Subprime Mortgage Crisis and Real Estate Investment

The verdict on the press is unanimous: We are currently experiencing a scary subprime mortgage market meltdown and it will affect everyone from Wall Street to Your Street. Certainly, the subject has gotten
sufficient (ok, maybe a little excessive) coverage. However, I wanted to look at it from a different perspective. More specifically, how is this current crisis affecting (or going to affect) the real estate
investment market. Are the subjects even related enough to be discussed on the same post?

I believe that the subprime mortgage crisis will affect real estate investment in two major ways (one more obvious than the other):

Put quite simply, there will be fewer buyers available to purchase the fixed-up homes. With some of the biggest players in subprime lending going under, many buyers with spotty credit and not much money to put down will find themselves unable to purchase home. Home flippers have counted quite religiously on offering $0 a down deals to prospective buyers to entice them into purchasing their investment homes. They’ll still be able to do that but to a much lesser degree as they will be limited to buyers will good credit. On the other side of the coin, whenever a buyer is found, chances of the deal falling through will be lesser as well.

1. Most importantly, this crisis will reduce competition for foreclosures, hud homes and investment properties in general. This is the less obvious of the two. You see this crisis will “weed out” a lot of the Carlton Sheets/Robert Allen seminar type of investors that purchase investment properties with no money down. These types of subprime investment loans will, scratch that, are no longer available. As such, those who favored a more conservative investment strategy, meaning 10% down minimum on the purchase, will face less competition from the OPM (other people’s money) investors.

Real Estate as a Savings Account

I know by now you might be a little perplexed by the title but do not worry as it will all be clear in the end. First, let’s start by a quick question: Let’s say that your bank representative called you one day and told you that if you opened a savings account in the bank today, they would put $20,000 in it with the stipulation that you couldn’t touch it for 2-5 years. Would you take that deal? In a heartbeat, right?

Well, buying a home right is in a way the same proposition as the pretend example above. “Right” being the absolute operative word in that sentence. “Buying right” simply means buying a property substantially below its true market value. Some of the reasons why a property may be below market value is as a result of a distress situation such as divorce or pending foreclosure. Other reasons may be the need for repairs or imminent job transfer. In other words, any time the seller of the home (be that an individual or an institution like a bank or HUD) must liquidate the home quick and will take a lesser price than the true market value of the property it is a good opportunity to buy a property right.

What happens when you do buy a property right and what does that have to do with savings accounts? Take the following example for instance: If you purchase a property that is worth $200,000 for $180,000, you are in effect realizing an equity gain of $20,000. Put simply, you just made $20,000 with the stipulation that you cannot touch it until you sell the home later. In that context, this home that you just bought is serving as a locked savings account the money in which you earned by simply making a smart purchase decision. In addition to the instant equity, you also gain the benefits of home value appreciation for every year you own the home. Most importantly, if you stay in the home as your primary residence for two years or more, you can avoid paying taxes on up to $500,000 of profit depending on your marital status. How about that: Instant Equity, Value Appreciation and No Taxes! Sounds pretty good to me.

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Photo Credit: Annia

Texas dominates best places to invest in real estate

According to a press release by real estate investment group HomeVestors of America, Inc., the Lone Star State is fertile land for investing in real estate. Dallas leads the charge with Houston following at a close second in the list of Top 10 Cities to invest.  Fort Worth and San Antonio round up the strong showing. Although it is not clear what criteria were used by the investment group, I am sure that strong local economies and job markets paired with relatively stable real estate values and foreclosure opportunities had to be taken into consideration.

Photo Credit

Houston Foreclosures