As Foreclosures Accumulate, Where Are The Opportunities For Investors?

The wave of foreclosures sweeping the nation has probably piqued the interest of most real estate investors. As more and more foreclosed homes flood the market, prices are plummeting, and there are seemingly more deals than one could ever hope to count. Should investors really be excited about these foreclosure opportunities? The answer to that question lies in one’s estimation of the real estate market.

Investors who believe that the market has hit bottom should seriously be looking at some of these foreclosure investment opportunities. Banks are becoming overloaded with REOs, and they are increasingly willing to deal with investors. This is not the case with all banks, but persistent investors are getting properties at 70 to 80 cents on the dollar, or even better in some instances. In Michigan and Ohio particularly, banks have more foreclosures than they can manage, and investors are getting especially attractive deals.

Investors should still use caution when looking at foreclosure investments. Areas that have a lot of foreclosures tend to be on the down trend. Neighborhoods that have a plethora of foreclosed homes are often faced with higher crime levels, lack of property upkeep and other negative features. This can lead to severe price drops in the neighborhood as it becomes less attractive to potential homebuyers. Unless investors are specifically looking for a neighborhood renewal project, they would do well to locate properties in neighborhoods which have not been as negatively affected by the downturn.

Investors must also consider that real estate prices could continue to slide. Even if one is able to buy a property for 70 cents on the dollar, if its value decreases another 20 or 30 percent, it no longer looks like such a good deal. In order to protect themselves, investors can look for properties which can be easily rented out to cover property expenses, including the mortgage. Cash flow property typically retains its value because it is not speculative like other investments, and investors can see the returns when they buy it.

If investors have the required funds, another foreclosure investment opportunity is to buy properties in bulk from lenders. Some lenders are more willing to offer discounts on their foreclosed properties if they can unload them in large quantities. Investors could then turn around and sell them off individually to other investors at a profit, or they could simply keep them for their own portfolio.

The Latest Gloomy Forecast For The Real Estate Market

To add more salt to the wound which is the real estate market, Federal Reserve Chairman Ben Bernanke is now proposing drastic measures be taken by mortgage lenders. His outlook on the future of the real estate market, if the decline is left unchecked, is very grim, but he wasn’t without ideas on how to curb the carnage.

Bernanke’s brilliant idea is to have mortgage lenders write down some of the principal owed by borrowers who are struggling to pay their mortgage payments. His reasoning is that if people have negative equity in their homes, then they have no incentive to keep paying the mortgage. If mortgage lenders were to write down some of the principal owed to make it more in line with the actual home value, then less people would default on their loans.

Previous talk of principal write-downs has gone nowhere, and for good reason. The thing is, Bernanke and those politicians who support his approach aren’t the ones who stand to lose money here. They are asking the mortgage lenders and the investors in mortgage securities, who have already taken a beating, to suck it up some more. Naturally, this idea isn’t going to sound all that appealing to them, but Bernanke and friends sure look good to the people. I know that if I owned a house with negative equity, then I would love a nice, easy fix to that problem at no cost to myself. Who wouldn’t? But if I were the one with money to lose, this type of deal would make me uneasy, and the fact that the government would be making me out to be the bad guy wouldn’t sit too well with me.

Who’s to say that these people are actually going to continue paying? Are they just guessing that the reason people aren’t paying is because of the negative equity? Bernanke was quoted by Bloomberg as saying, the “recent surge” in delinquencies has been “closely linked” to the slide of home equity. My thought is that they are using past information that suggests that people with equity in their home pay their mortgages at a better rate. Here is a potential problem: in the past, people with equity have been able to refinance and pull money out if they got into trouble, but that opportunity no longer exists unconditionally. Sure, if you have 20 percent equity, then you can probably refinance, but I don’t think that lenders would even contemplate a write down of that extent.

Writing off the principal to even it with the home’s value (100% LTV) still probably wouldn’t allow homeowners with negative equity to refinance. How far do they want the lenders to go with this write-off? If people don’t have the ability to refinance, will having the negative equity removed really make that much difference? I’m sure that it will have some effect on the amount of people paying their mortgage and avoiding foreclosure, but will those savings be enough to offset the additional costs to the lenders? That is the question that they will have to analyze for themselves.

Even if this plan could work the way Bernanke suggests, I don’t think that the lenders and investors will be able to come together to enact something like this. I just don’t see it happening, but if it does somehow come together, it will certainly be interesting to see how things turn out. Will it keep more people in their homes, helping the overall housing market? Or will it lead a mass fire sale of homes by people who now think that they can get out from under their house?

A proposal like this even being mentioned is an ominous sign for the real estate market. Investors who regularly read my blog know that I am very into cash flow real estate, especially right now. If I can’t see the income before I buy it, then I’m not interested; it’s that simple. I’m sure that there is money to be made in other non-cash flow properties, but with the way things are going right now, that is just more risk than I’m willing to take.

Has The Housing Bubble Bottomed Out?

It seems that many would-be real estate investors across the country are on the sidelines waiting to hear the words, “the housing bubble has bottomed out” and “now is the time to get back into real estate investment.”

Forbes just published an article titled, “Surprise! Home Sales Spark Hope” citing recent data issued by the National Association of Realtors (NAR) which has sparked a bit of optimism from investors. The funny thing is that the data wasn’t good news at all. The report showed that single-family home and condo sales dropped by .4 percent in January and sales are now at the slowest pace on record since 1999. Coupled with the looming increases in the conforming loan limits, this news has sparked hope that the bubble has officially bottomed out.

I’m not ready to agree, but I will say that there is still money to be made in real estate right now. While the real estate market is generally reported in national terms, it is still a local market. Nationally, real estate has been declining, but that doesn’t mean that it is declining everywhere. Portland real estate and Charlotte real estate have been performing fairly well overall.

There is another important point to remember: Good investors make their money when they buy the property. I know that phrase might seem overused, but it is true. Anytime you buy a piece of real estate, you should know in advance what your plan for the property is (exit strategies), and how much you can afford to pay for it and still make the profit you expect. No investor should ever add appreciation into their expectations, especially if it isn’t going to be a long term investment. In my opinion, the best exit strategy—though it isn’t really even an exit strategy—is to keep the property for the rest of your life, and then let your kids worry about what they are going to do with it when you pass on.

Investors should remember that cash flow is king (another cliché...sorry). In a tough market, properties that have built-in cash flow are sure to better retain their values than properties that don’t. Investors who own cash flow properties don’t have to worry about how they are going to make their next mortgage payment; the property takes care of itself. Cash flow property isn’t going to make you an overnight millionaire, like people who were buying up Las Vegas real estate a few years back, but neither will it cost you. Buying cash flow property and holding it for the long haul is a tried and true way to build wealth. It has been, and always will be so.