120-Day Opportunity for Distressed Asset Investors

It’s hard to argue the real estate market hasn’t stabilized significantly from April 2009 (bottom of the first dip). It is difficult, however, to agree on what direction the market is heading over the course of the next year. But looking forward to the next 120 days, I think there’s a small window for some creative investment property structuring of limited investment (less than 20%), and in some markets, zero-down real estate deals.

A quick check on what’s happing in the marketplace shows pending home sales are surging with people entering into contracts to receive the tax credit. The result of the tax credit will definitely be a shot in the arm to appraised values as these deals start closing. In doing so, comparable sales will be substantially higher over the next 120 days or so as many normal sales will take the place of distressed on appraisals. This jump in values (though artificially stimulated) will be throwing off many graphs and models people are using to try to find a clear direction where the market is. More importantly, this will create an unprecedented buying opportunity.

Tax credit buyers are gone, and prices will jump because of the lag from sale to closing. Appraisers can use tax credit comps hitting between now and the end of June for another 90 days or so after the end of June(maybe longer depending on the lender). According to NAR (National Association of Realtors) real estate inventories are on the rise, jumping an additional 400,000 units on the market from April to March taking the supply up to 8.4 months (higher than normal). This jump due to both foreclosures peaking and some seasonality means plenty of property available for investors to acquire. Banks should be quick to act and accept low offers (they are already), meaning you’ll get excellent pricing this summer on properties that are going to appraise higher than they would have now, and likely higher than they’ll appraise in the fall.

This window offers a great chance for opportunity seekers looking to buy a distressed asset, renovate it, and refinance the funds out. In fact this might be the perfect opportunity to do this. Really I see 2 main strategies that investors are using to process this inventory. The traditional where you buy with 20% down and a tenant is in place on the home (lenders love this), and the distressed buying as mentioned above. The former is being driven by rehabbers and wholesalers, and the latter by long-term income investors. Availability of financing on the distressed side usually pushes investors to the hard money lenders where the refinance gets tricky. This is due to many factors, seasoning, appraisals, inspections, but usually the main issue is the appraisal. This window will reduce the appraisal variable from a hurdle to a minor bump over the next few months, provided one buys in an area which had plenty of tax credit sales (usually near the average home price neighborhoods).

Using the short term money transaction with a refinance at a bank could allow you to even get in with little-to-no-money down. Here’s an article on finding hard money lenders. If you’re being prudent on your buy price and the quality of home, one should be able to really pull off some profitable transactions in the next few months. Just know this is an event horizon and not the norm.

Image Source: Calculated Risk

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