Market America Realty and Investments

FULL SERVICE RESIDENTIAL AND COMMERCIAL REAL ESTATE

REAL ESTATE PERSPECTIVES:

Foreclosures, Chinese Drywall, Commercial Real Estate

"Because it was made that way"

I grew up in a suburb of New York City, in a town where we knew all the kids in school and especially knew when a "new kid" moved in. But it is was suburbia, not a farming town, so when one of our neighbors decided to house a pony in a small fenced area in their back yard, they caused quite a stir. Harrington Park's shady streets and wide variety of stately homes and blue collar asbestos tiled modest houses were more a place for black labs and poodles than for ponies. But this era was unburdened by a bunch of town ordinances while there was no exact law against ponies, there was a law against farm animals. Brooklyn raised Seymour Russo and his concentration camp survivor wife Carmen were just as determined to keep "Sandy" as they were determined to love their cherished young son Alan and Carmen's aging mother who survived the camps with her daughter Carmen.

Carmen didn't make it out of the horrors of a death camp to be told what pet she was allowed to have, and Seymour, well, Seymour was a horse lover and he loved his Carmen. I became a frequent visitor to the Russo home, first drawn by the pony, then more to sit down with Carmen and Seymour and their stories and unique outlook on life. Carmen was always feeding me; not just with the steady onslaught of leftovers and freshly prepared cakes and snacks, but with her philosophies molded by her experiences. Experiences to me that was exciting as they were frightening. Seymour was city raised in Brooklyn, worked shoeing horses and his rough and tumble outlook and lack of schooling were just as foreign to me as Carmen's Jewishness and Nazi experiences were. As a young kid their differences from each other where not obvious to me; it was how different they were from me that made them the same.

Carmen worked in Manhattan, spoke German, and sold dental equipment. Seymour spoke Brooklyn-ese, never went to high school and was a blacksmith. Carmen quoted philosophers, Seymour knew how to make things. Carmen cooked, Seymour ate. Carmen planned, Seymour reacted.

Carmen taught me many lessons, but her overriding obsession with her own rights were the most prominent. Perhaps born from the fact that the Nazi's took all of her rights, she was determined not to let the town of Harrington Park infringe on her right to let her son have a pet pony. She and Seymour eventually prevailed, by the way, and Sandy lived a long life in Harrington Park, becoming a star attraction for many kids growing up in the area.

It was from Carmen's influence that I built my strong stance on individual rights and indeed private property rights, and it was from Seymour that I took a few kernels of street born wisdom that stick with me today. I remember Seymour teaching me how to make a bridle with a rope. (Seymour was to later help me buy my first and only horse when I was 14 - without my parents' knowledge or permission I might add, but I will leave that for a chapter in the book).

I was looking at the rope, made of three twisted braids of intertwined strands. I took the three strands apart at the end of the rope and was left with curly cue coils of hemp in my hand. If I wound them back together they stayed together. It was like they wanted to be wound together as rope.

"Why does this hemp stay curled like this?" perhaps forgetting I was talking to Seymour and not Carmen.

Seymour, intent on some other task at hand, quickly responded, "Because it was made that way. Hand me that brass buckle."

I was to learn years later when I was a manufacturer's rep that there is indeed a principle if not in engineering, certainly in manufacturing, that "things" actually "remember" how they were made. It was explained to me by a scientist at one of my suppliers that molecules actually can be oriented and "remember" that orientation, and properly motivated by heat or some other influence will return to that state. Seymour didn't need to learn this, he already knew it.

So next time one of your kids or grandkids asks a question that can be answered with "Because that's the way it was made", don't feel guilty about not taking the time for a long explanation. You might be giving him a basis for his future outlook on life!

Foreclosures

Talk to any real estate agent here in Lee County and they will tell you that they are swamped with buyers of foreclosed properties. We handle two to three a week here at Market America Realty and Investments, Inc. (If you want to get on my notification list and bid on the bank owned homes before they hit the MLS, email me at GFous@MarketAmericaRealty.com).

But how long will this continue? The low interest rates lately have been forestalling a train wreck that some believe is inevitable. That train wreck is the maturing of the famed "Option ARMS". The last adjustment did not cause much a problem seeing the interest rates are still low (MBA FORECAST HERE), but most of the Option ARMS were made in the markets with the greatest decrease in housing values, the sub-prime Option ARMS adjusted in two years - and this adjustment greatly contributed to the current foreclosure in lower priced homes. But the prime ARMS were mostly five year adjustments. This means that beginning as early as late this year we will see another surge in foreclosures - peaking in perhaps late 2010. (A good article about this HERE)

Chinese Drywall

In my years a manufactures rep I tried to get plastic film produced for me in China. I spent one month traveling to manufacturing towns in China looking for sources for plastic film for the Christmas tree industry. I learned a thing of two about manufacturing specifications, and product liability. I'll give you my conclusion first - the Chinese manufacturer is not to blame and I believe the attorneys will have a very tough time finding a "deep pocket" to recover money from. Sure there will be a lot of people to file claims against, but expect this one to be tied up in courts for the next few decades. Meanwhile home owners and builders scramble repair the problem.

To understand this situation you have to understand how manufacturing is brought to China. I know, because I did it.

Manufacturers probably began to look for lower cost production over seas. They went to China, sold some older rebuilt equipment or in some cases a new turn key factory to a communist village and helped that village build a plant. Some other entrepreneurs (or the same ones) gave that plant a specification to which they should make the product they would buy. The specification listed all the parameters that the product needed to meet - color, hardness, particle size, tensile strength, shear, maybe even printability. They may have even listed potential suppliers of raw material (along with the comment - or equivalent). In many cases the buyers of the finished product needed to send in quality control equipment or the very least testing standards against which these standards were measured.

For example; "white" is not a specification. How do you measure white? Is there a range? How broad is it? How much product will you accept outside that range? Can you afford zero tolerance for defect? Even simple things like length of a drywall board is subject to interpretation.

Eight feet long: measured how? Is eight feet plus or minus ¼ inch okay? At what humidity level to we measure the board? (Boards grow with moisture content) If we measure at 50% relative humidity and we ship to Florida with 100% relative humidity will the board grow?

I'm betting that no where in the specification was there a sulfur content or odor spec for drywall boards. It simply never turned up before. I am also guessing that the plant that manufactured the board was full of employees that had never seen or used a gypsum drywall board. If there was an odor in the manufacturing plant these employees would have no idea if this was normal or not. (It has also been reported that the odor does not show up until the boards get into high humidity areas like Florida)

If a purchaser was to return boards and want a credit for them because the boards were out of specification, the first thing that the manufacturer would do is QC the product and determine if the product met the specification signed off on by the purchaser.

On the off chance there was a violation of specification we are presented with another problem: the manufacturer's responsibility is limited to the replacing the out of spec material. This is why there is an incoming Quality Control department testing "to spec" of incoming materials. Because once the manufacturer adds value to the item, it is HIS responsibility.

I have seen homes built with drywall that is somehow contaminating the air, turning the copper air-conditioning coils black, harming the chrome on the faucets, and making an unsavory odor in the home.

To rebuild these homes - tear the drywall out and replace it - will cost about $35/square foot. For perspective on this cost, there are 1500 square foot homes in Lehigh and Cape Coral that cost less than $100/square foot to build new. There is a theory that is being tested now that the sulfur out-gasing is caused by bacteria, and that by killing the bacteria it will permanently stop the problem. This will cost about $14/square foot and require emptying the house for 30 days. I expect to hear about the results of these tests by the end of July. The $14/square foot, by the way, includes an underwriting fee by a national insurance agency guaranteeing the fix to be permanent.

I believe the Chinese drywall problem is fixable, for a price, and I have put together a team buying these homes, mostly already owned by banks that are ill equipped to deal with them and need to unload them.

What's a home owner to do that has a home with the effected drywall? Work with the builder to fix the problem. The large reputable builders that have reputations to uphold are standing by their work - they figure that they will sort the economics out later. The folks that are in trouble are the ones who can't find the builder of their home or he is too small to be able to back up his work.

(For background on the Chinese drywall problem click here)

Commercial Real Estate

The commercial real estate market is just beginning to see banks take back properties promised in mortgages. This lag in commercial foreclosures is the lull before the storm. Commercial borrowers are often required to have interest reserves to carry them through the project construction and subsequent lease out time. In some cases interest payments are made years in advance.

These periods are now over and banks, as reluctant as they are to own property are have become unwilling owners of vacant commercial buildings with carrying costs for taxes, utilities, and insurance.

Here folks are the opportunities. But it takes what I call patient money. Buildings are not leasing - either retail or office. The strategy however, is to be the low cost landlord when the tenants do return. There is also the opportunity to take these tenants from higher cost buildings that need to charge higher rents and put hem in your buildings at a great savings to them.

If we can buy commercial buildings low enough, we can rent them out at lower rents and fill them first.

I am also seeing commercial land available at prices that are only 20 to 40% what they were three years ago. For example, I just listed a prime corner across from Walmart on Route 41 at $8.00 per square foot. This was $20/sf just a few years ago