Buying opportunities, for those looking for bargain deals, are still good and should extend well into 2010 and 2011. Housing starts according to the Commerce Dept. have come in lower than expected for 2009.
One would naturally think, as home builders attempt to reduce inventory, that home prices would stabilize. To a certain extent they have stabilized albeit temporary.
First time home buyers who have been sitting on fences, automobiles and motorbikes are now out in force trying to take advantage of the $8,000 tax credit set forth by the U.S. government. Ironically, the tax credit is due to expire on November 30'th. This small flood of home buyers has temporarily created a high demand in low to middle income housing which in turn has created more competition among investors seeking cheap deals on foreclosures and HUD homes.
I came across this video which illustrates the cause of the banking crisis and stock market collapse. I found it very informative and easy to understand with excellent graphics and commentary. Video - Courtesy crisisofcredit.com
As an investor I hope I can always learn from my mistakes and help others. I hope together we can all grow stronger moving forward.
Over the past 12 months my partners and I have been buying single family home foreclosures. Homes are selling for deep discounts and providing high cash-flow rates once rented. Our strategy is not to buy and flip, but to buy, rehab then rent to provide cash-flow and capital appreciation. On the surface this may seem as easy as drinking coffee because of the high number of foreclosures available. But don't be fooled with high quantity and low prices. Buying foreclosure properties is not as easy as it may seem. Buying houses for cash has been our strategy which is one way to up your chances of success. Refer to my previous article "Buying Real Estate With All-Cash" In todays article I'll outline another strategy that when paired with all-cash works for us.
Relieving Some of the Burden
Buying homes at deep discounts for cash relieves vacancy pressure as there is no unerlying mortgage. You may still have a lean on the property held by a private lender but hopefully you have worked out the terms so that you have 60-90 days until your first interest payment. Racing out to find a tenant before your first payment is no longer a pressing issue. You can be more choosy when screening tenants. You can hold closer to your asking rent price and not decrease it just to get the property occupied. You can save money by performing more of the rehab yourself. These are just a few of the benefits.
The Problem With Real Estate Agents
As easy as it might seem to buy real estate at low prices, a problem has arrisen that must be addressed if we are to successfully close deals with banks. I have found, as with many of my collegues that seller real estate agents have all the control when it comes to you submitting your offer, deciphering which offers to submit, how much information they tell you ahead of time, and lets face it some blatently do nothing. As a buyer in the past I have typically used a buying real estate agent to help me track down candidate properties, perform showings and leg work. As a result I did not close many deals dispite offering near or above asking price. The reason...
In an up and down market there are those investors that will dig up opportunities regardless of the state of the economy. In the current climate banks are holding on to their cash with a wait and see attitude. Savvy investors are finding that buying with "All-cash" works as a viable strategy for acquiring residential and commercial bank owned properties. Investors with a wait and see attitude for institutional lending and financing are missing a great opportunity to buy while everything is on sale. Rock bottom prices in the residential and commercial markets in part have been driven down by the scarce availability of credit.
A Hostile Lending Environment
Currently, savings and loan banks, an alternative to commercial lending institutions and private lenders, will typically finance up to 65-70% percent of property values. Buyers in some cases are required to bring 30-35% to the closing table to even be considered. The Commercial Mortgage-Backed Securities (CMBS) market which has traditionally produced many lenders eager to compete for loans has been stalled since the 4'th quarter of 2007. For example: In the first 3 quarters of 2008 only $12 to $13 billion worth of commercial loans were securitized. Already, 2009 is on its way to having the lowest production of securitized commercial loans in 10 years as stated by Commercial Real Estate Direct. Some banks, in order to finace a new project, are requiring developers to pre-lease roughly 70 percent of office/retail units and housing. Shorter amortization periods and higher interest rates added to the mix creates the perfect storm for an even more hostile lending environment.
There are many risks when it comes to property investment as a business. I think sometimes people, especially investors forget the steps involved when obtaining a loan and how this process may open them up for risk. There are many concepts to understand mostly because the bottom-line is determined by capitalization (CAP) rates, return on investments (ROIs), and other net operating incomes.
It makes sense that people overlook the smallest detail when financing a property. It doesn't really matter "why" the loan is needed, if you are seeking a conventional loan from your neighborhood bank or turning to private lenders or hard money; it is still very important that you pay careful attention to the loan you are being offered. I understand you are concerned with flipping the property as quickly as possible; but in doing so you are not as attentive to the type of loan. And thus you find yourself in high-risk situation. Often times brokers may steer you into high-risk deals since they may have pegged you to be a risk-taker.
This opens you up to a different class of loan and areas of predatory lending practices which may incur high fees and other terms or conditions that are not always explained up front. Sometimes loans that allow you to flip properties are called rehab loans as they use hard money via private lenders. This not only means steeper interest rates but an area of lending that is not strictly regulated by the federal or local governments. These hard money loans only work to your benefit when they can get you out of a deal quickly. In other words, these loans only serve the lender because of the amount of leverage that increases the return.
During this time of financial uncertainty as giant powerful cornerstones of the American banking community fail, you have to wonder, is my money safe? What happens if my bank is no longer doing business? Should I take my money out? What about small, regional banks and even credit unions? Are they immune or will they suffer the same fate? Should I worry about my long-term investments? Is it finally time to get organized and figure out my finances?
For months now, the American financial backbone has been a sinking ship, headed toward a crisis beyond anyone's experience and description because not even the Great Depression can compare. Many say we have been in a recession but there have been signs of a Depression for a while. Even such financial leaders like Bear Stearns, IndyMac bank start to fail and powerhouses like Fannie Mae and Freddie Mac need federal assistance; there is something rotten here. This is not to mention the Lehman Brother's bankruptcy and the proposed bailout of $700 billion bailout, which was initiated by American Insurance Group or AIG. No wonder our heads are spinning; we don't know if we are coming or going. Everyday on the news it is something new. People are taking to Internet financial pages like MSN Money and sending emails to financial experts across the country for advice.
Oprah has Suze Orman on her show as a way to elevate the worry but still there are very few answers and still more questions. We can take a moment to answers the questions but you also must keep in mind, the answers are changing for from minute to minute.
How can I tell if my bank will fail? Well you really can't. There's no easy way to know and I'm certain the bank will try to ease your worries. You should look at indications within the market because there is no a hot list of banks going bad. The Federal Deposit Insurance Corp does not publish one. Furthermore, according to the American Bankers Association many banks rebound and recover so quickly that it's next to impossible for them to produce a list.
This current talk of financial bailout suggests that as a result mortgage rates will fall allowing a surge in home buying especially for first time buyers. Still one must wonder how long this will last but also what are the long-term impacts for the housing market? Right now it feels like the lending industry is distressed but this may not be true for very long. The banks at risk of failing just need to time to recover and it will actually be consumer confidence that drive the economy back to being fruitful again.
There just seems to be a lot flux in the market, organizations don't know if they are coming or going. This is a period of acquisition and consolidation. Lehman Brother's is on the auction block, AIG's failure has brought the issue of bailout into the limelight and Bank of America, of course, will remain standing, buying up new pieces for their vast umbrella like Merrill Lynch. This week has been historic and shocking for the experts even to say, they don't know what should happen. That's tough. While so many people grasp this concept, many are putting their ducks in row and wonder if this is a right time to even think about buying a home or new car. I believe people are hesitant this week but this will change once there is direction and leadership toward resolution. This is what some experts have to say about the future of home buying:
How does the latest fallout from Wall Street influence mortgage lending rates? Well, let's take a look. We can only hope. In the interim rates will more than likely go down because there is a lot shuffling going as the dust settles and investors look for safety nets in this uncertain market. Upon many experts advise, this is a time to put our money in real estate investment or income property. As of last week the 10-year notes went down which means that the yield also decrease but this makes for new opportunities. Experts expect mortgage rates to follow this trend because historically they usually follow suit. Expect rates to drop further as more news brakes. Just within the last week Bankrate.com commented that the 30-year fixed rate was 5.78% down from 6.08% of the previous week. Just to compare, this rate was 6.5% in August.
For a while now, many can spectulate the trouble started at the tail end of 2006 with the mortgage industry busy, the American economy has been struggling, facing uncertain times. Many understand the historic significance of last week but the implications of a federal bailout has yet to hit home. With the annoucement that the Federal Reserve will aid the ailing AIG with an $85 billion rescue package, the details seem murkey as more politicians throw in his or her two cents of how this bailout will work and impact the economy. While the bailout does not favor AIG, the company must hand over 80 percent control of the organization's future business dealings, this new bailout and the status of future bailouts remains in the balance and hands of the federal government who stepped into save the mortgage giants Fannie Mae and Freddie Mac not too long ago with a $100 billion package. Where this differs and many fail to see a need to save AIG is that Fannie and Freddie were already government controlled and sponsored by federal dollars. Why should the federal government step in and save a stockholder owned company? What I am trying to say is that this bailout of finance giants has been a popular trend, starting with a $30 billion loan to Bear Stearns in February. It is a trend we will see more of and possibly a part of the Federal Reserve's strategy to save the American economy. I believe many who are struggling to make ends meet, living pay check to pay check, the working class and even the upper class, when push comes to shove and with a cold winter on the way, wish that the Federal Reserve would give the American people a loan. That $300 incentive check just did not cut it.
While AIG must pay the Federal government back or risk losing control of its interests, many are concerned with the level of government involvement and bascially, the bottom line, who really will be paying for the bailouts? Is Washington really to blame for this mess? What about corporate accountability and the management of these organizations? Something is rotten in Denmark as Shakespeare wrote in Hamlet. Really it does not add up. It is cause to worry of how this can be avoided in the future but also how this will impact the American people over the years to come. Many will argue that this has been a long time coming that part of the issue has been a faillure to tighten lending practices and that the subprime market has lead to the downfall of the whole market. Truly companies like Countrywide should have known better instead of living high on the hog. We could have avoided a lot of trouble today with bad loans.
So should the federal government step in and save companies riddled by bad behavior in the market place? This whole crisis begins and ends with the practice of predatory lending and we've known it since before the mortgage buble burst. As said above, not only Countrywide but other banks allowed their lending practices to be too flexible allowing many under qualified borrowers to purchase items like homes and cars. Many brokers pushed such products on people who otherwise should not have been buying in the first place. Many did not look at the full picture and mainly the issue of repayment. Now the market is suffering due to underperforming loans or bad loans. Still the bank is at fault, they should have never allowed such practices to continue but they were leveraging on the risk involved as long as the portfolio was performing well, the bank was making money on subprime products. Now the current situation prevents this demographic of people with blemished credit from establishing any credit and only the prime customers (A & B paper) will prevail. Many will have to learn to live without or forget about keeping up with the Jones because there will just not be any loans out there for these customers. It is unfortnate because this takes aways from sales people's commission salaries and many people of these professional will be out of work. Truly this is why so many people have never believed in the concept of credit in the first place. It creates a vicious cycle.
It makes sense that people overlook the smallest detail when financing a property. It doesn't really matter "why" the loan is needed, if you are seeking a conventional loan from your neighborhood bank or turning to private lenders or hard money; it is still very important that you pay careful attention to the loan you are being offered. I understand you are concerned with flipping the property as quickly as possible; but in doing so you are not as attentive to the type of loan. And thus you find yourself in high-risk situation. Often times brokers may steer you into high-risk deals since they may have pegged you to be a risk-taker.
For months now, the American financial backbone has been a sinking ship, headed toward a crisis beyond anyone's experience and description because not even the Great Depression can compare. Many say we have been in a recession but there have been signs of a Depression for a while. Even such financial leaders like Bear Stearns, IndyMac bank start to fail and powerhouses like Fannie Mae and Freddie Mac need federal assistance; there is something rotten here. This is not to mention the Lehman Brother's bankruptcy and the proposed bailout of $700 billion bailout, which was initiated by American Insurance Group or AIG. No wonder our heads are spinning; we don't know if we are coming or going. Everyday on the news it is something new. People are taking to Internet financial pages like MSN Money and sending emails to financial experts across the country for advice. 
This current talk of financial bailout suggests that as a result mortgage rates will fall allowing a surge in home buying especially for first time buyers. Still one must wonder how long this will last but also what are the long-term impacts for the housing market? Right now it feels like the lending industry is distressed but this may not be true for very long. The banks at risk of failing just need to time to recover and it will actually be consumer confidence that drive the economy back to being fruitful again.
For a while now, many can spectulate the trouble started at the tail end of 2006 with the mortgage industry busy, the American economy has been struggling, facing uncertain times. Many understand the historic significance of last week but the implications of a federal bailout has yet to hit home. With the annoucement that the Federal Reserve will aid the ailing AIG with an $85 billion rescue package, the details seem murkey as more politicians throw in his or her two cents of how this bailout will work and impact the economy. While the bailout does not favor AIG, the company must hand over 80 percent control of the organization's future business dealings, this new bailout and the status of future bailouts remains in the balance and hands of the federal government who stepped into save the mortgage giants Fannie Mae and Freddie Mac not too long ago with a $100 billion package. Where this differs and many fail to see a need to save AIG is that Fannie and Freddie were already government controlled and sponsored by federal dollars. Why should the federal government step in and save a stockholder owned company? What I am trying to say is that this bailout of finance giants has been a popular trend, starting with a $30 billion loan to Bear Stearns in February. It is a trend we will see more of and possibly a part of the Federal Reserve's strategy to save the American economy. I believe many who are struggling to make ends meet, living pay check to pay check, the working class and even the upper class, when push comes to shove and with a cold winter on the way, wish that the Federal Reserve would give the American people a loan. That $300 incentive check just did not cut it.