From the Ground Up
by Phil Hardwick
Published: May 22,2000
This week we take on questions received from readers about the real estate in their neighborhoods.
Q: I work at a company that is located in a neighborhood that has drastically declined over the years. There are numerous boarded-up houses in the area. We have been attempting in vain to have the city tear down some of these houses. Recently one of the aldermen came out and told our manager that he was just as concerned as we were about the blighted neighborhood around us. The next day one of the boarded-up houses was torn down. It seems that the alderman is the only one who can get things done. The mayor says that he is trying, but doesn’t seem to have very much success.
A: I smell a rat in your neighborhood. One trick that some elected city officials have pulled in the past is to go to the permit department and find out which buildings are being scheduled for demolition. The alderman then goes to community leaders in the neighborhood the week before the scheduled demolition and holds “listening” meetings. Crime and boarded-up buildings are always of concerns to residents in the neighborhood. Lo and behold, within a week after hearing of the problem the city is taking action.
The alderman gets credit for something that was going to be done anyway. Of course, I don’t mean to imply that happened in your case.
Q: My neighbors just got a divorce and have offered to sell their house to my wife and me for way below market value — about 40%. My wife says that we should buy it and rent it out. I think it’s a risky proposition and that our new neighbors would be our tenants and would be calling us at all hours of the night. What do you think?
A: I think you are risk-averse when it comes to real estate investment. If that’s the case, you shouldn’t invest in something that will cause you worry.
However, based on what you have said, I couldn’t think of a better way to invest in real estate than buying property next door for — egad! — 40% below market value. At the least you could turn around and sell it. But what a great rental house you would get. It’s close to you and you can pick your neighbors as well. If real estate is appreciating in your neighborhood and there are not many other rental houses in the area it is especially attractive.
Q: I’m thinking of buying an office building in a part of town that seems to be just holding its own. Even though real estate prices in other parts of town have skyrocketed lately prices in this part of have not done so. The property is being offered at a very good deal. What do you think of “contrarian” investing when it comes to real estate?
A: I would caution you against paying market value for real estate in an area that is not improving while other areas are doing well. I’ve never really heard the term “contrarian” applied to real estate investors, but I think I know what you mean. To have a successful investment in an area that might decline requires that you pay well below market value for the property.
On the other hand, if you think that the area is about to experience revitalization, you might be doing the right thing. Just remember, invest in real estate for the long term, not the short term.
Q: What is the optimum length of time to hold a real estate investment?
A: Until your goal is achieved. That might sound like a trite response, but I believe that there is no way to come up with such a thing as an optimum time, e.g., a time when you will receive the highest return on your investment. I suggest setting a goal. Let’s say 15% annual return on your investment. As long as the real estate is meeting or exceeding that goal, then hold on to it. When is fails to perform, sell it and move on.
Obviously, there are many other factors involved in the buy/sell decision and they should be given consideration.
Q: We just learned that the taxes on our home have not been paid for last year. What should we do?
A: In Mississippi, property taxes are paid in arrears, which means that the taxes you pay this year are for last year. The previous year’s taxes are due in February of the following year. If not paid by August, the tax collector may sell your property at a tax sale. Fear not though, for there is a right to redeem you property for three years. Now to answer your question — call your mortgage company and tell them what has happened. I’m assuming that you make monthly payments to a mortgage company and that it escrows part of your payment for taxes and insurance. Ask the mortgage company to send you evidence that your taxes have been paid. You may want to go to the tax collector’s office and check for yourself just to make sure.
Phil Hardwick’s column appears regularly in the Mississippi Business Journal. His e-mail address is firstname.lastname@example.org.
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