Like many people in my generation, I spent a few extra years in college, 5 ½ to be exact, and yet I have no diploma to hang on my wall. I enjoyed my years at the University of Memphis playing a varsity sport, hanging with my fraternity brothers and in general trying to avoid studying. Don’t get me wrong though, I learned a lot in my time there and it has absolutely served me well since leaving college. I was a Political Science major with minors in Journalism Law and English and wound up leaving one semester of classes short to go to work full time.
Fact is, I don’t regret my decision to leave and I look back on what I learned during those 5 years as a Political Science student and often think my real-life lessons far outweigh a piece of paper on the wall. I believe with the lessons I learned, Congress could learn from me on how to resolve the housing crisis! Some of the lessons I learned included people skills development, risk assessment, team development, consensus building and the real-life give and take of negotiations. It seems to me, that a simple application of a few of those skills in these two areas could actually lead to a housing turn around…
Here are 2 sure-fire ways our elected politicians could help end the housing crisis right now by utilizing real estate investors
1. Recognize the economic impact of real estate investors
When a real estate investor purchases an investment property, in almost every case, there is work to be done. In today’s investing environment, many of the properties being purchased are in some form of dilapidated condition and some are certainly worse than others. Those properties have to be renovated and those renovations have an amazing impact on local economies.
According to the recent BiggerPockets.com/MemphisInvest.com study, real estate investors are spending $9.2 Billion per year on property renovations. The average dollars spent on each property; according to the data collected by ORC (the inter-national CARAVAN polling company) is $7,500. Now, 23% of the self identified real estate investors taking part in the study said that they spend between $20,000 and $50,000 per property renovation so recognizing that number could be much, much larger in some parts of the country is important.
Experienced investors will tell you that if they spend $1 on a renovation then .50 cents went to material and .50 went to labor. On higher cost renovations those numbers will skew a little heavier toward material, but the costs are still split somehow between labor and material. Now let’s consider this real quick.
$9.2 billion is the calculated number spent on renovations by real estate investors. If that number is split evenly between labor and material, then roughly $4.6 billion is spent on each. I give most real estate investors the benefit of the doubt here and assume that they are buying locally and hiring locally. What is the point of watching costs if you are trucking in labor and shipping in your materials. I guess in some cases, really thrifty investors may buy on-line, but I would venture to say a vast majority are spending those dollars locally.
They are spending money buying materials from local stores like Home Depot, Lowes and other national chains, but they are also buying from local mom and pop companies — local lumber companies, local plumbing suppliers, local HVAC suppliers and electrical suppliers as well as small town hardware stores. Those dollars are driving local economies and keeping those big box stores and local suppliers in business. Their share of the $4.6 billion helps keep rents paid and lights on as well as hiring additional help when needed and stocking up on inventories ahead of seasonal orders. The simple routine purchases of real estate investors add up to significant dollars.
But that is only half of the story. The other half of the story is the $4.6 billion spent on labor. That money goes directly into the hands of local companies and labor forces, and acts as a direct stimulus on the local economy. Those dollars are spent to pay bills, purchase food and gas, buy clothing and spend on thrift items such as movies and other entertainment. Those dollars have a much great impact locally and can be a major reason that local small business serving the investing industry thrive instead of disappear.
The effects of an active investment environment are far more reaching than simply the looks of a neighborhood REO that has been revitalized. Creating an environment where more purchases and renovations are able to take place should be priority #1 to stimulate spending and drive hiring in the housing sector.
2. Move Properties in Greater Numbers To Real Estate Investors
There is a debate in Washington at the Federal level, that giving real estate investors greater access to purchase excess inventory would be a bad thing – especially for elected officials. I look back over the last 15 years and really wonder how anyone who was in Washington over that period thinks previous decisions were good. Allowing unqualified homeowners to purchase properties was a bad decision. Allowing investors to purchase unlimited properties with 100% financing qualifies as a bad decision. I think this list could go on and on…
But the great thing about today’s real estate investor, they are not looking to speculate on the housing market. They want to fix it. And the quickest way to fixing the market is to sell the remaining inventory as fast as possible. Home ownership rates sit at 65.9% according to CNN/Money and that is 4% points lower than the peak in 2009. However that is roughly equal to level of home ownership in 1998 before the housing bubble started with the loosening of credit standards at Fannie Mae mandated by Congress.
Instead of creating more legislation to encourage home ownership, now would be a great time to take another tact and encourage cleaning up the inventory using individual investors. According to the BiggerPockets.com/MemphisInvest.com study, individual investors are not looking for handouts and an easy road in the process. In fact, 44% of real estate investors plan to finance their next purchase by putting between 25% and 50% into the deal as a down payment. 32% of real estate investors say they would be willing to put as much as 50% down on a deal if they could obtain unlimited financing from lenders such as FNMA.
This seems like an obvious no-brainer, which some would argue is the problem in Washington. Allowing for greater investment by individuals and actually raising the standards to qualify for those purchases would actually spur more transactions not fewer. Those additional transactions would mean additional money spent renovating homes, creating jobs and stimulating local economies while simultaneously reducing inventory and clearing the drag on local home prices. The great thing about this plan is that it would not lower the percentage of home owners. These properties are often sitting vacant and in need of repair. They are already calculated into the percentage of home non-owner occupied. Create an environment for individual investors to take over and watch the housing crisis end quickly and a return of slow, steady, historical home ownership growth.
Photo: Johan Ohrling