Dear Mr. Berko:

I’m considering the purchase of a home for speculation. I found a beautiful home that is as solid as a rock (except for the yard) that will take between $60,000 and $80,000 to fix up. The house would cost me $355,000 and it would probably take me a year to complete the work, so I would have between $415,000 and $435,000 invested. I thought I would get one of those 1 percent interest-only mortgages, and after it’s fixed up, I figure I could sell it for about $625,000 and make about $200,000. I’ll be moving to take a good job in Florida in October, and we (wife and two kids) will move into her parents’ house until we get settled. Her folks are missionaries and won’t return until August 2006. There are many people who do this for a living, and there’s no reason I can’t do this part-time and every year or so make an extra $125,000 to $200,000. I know that you know the South Florida area, so please tell me what you think.

L.W., Bethlehem, Pa.

Dear L.W.:

A 1 percent mortgage — that’s industrial-strength dumb, and the snakes who sell those “1-percenters” ought to be jailed for their deceptive practices.

I’m guessing that you attended one of those gung-ho real estate seminars and paid about four grand for their ridiculous books, tapes and instruction kits. But I’ll wager my rock orchids against a yard full of weeds that South Florida is in a real estate bubble and that spells trouble — and I can hear some of the air escaping.

According to the National Association of Realtors, 23 percent of all homes sold in 2004 were purchased for resale. That was last year! A developer friend of mine believes that the South Florida numbers now are between 50 percent and 60 percent. According to analysts at Raymond James, 84 percent of all high-rise condominiums purchased during the past 12 months in Miami were bought by speculators and investors. Wow and wow!

There are signs that South Florida home buyers are starting to sweat. Few angels in heaven will be able to help those speculators and investors when there’s bubble trouble.

I’m certain that the property you want to buy is fairly priced, that it’s well-built and that you can complete your modifications in less than a year. You know that you will have about $425,000 invested. But I think it’s important for you also to know that a real estate bubble not only means higher prices but part of that definition includes a specific period of time when many people stretch to pay more for a house than they normally would because they have grand expectations that the price of their home will increase significantly.

That’s your problem. So here’s a security check. The family who buys this home, for say, $600,000, will have monthly payments (principal, interest, taxes and insurance) of $4,500, which is $54,000 a year. The average income for a South Florida family of four is just a smidgen less than $45,000. If the buyers earned $100,000, there is no way they could afford that home unless they’re into the awesome South Florida drug action.

In fact, I can’t imagine why a mom and dad would move from Bethlehem, Pa., to Miami and expose their kids to the heavy drug scene, the disconcerting cultural shock, the high violent-crime rate, a public school system that is among the worst in the nation and gridlock that nearly puts Los Angeles to shame.

I don’t know when the bubble will burst. But it will happen when you least expect it, and then you will be forced to sell into a buyers’ market. That’s no fun.

Even Robert Shiller, the eminent Yale University economist, recently commented, “The housing market is now nurturing the same reckless abandon that fueled the high-tech market in the 1990s.” Schiller believes that the danger is especially acute in South Florida, where 68,000 new luxury condominiums are coming on line (45,000 of them in Miami). Those high balconies might encourage a few Jacks to jump when retail prices begin to fall way below preconstruction prices.

I think you might be “burned to the socket” if you speculate on that house. I asked a Realtor client to check the neighborhood, and the average home price on that block is $385,000, so you’re buying that house slightly below the comps. But he also said there were six more houses for sale on that block priced between $377,000 and $435,000. South Florida real estate is like a huge game of musical chairs. When the music stops (it always does), you could be among the owners left standing. Can you take that chance at this stage of your life?

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

© Copley News Service