Skating On A Frozen (Credit) Pond
October 6th, 2008 by Richard Warren | 2 Comments | Filed in Blogs, Credit, Economy, Real Estate, Real Estate Investing
The credit markets have been so frozen that the Government felt that they had to step in with the recently enacted $700 Billion bailout. The freeze that started with subprime mortgage loans had spread to prime mortgages, auto loans, credit cards and other consumer loans. The entire economy was teetering on the brink of collapse. This situation was so serious that they felt compelled to act a mere five weeks before a major election. This bailout is going to fix all of that, right? Wrong!
The idea of the bailout is to help large lenders and investment firms in danger of being crushed by the weight of the bad loans on their books. The fear is that there would be a domino effect throughout the economy that would cause it to come to a screeching halt. As these companies are relieved of the burden they would, in theory, be able to lend again. The initial benefit of the bailout legislation will be felt by these large institutions. The hope is that the benefit will trickle down in time and the economy will improve. The key phrase here is “in time,” this is not an instant solution.
What’s An Investor To Do?
Real estate investors need to get creative. The days of easy credit and no money down loans are gone for good. The so-called “liar loans” are as extinct as the dinosaurs and investors will actually have to (gasp) qualify for the loans they want. In terms of the long-term health of the real estate market, this is a good thing.
Investors who are challenged with poor credit or lack cash for down payments will have to look for alternatives. They will need to seek out sellers willing to provide financing, find money and credit partners and learn to acquire property subject-to the existing financing. All of this was done before the housing bubble and easy credit days and it can be done again.
What’s A Consumer To Do?
The primary thing that a consumer needs to do is forgo the need for instant gratification. The recent economic expansion was fueled, primarily, by credit. The bill has certainly come due. If you want
something you should do the unthinkable: save for it. So many people are burdened by debt that they acquired to buy things that they could have done without. It’s time to pay as you go and stop maxing out the plastic.
If people learn a lesson from all of this we may actually come out ahead. It’s time to stop spending money that we do not have. This is also true of our Government, the wasteful spending and pork has to stop. We can’t keep throwing money away, we need to establish priorities and stick to them. We’ve had tough times before and we have managed to get through them and I believe that we will get through this as well. Will it be easy? Absolutely not.
The government solution to a problem is usually as bad as the problem.
Milton Friedman
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Tags: bailout, credit crunch, Economy


story. She would tell me how her father and brothers, all coal miners, would get paid twice a day. The currency was devaluing so fast that it needed to be spent as fast as it was earned. My grandmother told of collecting the money and going shopping for food. The grocers didn’t even bother counting it, they just estimated the amount by how large the stack was. A loaf of bread could be purchased for two bags of money in the morning, by the afternoon the price might be three bags. The currency had so little value that people would burn it in their stoves for heat because wood had more value than the money.

administration. They talk of their beloved Bubba as a great multi-tasker who could balance the budget while, at the same time, chasing interns around the Oval Office. They blame the current administration, whose mistakes are too numerous to list, for everything from a hangnail to the current financial mess. But with one stroke of the pen President Clinton repealed the Glass-Steagall Act on November 12, 1999 and may have planted the seeds for a financial crisis of epic proportions. Do you remember where you were?
By now everyone understands that the insane run up in real estate prices was fueled by easy credit. Buying a house with little or no money down was child’s play. Every novice investor that entered the market only exacerbated the phenomenon. Even those who weren’t looking for an investment, just a primary residence, got caught up I the frenzy. It was either buy now or rent forever, or so it seemed.
year-old car only to find that it was worth less than remaining balance on the loan. Your options would be to make up the difference in cash or to roll the balance into the new loan. Unfortunately that isn’t an option with real estate.
Imagine that you are on an African Safari. As you are working your way through the jungle in search of big game, suddenly you are confronted by a lion with a bad attitude. If you were armed like Rambo with a huge gun and lots of ammunition, you would probably come out of the encounter in pretty good shape. But what if you only had a small caliber peashooter with one bullet? The results might be quite different and you would certainly be very careful about using your lone bullet.
I started in the days of assumable FHA mortgages (I know, I’m showing my age) that didn’t require qualifying. If you could convince a seller to take is equity in the form of a note you could do a deal with little or no money down. Although today’s mortgages are not assumable, you can accomplish pretty much the same thing by acquiring properties “subject to” the existing mortgage. While you are violating the due on sale clause of the mortgage, it is becoming a fairly common way of doing business. You may have some headaches if the lender finds out, but if the payments are kept current they probably won’t. The biggest problem is that so many homes do not have enough equity to allow these deals to make sense.

Is it worth $300-$500 to have a professional home inspection prior to making a purchase? This is a question that I ask myself frequently. For most people the answer is absolutely! The average homebuyer does not have the experience or the knowledge to effectively evaluate a home prior to purchase. Experienced real estate investors, and especially rehabbers, probably have enough of a background to make a decent evaluation. However, that doesn’t mean that they shouldn’t have an inspection done.
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