Is It Time to Buy a House?

Historically, there have been large amounts of money made by investors who are considered Contrarians. They ignore the hyperbole on the news and focus on the value of a given deal. These days, it seems the real estate market and the housing crisis are on every channel and in every newspaper. There are numerous anecdotal horror stories of evaporating value and billions of dollars in losses. In this article we will not be exploring the reasons for the collapse of the credit markets and the deflation of value. We will be looking at the value of the deals that are available and look at methods to “get in at the bottom”.

This is a buyer’s market. If you are positioned to buy, and buy right, you may be handsomely rewarded in the next few years. Sellers are motivated, prices are artificially depressed, and mortgage rates remain at historic lows. Creativity will maximize your ability to buy and minimize your downside risk.

There are a number of interesting deals to be done. An example is an investor client who is buying as many homes in Queen Creek, AZ as possible. Queen Creek is a suburb roughly an hour southeast of Phoenix, AZ. In the real estate price run up in the first half of the decade, prices for a +-2000 square foot tract home went from $97 per foot in 4Q 2001 to over $154 per foot in 4Q 2005. There are many square miles of nice homes in well planned neighborhoods that have all been built within the last five years. He is buying at $50 per foot – almost half of 2001 pricing. With a cost to build of nearly twice that price his downside risk is very low. The homes are almost brand new and he easily rents them for $950 per month, which is enough to cover his mortgage of $665 per month. He has cash-flowing rentals and the ability to hold for a number of years. Has the market completely bottomed out? He doesn’t care.

Another example is a foreclosure bailout. This is a term that causes fear for banks and investors alike. Why would you help someone who cannot pay their mortgage stay in a house? Let’s define a bailout. Typically, a homeowner who is in default on their mortgage looks for a family member or investor to help them stay in the house. Then the current mortgage is brought up-to-date or there is a new mortgage put in place. The old incentive for an investor to do this type of deal was the equity in the house they would receive if payments were not made by the old homeowner. However, today most of these homes are “underwater”. That is, homeowners owe substantially more than an investor would be willing to pay.

Here is how the bailout looks today. In our example we will assume that the house is worth $200,000 and the current homeowner owes $240,000. The investor is willing to pay $160,000. First, an investor offers to purchase the property from the homeowner at $160,000. Since this is less than the amount owed on the property, the bank must approve a short sale on the property. This means that bank must be willing to accept the lower amount as payment in full and write off the difference between the purchase price (less fees) and the amount currently owed on the property. Since the investor is offering 80% of today’s market value on the property and the current owners have probably not been able to make their payments for 2-3 months, the bank will likely accept the offer.

The investor now owns the property. They can then offer to lease the property to the former homeowners. They may even allow the former homeowners to buy the property from them in a year or two for $220,000 (as long as the tenant pays all of their rent on time). The rent may be slightly above market rates and will more than cover the new mortgage that the investor has taken out on the property.

This transaction works for the investor since they have a cooperative seller (new tenant) and they get a good deal on the property. The property cash-flows. They have a profitable exit strategy in place. Best of all, they do not have the house sitting vacant while marketing for a tenant, and the old homeowners are happy because they get to stay in the house. The one argument often heard is, “If they do not pay the bank, how will they pay me?” Many times the new rent is dramatically less than the old combined mortgage payment. Often the rate has risen due to the original loan type and has only recently become unaffordable.

These are two examples of a multitude of creative ways to profit from the current real estate climate. We offer custom tailored solutions for most scenarios, and we lend nationwide.

Always seek financial advice from a financial advisor before investing.