The Mortgage Crisis Has a Silver Lining (…and other truths you won’t hear on cable news this week)

We’re living in exciting times.

Folks all over are blowing the trumpet of doom and despair concerning REI. In fact, the mortgage crisis has almost reached cliché status (we’re anxiously awaiting Rosie to expound on her blog before declaring this a done deal.) Granted, it all sounds pretty bleak and while I’m not trying to make light of those who’re hurting, the current situation is presenting amazing opportunities for investors prepared for the change of scenery.

Yes, real estate investing is careening through some massive alterations. The days of runaway appreciation are over and speculative buying isn’t such a hot idea anymore. Flippers with current inventory who bought at the top of the market may get squished in the middle as prices continue to fall in overheated markets.

But real estate investment isn’t dead. It’s not even breathing hard. Investors will have to learn new strategies and adapt to the new reality while old methods may not be as profitable. But homes can and will be bought and sold and someone will make lots of money.

Pundits and other smart people have expounded on the current situation ad nauseum, but truth be told, it doesn’t take a rocket scientist to find ways to make money investing in real estate in the current situation. Most of the changes revolve around two major truths:

Credit is tightening

Prices are falling

Which means: bargains will be available, just harder to finance. The good news? If it’s harder to find financing, it’ll be harder for everyone to finance meaning less competition for inventory. Smarter people can expound on the myriad ways investors can make money when credit’s tight and prices are low… but just typing that sentence sends shivers of cheer coursing through my Inner Investor.

Here are a few tips for the days ahead-

Check the copyright.

Before buying any REI books or courses, you might want to check when it was written. Just as in the ‘80’s,when real estate investment changed so drastically following the new tax laws, once again things are changing almost too quick to keep up. Of course, some books are timeless-those based on principle rather than gimmick but others will be outdated or no longer applicable. That’s one reason websites and forums such as BiggerPockets are such a valuable resource. Information can be updated rapidly, keeping up with changing opportunities.

Learn everything you can about private lending.

Long before banks came along and swiped the idea, Mr. and Ms. Everyday Citizen toted the note. When money’s tight, someone’s going to fill the gap. Maybe that somone could be you. Or perhaps you’ll find others willing to loan money for the bargains coming up in the next few years. Now would be a really great time to brush up on the methods of creative financing, both as a borrower and a lender.

Every market is local.

Let’s repeat that another way… Market conditions vary from city to city, neighborhood to neighborhood, even from street to street. You can’t call Joe Investor on the phone and ask, “How’s the market down there in Texas, Joe?”

Wish it were that easy!

Every day I hear friends and neighbors fretting over ‘falling house prices’-the catch? The vast majority of homes here haven’t dropped one bit. Some of these folks seem to think we live in Boston.

Take my word for it… we don’t.

Hyperinflation of housing prices did not occur in every market. Some of us who-shall-remain-nameless were caught whining a time or three just wishing for a smidgen of the appreciation of California and Florida. On the other hand, poor lending practices have pretty much been universal for a while now. So here, homes over a certain price continue to rise at a steady 3-5% while older, starter homes are falling in price as a glut of sub-prime foreclosures hit our market and drag down the comps.

Word to the wise: Get to know your market (and don’t take CNN’s word for it.)

How’s your credit?

A good credit score is a valuable commodity and as credit tightens, it will become even more important to safeguard your score. During the next year, work hard to fix your credit scores.

That doesn’t necessarily mean paying off all personal debt. In fact, sometimes it’s best to use those dollars to invest in something that will produce extra income every month rather than pursuing an aggressive strategy of debt reduction that will leave you without a cushion for investment and emergencies. Personally, I like the Pay Yourself First approach-put 10% of net pay in savings before anything else and learn to live on the rest. Read “The Richest Man in Babylon” by Clason for more on this subject.

Find access to cash-

All cash deals may just be the biggest bargain out there in the next few years. Just this week, a nice 2 bedroom home in our area listed for half the price it would’ve brought just a year ago. Someone (quicker than myself) is going to pick up that puppy and cashflow all the way to a very healthy bank account. (Heavy sigh…)

Bargains will be available to cash buyers who can close quickly. But according to financial smart-guys, savings are at an all-time low. What to do? Perhaps you can liquidate assets to raise capital in one of these ways–

HELOC:

If you have equity in your primary residence, perhaps you can open a line of credit to make cash offers. Just make sure you have permanent financing lined up before writing offers.

Sell something:

Do you really need that boat? Have you got any gold or silver coins sitting in a drawer somewhere? There’s usually something that can be sold to raise capital if you scrape close to the bone.

Find a private lender:

Plenty of folks out there would love to earn a better return on their savings, but know nothing about real estate. Put together a nice portfolio, complete with a solid business plan and send it to a few individuals you know that might be interested. Don’t go asking for favors. Be professional, use conservative figures and show them the money. You might be surprised who’ll bite.

Develop a good working relationship with a local bank.

Sometimes local banks have different lending criteria than national companies and can offer attractive lending options for investors. One bank I know of will waive the seasoning rules for homes purchased with cash on a case by case basis (read that: for their customers with an excellent history of repaying loans on-time.) As of the last time I spoke to the loan officer, our local bank is willing to loan the full purchase price for homes we buy for cash as long as the appraisal comes in at 70% LTV and no seasoning period. Most big banks require at least a 10% down payment on investment properties no matter how low the purchase price- a policy that can really tie up your cash and require you to own a home for one year before taking out a mortgage.

Sound Business Practices:

There are times in life and business when the conditions are so extraordinary you can’t help but make money. For those of us old enough to remember the Turtles, we’ve seen booms and bubbles and busts before (google that if you’re under 45-best 60’s group evah). So maybe the boom times are over… so what?

We’ve heard it all our lives-buy low, sell high. So wouldn’t right about now be one of the best times to buy, when everyone else is running away, waving their hands and squealing like a bunch of girlie-men in wholesale panic maneuvers?

Okay then… let’s get ready to do some buying!

Another random picture that has nothing to do with the article… except that it was taken recently while out hunting for bargains… and there may or may not be some clouds which may or may not have silver linings.

REI, mortgage crisis, real estate investment, credit score, cashflow, HELOC

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