Brave New (Real Estate) World

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When we the real estate market return to normal? When will things go back up? When will I be able to get $0 down loans again? How long will it be before I am able to get a loan I can’t afford? When will I be able to go back to flipping my way to outrageous fortune? The short answer: never! With any luck those days will never come back.

Things had been so crazy in the world of real estate investing for so long. People came to accept that insanity as the norm. There were so many novice investors in the market who thought that the mania we were experiencing was the way it was supposed to be. Many of us who had been around awhile, and should have known better, got caught up in the hysteria as well. As with any overheated investment market, when the bubble of speculation burst many people were left holding the bag. A large number of those who lost money will never again invest in real estate. They will blame the real estate market just as those who invest in the stock or commodities markets do when things go bad. They should really be blaming themselves and their own unrealistic expectations.

The Pendulum Swings

The fallout from the bursting bubble is that things have swung too far in the other direction. Lenders that were burned by the liar loans and fog-a-mirror are now afraid to finance even well qualified borrowers. They too were caught up in the speculative fever and made many loans that never should have been approved. Afraid of compounding their mistakes, they are now in a state of paralysis. This lack of liquidity is magnifyng the problem. How can the market recover if even those who are qualified can’t obtain financing?

There are fantastic deals everywhere these days. During the heady days of the market the challenge was locking up a property before someone else did. Today the issue is be able to finance it. Many investors rely on stated income loans to obtain investment real estate. The over-correction in the credit markets has caused many lenders to eliminate these programs or change them in such a way that it is much more difficult to qualify for them.

The Government has jumped in as well. The state of Nevada passed a law that attempts to eliminate the use of stated income loans (Assembly Bill 440). While these loans still exist to some degree, lenders in Nevada have to follow a stringent set of guidelines before approving loans of this type. Many lenders have decided to eliminate the product entirely rather than risk running afoul of the law.

They Way We Were

The lenders will eventually work things out on their end. They need to lend money in order to survive. The rules will certainly change as the market adapts. Investors will eventually be able to purchase property, albeit with rules altered for qualifying. The excess supply of homes on the market will be absorbed in time and at some point supply and demand will reach a point of equilibrium. The real estate phoenix will rise from the ashes.

As investors, we once again need to look for deals that make economic sense. To buy with the hope that the price may someday rise is not investing, it’s speculating. We should be looking for deals that make sense when we purchase them. You should have clearly defined investment goals and follow them. Perhaps you are investing for cash flow or built in equity or long term appreciation, or some other reason. Whatever that goal is, be true to it and be careful not to get caught up in frenzies that will inevitably occur in the future.

Make a distinction between being interested and being committed. When you are interested in doing something, you do it only when it’s convenient. When you are committed you follow through – no matter what – no excuses. – Mike Krzyzewski , Duke Blue Devils

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.