth? I realize there are some desparate people out there in some bad situations. But even then, no one’s going to say, “OK, I’ll sell my home to you when I KNOW I can get 50% more for it.”
For those who have built fortunes being able to defy this seemingly simple law of economics, how exactly do you present an offer like this? If it’s a fixer-upper, do you include an expected list of repairs to justify an offer of 50% less than the current market value? Do you inflate those repairs to match that figure? What if it’s NOT a fixer-upper? What then? How many properties do you figure you can actually find in one year like this?
If they could, they would. But they can’t…so they sell for a hugely discounted price to someone like us. If they ain’t that at least 30-35% equity in them, don’t buy it.
How many properties do you figure you can actually find in one year like this?
I did 22 this past year.
Mike
I did 22 this past year.
Mike,
Wasn’t it more like 16 @ 50 cents on the dollar?
I seem to remember at least 6 you got for something like 15 cents each.
-Mike
Yes, I bought a few at ridiculous prices. People are starting to throw in the towel!
Mike
50 cents on the dollar?
I love the most base of questions.
That’s where it’s at.
-Mike
Thanks everyone, Bluemoon and allagash’s answer was what i was looking for.