May 2007
Trying to sell a home in a neighborhood where nobody is buying can be an extremely trying time for a seller. Foreclosures are on the rise, fueled by subprime loans that never should have been made and overeager investors betting on dreams of continued double-digit appreciation. Sadly, we are now feeling the results of too much credit chasing poor or borderline borrowers.
Yet people who default on their homes still need a place to live and many of them are well-meaning consumers who hold down decent jobs. While they have shown they are not able to pay the huge monthly payments that come with high-interest-rate loans, they are capable of paying a fair monthly
housing expense.
Three years ago, Tom Dimercurio, a veteran of 37 years in the foreclosure business, was the first to label and predict a "foreclosure tsunami" for several areas of the country. While he says many markets have yet to hit rock bottom, he also believes this is a great time for long-term investors to begin picking up single-family homes for their portfolios. However, potential buyers must be genuine players, not speculators, and be prepared do factual research if they are interested in purchasing an additional piece of real estate in a specific area.
"The residential rental market in places like Denver has been very strong because there have been so many foreclosures," Dimercurio says. "Indianapolis also has been in a foreclosure mess and everybody is starting to understand how deep the problems are in Detroit.
"But anybody who wants to buy a property in addition to their primary residence really needs to go back to basics. The value of a piece of real estate must be based on the net income it can produce. If it's sustainable with a modest — yet realistic — downpayment, then it becomes a viable candidate for investment."
Cheap money and incredibly flexible loan programs sparked overbuilding, a flip-and-run mindset for speculators, and unrealistic expectations for first-time homebuyers blinded by the initial low payments of adjustable-rate or no-interest loans. While the equity gained by rising home prices can cover many ill-conceived loan mistakes, a flat or sinking market only compounds those lending problems.
Think about it. When a buyer can get 100% financing on an investment property with stated income and a lousy credit score, it becomes a road map for trouble. Especially in a flat market.
"The buyer has got to have some skin in the deal," Dimercurio says. "The subprime thing is just the frosting on the cake. Sure, there are people with low credit scores who should not be given loans. But there are many others who are simply putting nothing into the transaction because some lender has been willing to do it. Well, this subterfuge has been discovered and the real estate industry will be paying a heavy price for the next three to five years."
Historically, the main reasons for default and foreclosure of a primary residence were divorce, loss of job, death, or serious illness. Now, we have added over-borrowing and the residue of too-liberal lending practices. Too many for-sale signs in the neighborhood can take their toll and often reduce the amount of equity for nearby homeowners. While long-term owners simply can stay put and usually ride out a cyclical housing downturn, the stigma of a down neighborhood can be felt immediately when a job transfer demands a quick sale.
No-money-down investment properties accelerate and deepen the problem. When a buyer purchases an investment property with very little or no money down, there's no margin for error when the renter bolts in the middle of the night because of job loss or a death in the family. The renter was basically paying the owner's mortgage, taxes, and insurance with the monthly rent check. When no new renter surfaces and the place goes vacant for a few months, the owner quickly tires of coming out of pocket with the mortgage for the investment home and simply walks away from the deal.
If you are looking to pick up an additional piece of real estate, be prepared to put some cash into the deal to make it sustainable. Determine if the employment base in the area will support your monthly mortgage, taxes, and insurance. If you are looking to pocket short-term profits — cut and run — there's a good chance you'll be adding fuel to an already hot fire.
