The Cost of Money
The year was 1981. I was living in Ross. Ohio and working as a sales manager for a company in Miamisburg. I owned a home in North Ridgeville, Ohio (Near Cleveland) and had to rent the home out because the real estate market was so bad I could not sell it. (My first landlord experience). Interest rates peaked at 18.45% in October of that year. I bought the house in Ross and was financed directly from the builder somehow. Down the street from me there was a house under contrition. One evening I was walking through the house with my dog, as neighbors of new construction are apt to do, and when I came out the front door there was a gentleman pulling up into the driveway. He was the banker that had taken back the house, still under construction.
The house was a 1500 square foot, brick house that the banker told me they would finance at 12% fixed for five years with 5% down. I asked him if he would be that for an investor.
“Gregg,” he said, “We will do that for anyone that is qualified, we just need to get this off our books”. I told him that I was interested but not sure I would qualify. He asked me to put some financials together and call him the following week.
A week went by and I did not get a chance to send him anything but the following Saturday morning I was putzing in the garage and he pulls into my driveway.
“Still Interested?” he asks.
“I am, but I have not had a chance to put any documentation together.”
“Jump in the car. Let’s go to town and chat.”
Two hours later I called my wife, “Honey, you need to come to the bank, we just bought another house.”
“Are you kidding? I thought you were cleaning up the garage!”
We signed the purchase agreement on the house for $69,000, I wrote a check for $5,000 that Saturday. The house was due to be complete in 90 days. The following Monday I put an advertisement in the paper offering a lease option in the house. By Friday I had it under contract with a three thousand dollar deposit. I had sold the gentleman an option to buy the home for $5000, leased it to him for three years, and wrote the purchase contract so that the buyer could exercise his option at a programed increase in price any month after month 12. I was cash positive during my ownership period, and in the end my buyer got transferred to another state in three years, so I sold the house into a much stronger market for over $100,000 to another buyer.
I was able to do this when interest rates were 18%, I had no money out of my pocket (the option money paid my down payment), and I did this in a down market.
I share this story to let you know that it is possible to prosper in a tight market that was obviously much bleaker looking than the slight rise in interest rates of today. Interest rates “jumped” to 4.2% this past month. This is still cheap money, but you can pay a lot for money if your exit is properly constructed. Would I borrow money again at 12%? You betcha, especially when this is 6 percent below market rates.
Here is the forecast from MBAA:
Click here to see the MBA Mortgage Finance Forecast, June 20, 2013
You can see from the forecast above, that the MBAA does not see interest rates going above 4.5% through next year, and I certainly do not see a return to 1981 levels like above.
Have a great week.