This topic I am sure will be met with many raised eyebrows, but I honestly feel the best approach with anyone is 100% disclosure.
As everyone is aware, the US Real Estate market was absolutely hammered with foreclosures as a result of some very very relaxed guidelines on mortgage's. There is plenty of blame to go around on each side. I mean it was so ridiculous, that it seemed all you needed to do to qualify, was prove to them you were breathing.
The upside to this debacle, is the very result that we are seeing. At no time in the history of the US, has anyone been able to purchase real estate this cheaply, and it will never happen again. Now is the time, as they say! I mean really, apartment complex's being sold for 10-12K per door, before rehab! Gotta Love It!
The downside to the debacle, is that is has forever changed how banking gets done in this country, when it comes to Real Estate. The days of 100% financing are DONE, and never will return. This means one thing, if your looking at purchasing a home, better bring some cash. I am referring to the Big Box Banks, and not creative lenders who will do just about anything. Watch the Fees!
What this means, well unfortunately nothing good comes without something bad.
When your looking to buy and then sell, understand there are additional risks that need to be factored in. Outside the normal risks of any real estate deal, the reality of being able to fix and flip like the good ole days, just are not there.
There are plenty of retail buyers in this market, as these home prices will draw them out in groves. Here is where the problem begins to manifest itself. Most if not all of the big box banks are requiring 15-25% down to purchase a home. Here is where our society beliefs and our financial ignorance, starts to hurt the process. It is a well known fact, that a vast majority of Americans, DO NOT save money! This country is in so much credit card debt, its pathetic. Most Americans will complain about the high gas prices, then turn around and CHARGE it on a credit card at anywhere from 10-25% interest! Really? Okay, sorry got side tracked…LOL!
So anyway, you list your beautifully renovated home, in a superb neighborhood at 100K! As my banker said, if you want a 85% loan, we better see a 5-7 year excellent credit history…uh oh! So in reality the banks are going to ask for 20-25% down, this means your buyer needs 20-25K in cash. This can be a problem for a lot of buyers, as they simply do not put money away for a rainy day, as they say.
The buy and sell method is very profitable in this current market, as I currently work with a client and that's all she does. But she factors in an additional 3-6 month carrying costs, to locate a buyer than can actually get to the closing table. The last property she was involved with, had 9 contracts tore up, until lucky contestant #10 walked away from closing with the keys.
Almost forgot, don't get your hopes up high on anything from a bank that says buyer has been approved already, I can't count on both hands how many times, the bank has changed their mind. The term pre approval, does not carry the same definition as it once did.
I'm sorry if this scared anyone from considering this strategy, but I only participate in full disclosure and this is a very real scenario. It's not to suggest that it always goes this way, but it's always better to calculate expenses on a worst case scenario, rather than a best case scenario.
Good Luck with all your future deals!
John
It wasn’t quite zero down, but I paid $10k + closings for a $950k 4plex in an upmarket area of Socal last month. Assume the loan (which in this case drops from 6.25 to 3.25 next year) haggle over the money the vendor (seller) needs – it is often a lot less than you might think. Horses for courses but if you venture outside the foreclosure market there is also great opportunity.
John,
You make some great points. I will add that one thing that every buyer must keep in mind when buying a property is the seller’s motivation. Once you know the seller’s motivation, that gives you a lot of leverage when it comes to negotiating deals. For this reason, when I purchase any property I deal directly with the listing agent. This way I know exactly what the seller is looking for and I can come up with some creative ideas to meet the seller’s expectations and at the same time not pay the highest price for the property.
For instance, I bought a deal couple of months ago, where the asking price was $80k for a 4 plex and I picked it up for $40k, because the listing agent told me that the property is owned by 3 siblings and they are really looking to get around $13-15k each from the sale.
But financing is tough in this market and you gotta be able to adjust your strategy based on the market.
Happy investing!
lawsjs wrote:It wasn't quite zero down, but I paid $10k + closings for a $950k 4plex in an upmarket area of Socal last month. Assume the loan (which in this case drops from 6.25 to 3.25 next year) haggle over the money the vendor (seller) needs – it is often a lot less than you might think. Horses for courses but if you venture outside the foreclosure market there is also great opportunity.lawsjs,
I completely agree with you, as an investor buyer, there are 100s of ways to get creative on any deals. For the retail end buyer, those opportunites rarely exist, as they simply don't know the business as well as investors would or should. They simply run to a local bank and get the "bad news", we can do your loan, but we need 20% down.
Chicago Max wrote:John, You make some great points. I will add that one thing that every buyer must keep in mind when buying a property is the seller's motivation. Once you know the seller's motivation, that gives you a lot of leverage when it comes to negotiating deals. For this reason, when I purchase any property I deal directly with the listing agent. This way I know exactly what the seller is looking for and I can come up with some creative ideas to meet the seller's expectations and at the same time not pay the highest price for the property. For instance, I bought a deal couple of months ago, where the asking price was $80k for a 4 plex and I picked it up for $40k, because the listing agent told me that the property is owned by 3 siblings and they are really looking to get around $13-15k each from the sale. But financing is tough in this market and you gotta be able to adjust your strategy based on the market. Happy investing!Chicago Max,
I appreciate your comment, and your correct, when the seller has hidden or even not so hidden signs, experienced buyers can catch them and make an offer accordingly. When we are looking to sell to a retail buyer, we work hard to eliminate those signs, as we figure all costs on a worst case scenario, so we don't put our clients in a "must sell" scenario. Thus we can hold out for the top dollar, the buyers are out there, it's just getting one that can actually go all they way to finish line.
KC Homes,
You make some valid points – we do exactly that for our investors, we buy homes, rehab them, and resell them to local home buyers rather than to investors.The market times vary widely as far as 2011 is concerned for us – from just days up to 6-7 months.
Financing is harder than it was back in the day, appraisals is the biggest thing to overcome for us as they tend to be VERY conservative these days!The saving grace for us is the FHA (first time buyer) loans, 99% of our buyers are FHA, bring 3% down – the requirements seems to change almost daily when it comes to what credit they need and other things the banks look at, but it has allowed us to keep our money turning over every few months.
We do most of our deals in the Midwest, I'd be interested in seeing some opportunities in KC as well if anything comes up.
Highincomeproperty,
I think in the long term, your flips may be the way to go for Aussie investors as property management seems to be the biggest issue. Do you have any information on this?Portpirate, I do have info on it, but forum rules won't let me put too much on a public forum, and I don't really know too well how to use the "profile" on here – can you shoot me an email on [email protected] and I'll send it back out to you?
HighIncomeProperty wrote:KC Homes,
You make some valid points – we do exactly that for our investors, we buy homes, rehab them, and resell them to local home buyers rather than to investors.The market times vary widely as far as 2011 is concerned for us – from just days up to 6-7 months.
Financing is harder than it was back in the day, appraisals is the biggest thing to overcome for us as they tend to be VERY conservative these days!The saving grace for us is the FHA (first time buyer) loans, 99% of our buyers are FHA, bring 3% down – the requirements seems to change almost daily when it comes to what credit they need and other things the banks look at, but it has allowed us to keep our money turning over every few months.
We do most of our deals in the Midwest, I'd be interested in seeing some opportunities in KC as well if anything comes up.
HighIncome,
I will add you to my buyers list and keep you up to date on the deals we have working. Do you have an interest in commercial projects?
KC
Owner occupied deals are happening all day long at 3% down FHA that is the majority of the sales just like High Income stated. I think your talking about non owner occ. or conventional deals and conventional deals on the west coast are those above the FHA limits, which are depending on the area 380k up.
in the mid west I am not sure what FHA maximums are but I think they are probably about 200k or so. Its really a credit score issue you have under 620 and your not getting a loan. These big box banks as you call them ALL sell their loans to freddie and fannie with the big banks just servicing them. FHA then guarantees them. in the ole days you could get FHA loans in the mid to low 500 fico score. Although Wells will sell you an REO of theirs with a 580 for owner occ..
The other issues is the banks really check income much closer than they used to. And I am not talking just lier loans. I did have 2 sale fales in Aug. here in Oregon and have not had that happen in years. One was owner occ FHA and the underwriter just prior to funding doubled checked income and cash reserves buyer fibbed about them loan died so did the deal. The buyer was left with no place to live. The lender did not get paid of course the agent bringing the buyer did not get paid, And my house did not close. I ended up renting it again. Then I had a 4 plex that I owned not close as the underwriter got picky and demanded 50% down instead of 25% still cant figure that one out. But your right its happening.
What your describing is really a sub prime borrower , which runs very heavy to minority borrowers African american and Hispanic, and there is no question these buyers have been taken out of the retail market at a greater rate than non minorities, except the Nuvo riche' Chinees buyers of the west coast. Just look at any property in Cupertino CA. or Palo Alto CA. average price in excess of 1 mil and plenty of buyers.
For these reason's The % of homeownership east of the Rockies has plummeted in the big cities. Heck look at a city like Memphis 60% of all single families are rentals and this before the melt down. Other cities in the mid west and I am talking every single one of them the % of home ownership has plummeted especially in neighborhoods that are minority, Any one can check these stats.
As you stated I think homeownership for many has changed for the next decade and maybe as you state forever. its going to take a new generation coming into purchasing power that cares about their credit and can save 5k to buy a house in the mid west.
On the west coast were I live you need to save 10 to 50k for FHA.I know when I bought my first home in the late 70's you needed 10% down then a private lender ( hard money would give you a second for 10%) The banks at that time would only lend 80%.
You then had thrifts come into the market S and L's they were called and the sub prime was born in the mid to late 80's. Our area saw companies like Long Beach S and L there were thousands and they all got hammered in the late 80's to mid 90's with thousands going out of bizz.
We are just seeing a big replay only much worse than in those years. Its Deja Vu all over again
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