Recently, my sister-in-law told me that she had some friends buy a foreclosed home in Bartlett, a far-out northwestern suburb of Chicago. They thought they were getting a “deal.” The home had originally sold for $400,000. They bought it for $250,000.

I said to her, “can they cover their costs in renting it?” (Since that is the first rule of real estate fundamentals.) She said they could get $1700 a month as rentals were “hot” in Bartlett.

I looked it up on a mortgage tracker. If they put down 20% or $50,000 for a loan amount of $200,000 with a 30 year fixed loan they would just barely break even. And that is if NO repairs ever need to be done to the house. Well, we know the reality of that (especially with renters in the house.)

Without 20% down, you’re losing money.

The foreclosed house “seemed” like a good deal, but in reality, it wasn’t.

Not yet.

There are people all over the country flocking to property auctions for their chance to get a house on the cheap. And compared to recent prices, they certainly seem like deals. Such was the case over the weekend in Boston. 2,000 people showed up hoping to get a “deal” on a couple hundred foreclosed homes. Many bought their properties sight unseen. From the Boston Globe:

A Victorian-era house on Washington Street in Norwood sold for $585,000 in July 2004. It sold yesterday for $350,000 to a group of four friends, investors who said none of them had seen it. They bought it, they said, because it seemed like a good deal.

The house has 2,800 square feet of space, with five bedrooms and a large backyard. Now, however, the polished wood of the living room floor is ruptured in several places, perhaps by burst pipes. The smell of a moldy basement permeates the house. Something with sharp teeth savaged the woodwork. The fire alarm chirps endlessly.

But the pros know that these prices are still too high.

Chris Willis and Eli Sanchez wanted a vacation house on the Cape. They came to shop for bargains, but prices on the properties they liked quickly soared out of range. They were willing to pay $100,000 for a West Yarmouth ranch they considered a teardown. Willis, a Boston real estate broker, said the place looked good but had foundation problems.

The bidding soared past $100,000 in a matter of seconds. The place eventually sold for $200,000, leaving Willis shaking his head. “They’re basically buying land,” he said. “It makes no sense.”

Willis and Sanchez left after an hour.

Mike Gubla, a New Bedford contractor, also decided that the prices were too high.

“There’s civilians bidding here,” he said, explaining that inexperienced buyers were paying more than properties were worth. “I’ll come back next year, and the prices will be better,” he said.

Funny that he called the bidders “the civilians.” They have no idea that they are catching a falling knife. This happened in the dot-com bust too. Cisco was at $70 during the bubble. It must have looked mighty juicy at $40 a share. Too bad it would go as low as $11 before turning back up. Many people were buying at $40. Who was buying at $11? Almost no one.

Newbie investors also might be in for a rude awakening when they actually get to their properties. Many of the foreclosures are not well taken care of. Some are even stripped of things like their copper piping and have no electrical.

“They don’t tend to be in the best condition,” said Terryanne St. Pierre, an associate broker with Taché Real Estate in Salem. She said her company had listed several of the houses being auctioned. “They’ve been abused more often than not,” St. Pierre said.

Moldy basements, missing windows, burst pipes, and buckled floors are fairly common, the Globe found in touring some of the houses last weekend. The need for new paint is pervasive.

As an investor, you have to get it really cheap to make it worth your while.

Housing won’t hit bottom until no one shows up at these mass foreclosure auctions except a few of the pros. They’ll pick through the properties at that point and then there will be some great deals.

It’s too early. Don’t buy investment property right now.

Leave it to the Donald to know how to cash in when times are good and when they go bad.

Last Sunday there was a full-page ad in the front page section of the Chicago Tribune touting “free” real estate seminars in the Chicago area through Trump University Chicago.

The ad and the website claim you can “generate thousands of dollars in immediate profit potential.”

The newspaper ad also trumpets the following:

Buy Low, Sell High, Walk Away Rich

It seems so easy, doesn’t it? Why didn’t I think of that?

Gee…I wonder.

The Donald and his “brand” are still out there promoting themselves and the easy path to riches. Of course, The Donald won’t be at any of the three free seminars. He has better things to do. Like run his empire. The speaker will be this fellow:

Successful investor, author, and entrepreneur, Jerry Foster has been investing in and developing real estate for over 12 years. Specializing in foreclosures and real estate purchase options, Jerry now teaches his powerhouse investing principles to thousands of fellow investors, real estate agents, and brokers in an effort to help them learn the basics, polish their skills, and maximize their earning potential. Jerry has a B.A. in Communications from Brigham Young University, and is considered one of the most practical, down-to-earth instructors in the country.

But The Donald assures you in the newspaper ad that “when it comes to making money, I only work with the best. That’s why I hand-select every Trump University instructor.”

The seminar discussion topics include:

How to Find Foreclosures Near You at Bargain Prices“Take advantage of the hot investing opportunities in your neighborhood before anyone else does.”

Help Struggling Homeowners “Learn how to be a hero to a homeowner who can’t afford their adjustable rate mortgage.” What????

Credit“How to be in good financial standing so you can make money at every stage of the investing process.”

Financing“How to benefit from specific sources of seed capital adn put toegether your own creative financing deals.”

The Phases of Foreclosures“When to make a move and how to capitalize at every stage of the process.”

What to Do Once You Have the Property“Do you rent, renovate or sell immediately? Learn what’s best for your specific situation.”

I will never argue that you can’t make money off of foreclosures. You can. But in most parts of the country, you would be better off waiting at least a few more years to get the truebargains. Most banks aren’t desperate enough to unload their foreclosed properties.

You invest when you smell desperation.

The Donald is once again trying to capitalize on the herd. Buy real estate when it goes up! Buy it when it goes down! Just make sure you attend one of HIS seminars.

He’ll make you rich.

And then himself even more.

If anyone attends one of the “free” seminars, please report in and let us know how it went. They are Saturday in Oak Brook, Sunday in Alsip and Monday in Chicago.

If you bought a house in 1960 for $17,000 and sold it in 2006 for $750,000 was that an outstanding investment?

It seems to be, right? Gosh, only paying $17,000 and then selling for all that money 46 years later.

CNBC recently had a segment on housing called “Time to Rent or Buy?” They had on two guests: David Crook a writer for the Wall Street Journal and R. Donahue Peebles, CEO of The Peebles Corporation. They discussed whether or not housing was a good “investment”.

Don Peebles brought up the example above, apparently based on the real life events of his own parents (who bought in 1960 and sold in 2006.)

But the real question is, isn’t ANY investment made 46 years ago going to be performing pretty well? Time is on your side in any investment. And inflation too. David Crook commented that the only housing market to keep up with the return on the Dow Industrial Average over the last 30 years has been San Francisco. If you bought a house anywhere else, you would have been better off in the stock market. He called housing an “inefficient way to invest.”

Mr. Peebles, however, argued that the average person is, basically, too dumb to invest in stocks (he didn’t say the “d” word, but he implied it.) He said, “the average person can’t invest in the Dow Jones” and then brought up the dot-com disaster stating “the last time they did was the tech stocks” and, well, look what happened.

Again, the house lookslike a great investment because it seems like, gosh, going from $17,000 to $750,000 is really, really great.

But it’s not. Not when you compare what stocks would have done over the same time period.

I have argued this before (that stocks kick housing’s b*tt as an investment) but I will do so again.

Repeat after me: The way to get rich is through stock investing. Not housing.

Don’t believe only me. Read Jeremy Siegel’s excellent book: “The Future For Investors”.

The Top Four Best Performing Stocks from 1950-2003

Think you have to be a genius to be a good stock picker? Think again.

Siegel names the top four best performing stock picks from 1950 to 2003. It’s likely you or someone you love has used products made by each of these companies:

1. National Dairy Products (aka Kraft Foods)
2. R.J. Reynolds Tobacco
3. Standard Oil of New Jersey (aka ExxonMobil)
4. Coca-Cola

$1,000 invested in each would have been worth $6,291,510 in 2003 (even more today).

How much did the Peebles make in 46 years? About $700,000 once you subtract agent fees, the downpayment and paying off the loans.

That’s nothing compared to the power of the American stock market. (sniff, sniff.) Heck, even just putting it into a stock market index would have yielded $1,118,936.

A House is Not a Retirement Plan

You have to have somewhere to live. For that reason, of course, you should be buying a home at some point. It is forced savings to pay down a mortgage and it will give you peace of mind and a cheaper standard of living when you do finally retire.

But it is not the road to riches. It cannot fund your retirement for the next 30 years like stocks can.

Mr. Peebles said, “you can’t live in your stocks.” I’m so SICK of hearing that argument (as a reason not to buy stocks.) No, you can’t. But your stocks can buy you something very nice to live in in the end.

Don’t believe the hype! Stocks beat housing every single time.

Invest in stocks for your future.

Maybe you were among the millions of Americans in the last few years who took out a home equity loan or did a cash back refinance to pay off some bills.

It was a common occurrence. As housing boomed, Americans found their split-levels had doubled in value and the tv and radio commercials telling you to “tap your wealth” were too seductive.

In 2004, when I lived in the San Francisco Bay area, there was an advertisement on the radio telling you to unleash your inner wealth and go on that trip to Hawaii, buy that boat and live your dreams. (It really did say to take the trip to Hawaii and buy the boat). All, apparently, for free. After all, real estate only went up (especially in the Bay Area.)

For many people in the major metropolitan areas, their home became like winning the little lotto- as they took out $100,000 or $200,000. It was more money than the middle class could hope to save in probably 10 years of working.

Only, unlike the lotto, the money was actually more debt. It wasn’t “free.” It has to be paid off someday.

Or, maybe not. The problem is, many people can’t repay the loan.

Imagine that?

The money was simply too tempting. What is happening in towns like Merced, California, is all too typical of what is happening all over the country. But because home prices have escalated so quickly in California and Florida, the pain will likely be more severe there. From the Merced Sun Star:

That’s what’s about to happen to the North Merced house a local business owner bought in 2000 for $135,000. As his home’s value nearly tripled, he refinanced several times and now owes $365,000. He took out loans to start a business that failed. He said he was too embarrassed to let his name appear in the newspaper. But he offered plenty of theories on why so many Merced homeowners took out loans they couldn’t afford.

“A lot of people here are tired of living check to check and they say, ‘My house has doubled in value and there’s a chunk of change just sitting there. I could take it and for once have a little money in my pocket,’” he said. “You see a lot of people driving Hummers around town and they probably make $15 an hour. That money came from their house.”

That is the American way. Buy what you want now. Want that $300 Coach purse but only make $25,000 a year? You charge it. Want that Mercedes? You take out an 8 year loan.

In the last few years, it seemed like no whim or desire could be denied people. Only make $25,000? You too could buy a $400,000 house!

It was an endless party.

Only now, the piper must be paid.

Clearly, Americans cannot pay for what they bought. The escalating foreclosure rates are evidence of that.

Where will they go? What will happen to millions of Americans who are in over their heads? From the Merced Sun Star story:

Less than a year ago, Mark Gallegos was poised on the brink of success. His South Merced house had doubled in value. Like hundreds — if not thousands — of other Merced homeowners, he used that asset to grab $270,000 in home equity loans. That money went quickly to fund a business he’d long dreamed of owning.

Today, the 45-year-old is poised on the brink of failure. His mortgage company has started foreclosure proceedings. Standing on the lawn of his S Street house, he jerked a thumb toward a group of homeless people congregated in a park down the block. “We’ve got about 90 days to resolve this or we’re going to be living over there with those guys,” he joked grimly.

It’s hard not to feel some sympathy for their plight. But compound it by millions of people.

You don’t get something for nothing. The money wasn’t free.

Who will pay to clean up the mess now? Several senators are saying that homeowners should be bailed out.

Are you willing to bail out people who went to Hawaii?

Me neither.