Orange Juice "Sweat Equity"

Old Houses and Fresh Orange Juice

Here's how I introduced the concept of (orange juice) sweat equity to my three kids:

You can go to a restaurant and order eight ounces of fresh orange juice for $3.50.

Or, you can buy 5 pounds of fresh oranges at Target for the same price, and use your juicer to make a half gallon (retail value: $28).

(The multiples for housing sweat equity aren't quite as impressive.)

Fern Hill Extreme Makeover

Playing Housing "Leapfrog" on Huntington

Where: 28xx Huntington Ave. South, in St. Louis Park's Fern Hill neighborhood

What: whole house renovation

Who: Mike Sward, agent; Edina Realty, broker

When: due back on market late Summer

How much: projected selling price = low $800's

No, you won't recognize this home driving by -- it won't look like this for a few more months, when the new dormers are added.

For now, it's a hive of dumpsters and contractors, who are busy remaking this 1949 Fern Hill Cape Cod.

When it's complete, the home will go from the runt of the block (1,949 FSF; sold price $390k this March) to the "Charles Atlas," complete with all the bells & whistles.

"Rehab Novices"

Why Such a Big Discount For

Big Homes Needing Updating?

Want a novel -- but not at all far-fetched -- (additional) explanation for why so many nicer, bigger homes are facing significant discounts in today's market, especially ones that need significant updating?

Keep reading.

Far and away, there are three big reasons why such homes -- let's just say 4 or 5 Bedrooms, 3-4 Baths, with 3,500 to 4,500 finished square feet, in a nice part of town -- are proving tougher to sell. (Note: the price tag for such a home could be anywhere from $600k-$800k (or more) locally, depending on the particulars).

One. The economy. A rough economy shrinks the number of people who can swing a $5,000 monthly mortgage payment, $10k or so in annual property taxes, and the upkeep on a bigger home.

Oh, and since Buyers of such homes typically need a jumbo mortgage, they'll need to put down $50k or $100k instead of a fraction of that amount needed to buy a home under $500k.

Two. Demographics.

The Baby Boom generation now retiring/downsizing is being followed by a smaller generation with fewer, smaller families.

Ergo, demand is less than supply.

Three. Remodeling costs. You can finance a home purchase with a still-cheap 5%-plus mortgage.

Remodeling costs are typically straight out-of-pocket (remember that little Recession we were just in?).

Rehab Novices

That's probably all the explanation needed to explain why bigger, dated homes are taking longer to sell.

But I think there's actually a fourth reason that goes with the other three.

Namely, the resulting "market compression" makes rehab/updating projects especially daunting for the people who would naturally undertake them.

Here's the logic:

Because of the peculiarities of today's market, it's not unusual to see a completely updated, mint condition home with around 2,500 square feet fetch $500k or more, depending on where it's located.

Meanwhile, some 4,000 square foot-plus homes can be had -- especially if they need significant updating -- for $600k to $700k.

What happens when someone who's outgrown their (otherwise perfect) 2,500 square foot home looks at a 4,500 square foot home that needs "everything?"

It looks overwhelming.

That's especially the case if the biggest remodeling project they've tackled previously is a new bathroom.

Ironically, this "feedback loop" results in bigger homes sitting on the market, which results in discounting, which makes them affordable (at least on paper) to more Buyers moving up from smaller homes . . . who find a big project daunting.

No, I can't prove the foregoing -- but my gut (and my Buyer clients) tells me there's something to it . . .

Bigger Isn't Better

The Rehab "White Elephant"

When isn't bigger better? (Try saying that 3 times!).

When it's a major rehab.

The dividing line seems to be about 3,000 finished square feet.

Below that, and "bringing up" a house with the proverbial good bones can be done for as "little" as $150k or so, spent strategically (Kitchen: $40k; painting, wall and floor coverings: $30k; windows, roof(?), and mechanicals: $50k; bathrooms: $25k; landscaping: $10k

However, the budget for tackling a very dated, 4,500 square foot-plus house might be easily go north of $500k.

That's a lot to pop for, at the moment. Especially if you have to pay for it out-of-pocket (vs. financing at today's cheap mortgage rates).

And it adds inventory to what is already the weakest part of the housing market locally (nationally, too).

Flip-flop? Not!

Spring Foreclosures Make Their (Re)Debut

Sorry for the Dr. Seuss-inspired headline (guess who's got little kids they read to?).

My point was, enough time has now elapsed since this Spring's flurry of deeply discounted foreclosure sales that several are now re-appearing on the market as for-sale rehab's. And selling -- quickly.

A good example is this Cape Cod-style home in Minneapolis' Powderhorn Park.

It came on the market in early April for a ridiculously low $88,900, and immediately attracted more than 15 offers (my client's was one of them).

Ultimate selling price? $121,500.

The Buyer, apparently a real estate agent (at least, the same agent represented the Buyer and now-Seller) put new roofs on the house and garage, refinished the hardwood floors, and cleaned up the Kitchen.

New asking price: $199,900.

Did she get it?

Yup, and then some: it just closed for $213,000, which it fetched almost immediately after coming back on the market in July.

Public Loss, Private Gain

So all's well that ends well, right?

I think it's good for the housing market that foreclosures are being absorbed, fixed up, and re-sold.

And it's certainly good for the foreclosure Buyer cum Re-Seller who made a quick $50k (my estimate -- let's hear it for the profit motive!).

And it might even be good for the Buyer's Buyer, who got a nice, cleaned-up house (having been through with my client twice, I can attest to its quality).

So who loses?

All the taxpayers -- us -- who effectively ate the loss on the defaulted mortgage, and never saw the upside on the re-sale.

Add nine zeroes, and that's what just happened with taxpayers and their multiple bailouts of Wall Street investment banks.