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.
We now realize that this “irrational exuberance” could not last. Like a roller coaster that reaches the top of its climb, it came crashing down with a vengeance. Prices collapsed and refinancing was no longer an option. Left with no equity, there was no reason for someone to hold on to an investment that they didn’t have their own money in anyway. The housing boom led to a foreclosure boom. But what about those who are trying to hang on? Or those who are trying to invest in this mess of a market?
Many people are familiar with the term “upside down”, it means owing more on an asset than the value of that asset. It was often heard in relation to automobiles. You would try to trade in a three-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.
In this case the buyer only has one option other than foreclosure if he must sell. That would be getting the lender to agree to settle the loan for less than the balance owed. That is known as a “short sale.” The main problem here is that the banks aren’t equipped to handle the volume of short sale requests. The process can drag on for months with foreclosure looming ever closer. Many buyers will back out because of the lengthy delays leaving the sellers in a situation that is even worse than before.
Many buyers are unwilling to deal with the headaches of a short sale and choose to look elsewhere. All of the foreclosures have resulted in a tremendous number of opportunities if the buyer has cash or the ability to obtain financing. But what about the investors who don’t have access to capital? They will pursue deals involving seller financing or try to acquire the property “subject to” the existing financing. There are huge problems here as well.
If the seller is upside down, there is no equity. If there is no equity, there is no deal without a short sale. When hunting for a deal a buyer may find a property that the seller has owned for a long time and thinks that a deal may be possible. The buyer then learns that the seller refinanced and pulled out cash at the height of the market and there is no equity. Frustrated once again.
As frustrating as things are, this too will pass. Eventually some sense of normalcy will return to the markets. We all have to adjust to a new set of rules and learn to adapt to ways of doing business. All we can do is hang in there and keep trying.
Patience and perseverance have a magical affect before which difficulties disappear and obstacles vanish. – John Quincy Adams