Who Pays $75,000 for 'Garbage'?

"This one's a piece of garbage," said the man sitting next to me.

He pointed to the listing in his guidebook. "I saw it. They had a sign outside that said 'unsafe structure.' Fire had damaged the back, and it was in a very dangerous neighborhood..."

On Saturday, I went to a property auction in Fort Lauderdale. Banks owned these properties...

Banks hate owning real estate. For one, it ties up a bank's capital and stops them from making loans. For two, banks don't want to be in the property business. They aren't set up for it. To them, selling property is a huge hassle. So they'll do anything they can to dump property as quickly as possible.

In the real estate business, they say banks are "motivated sellers."

The market in Fort Lauderdale is so bad these days, selling property through a realtor just doesn't work. So the banks resort to auctions. If you really want to see how bad a property market is, go to an auction. The seller (the bank) has no power over the buyer. They must sell. Therefore, the sales price at auction represents the worst-case valuation for a house...
 
On Saturday, Hudson and Marshall, the country's largest property auctioneer, offered 150 properties for bidding. The unsafe structure was the second lot of the day. Bidding started at $30,000. It sold for $75,000.

"He paid too much," said my neighbor. "That property is garbage. They see duplex in the brochure, and they think it's in a new development. But I saw it. You can't go there after dark..."

Turns out, the person sitting next to me was a realtor named Zaheer. I asked him if he was buying anything...

"I'm just dipping my feet in. I want to see what the market is like. There will be more auctions here. They're having another one in March actually. There hasn't been one since 2001, but now the market's going down... they'll have one every few months."

I hadn't seen any of the properties up for auction, so I couldn't judge the prices. But Zaheer could. He'd seen almost every property in the auction book and had worked in the area for 25 years...

"Lots of new businessmen here," he said. "They're paying too much still."

I talked to another professional real estate investor sitting behind me. He had also visited many of the properties in the auction guide. Plus, he had been to a similar auction in nearby Melbourne the day before.

"There were a few good bargains," he said. "But for the most part, I didn't think prices were that low."

I've looked at property values all over the country in the past year... from Detroit to Vancouver to Miami... and I even bought a house myself a few months ago. My gut feeling tells me people are holding out. Property is not a liquid investment like a stock or a bond. It takes much more effort to sell. And it's personal, too. People have emotional attachments to their properties. They'll hold on, even when they're losing money.

As my editor Brian says, "Property prices move at glacial pace."

A bombed-out shack sold for $75,000 at auction. This is not a sign of deep value. I think house prices in Fort Lauderdale are holding up because owners are holding out. They haven't faced reality yet.

In sum, I think it's much too early to invest in south Florida real estate... at least here in Fort Lauderdale. That time will come, but it's not here yet.

Good investing,

Tom