Real Estate Crash: Lessons Learned

real estate crash

As the real estate market settles into the bottom and even starts to climb after the real estate crash, future homebuyers should take time to understand how the US real estate market found itself in such a poor state.

Real Estate Crash: Consumers View of Real Estate

Over the last ten years, homeownership went from a hard won privilege to a cheap lottery ticket. In the past consumers viewed owning a home as something to be strived for. They saved up 20% – 50% of the down payment and sought to make their house a home for the next 5 -10 years.

As interest rates declined and prices rose, consumers begin to look at real estate as a means to get rich quickly. In fact, many of the early investors did just that. Unfortunately, many areas simply became unaffordable and many buyers/owners were running very low on cash. As low teaser rates expired, homeowners could no longer afford to pay the mortgage and with home prices declining, selling became impossible.

Going forward, consumers need to shift their mindset. Real estate can be a great long-term investment strategy, but it also represents a very poor and volatile short-term investment. Relying on a short-term sale as an exit strategy to avoid mortgage payment resets will not work anymore. Taking a longer term view will add tremendous value to neighborhoods and significantly decrease the likelihood of foreclosure.

Financing Real Estate Purchases

Long gone are the days of a simple 30-year fixed mortgage after this real estate crash. Now consumers can access 40 or 50-year mortgages, option ARMs (adjustable rate mortgages), pick-a-pay and more. Understandably many consumers were confused by these choices and unsure of what their monthly payment would be. Resets always seem to hit at the most unfortunate time, sometimes doubling or tripling mortgage payments.

Everyone pointed the finger at everyone else. Consumers claimed they were tricked by unscrupulous mortgage brokers. Brokers said they were only pursuing the best incentives provided by banks. Banks admonished consumers for not reading and seeking to understand documents before taking on thousands of dollars of debt. In the end, everyone in the process was to blame and should learn for their mistakes.

Consumers should learn to read every document thoroughly and ensure that they know when and by how their payments will rise during a reset. They assume that they will be in their home for at least 5-7 years. Brokers should seek to better understand their clients’ needs. Does it really make sense for a school teacher making $30k to purchase a $500k home? Banks also need to be more vigilant. Relying on the foreclosure process to recoup losses has been a tough less for banks. Not only are they suffering huge losses on their loan portfolios, but they are also being heavily scrutinized by the government for their lending practices.

It’s a new day in real estate. Going forward, consumers need to take the lessons of the past two years to heart. A home can be a great investment, but in the end it should be a great home first.

Renting vs Purchasing: Advantages and Disadvantages

renting

It is a fact of life that most young people start off renting a house, apartment or flat when they move out of their parent’s home for the first time. The decision to buy a home is made after considering many factors.

According to the Melbourne Institute Household Financial Conditions Index, released recently, Australians living in Western Australia and Queensland are moving away from renting and are more likely to purchase real estate.

Renting: Advantages

  • If single, renting a house with friends or other young people can be cheaper.
  • Renting an apartment in a big complex can provide additional facilities such as a gym and/or a swimming pool which is fully maintained.
  • Weekly rentals are usually cheaper than a weekly mortgage for a comparable property.
  • No additional fixed outgoings such as council rates or water rates need to be paid.
  • Repairs to the property is carried out by the landlord (unless the damage is caused by the tenant).
  • Ability to vacate a property at short notice, usually one or two months.

Living in a Rental: Disadvantages

  • Landlord’s approval required to keep pets and/or have additional people live in the house.
  • Having to give access to a representative of the property managing agent every three months for an inspection of the premises.
  • No choice of decor in terms of colour or furnishings.
  • The landlord may require the premises to be vacated at a time that is not convenient to the tenant.
  • There is no ‘return on investment’ on the rent paid.

Notwithstanding, living in a rental property will suit some people at a certain stage of their life. For instance when one moves to a new state, it is prudent to live in a rental house while getting used to the area and deciding on where to set up home permanently.

It is also necessary to rent if one is aware that the stay in that area is temporary.

Buying: Advantages

  • Freedom to decide who lives in the premises and whether to have pets or not.
  • No quarterly property inspections.
  • Ability to renovate, redecorate or change certain aspects of the house to suit the taste and lifestyle of the purchasers.
  • The decision whether to move and, if so when, is made by the owners.
  • Wealth creation through capital gains and the ability to use equity in the property for investment purposes.

Living in an Owned Home: Disadvantages

  • The weekly mortgage repayment may be higher than the weekly rental for a similar property.
  • Having to maintain additional facilities like a swimming pool.
  • Total responsibility for all repairs and ongoing maintenance.
  • Having to pay other outgoings such as council and water rates.

Depending on the personal circumstances at any given point in time, renting real estate may be a better option than buying a property. However, in the long term investing in property could be a vehicle for wealth creation.

Foreclosure Purchase Expectations

foreclosure

It’s sometimes trying negotiating a real estate purchase with a bank, loan company, or mortgage company as the seller. The institution seems non-caring and even illogical at times, but there are advantages that make it attractive; namely price. A buyer can save dramatically on current market prices by purchasing a foreclosure. Knowing what to expect helps to be prepared for the experience.

Basically a real estate foreclosure is a property that has been “taken back” by the first priority lien holder. This entity is usually a major bank, loan company, or mortgage company. The home owners have defaulted on the payments and maybe tried to sell the property as a short sale. The first priority lien holder will then start legal proceedings to “take back” or “repossess” the home. All subsequent lien holders like home equity line and second mortgage companies are out of luck with regards to debt recovery, plus the defaulting homeowners are out their initial down payment.

Most states in the US have been overwhelmed with a massive influx of foreclosures clogging the market and lowering prices drastically. It’s a great time for investors to get a great deal and there are distinct advantages and disadvantages of buying one.

Foreclosure Advantages

Prices and interest rates are at all-time lows: The real estate market works on the basic principle of “supply and demand”. When the market is glutted with supply, demand goes down and so do the prices. Not only do mortgage or finance company’s price the foreclosures under market, they also tend to “price war” with their competitors in the same local markets. Regular home sellers just can’t compete.

  • Liens: The liens are usually cleared through the legal act of foreclosure. Liens like mechanic liens, utility liens, old equity lines, and tax debts are usually cleaned up. This is different from a short sale, in which liens can pop up at any time and a buyer can easily get stuck paying them.
  • Repairs: The banks or mortgage companies will pay for major defects in a home that would prevent virtually anyone from getting a loan on the property, such as major termite damage or a flooding problem.
  • Timely manner: The institutions want it done and off their books. The escrow period is similar to most other real estate transactions, between 30-60 days.
  • Highest bottom line: The institutions want the biggest bottom line net for their foreclosures. An offer with a net of $100,010 with the buyers obtaining a loan can easily win out over an all cash offer netting the bank $100,000.

Foreclosure Disadvantages

  • Condition issues: A defaulting homeowner is stressed out trying to save their home and their credit score from a foreclosure. The poor homeowner has just “had it” by the time a legal foreclosure process is underway. They can be very angry and damage the property badly. Homes are often stripped of appliances, fixtures, and major components. There have been cases where cement has been poured down plumbing drains and fires have been set.

The lending institutions holding the foreclosures aren’t excited about paying for home inspections, warranties, or even turning the utilities on for a home inspection. In fact, even if the buyers agree to foot the bill for these costs, it’s hard to get a liability release from them to proceed.

Highest and best

Numerous banks and mortgage companies wish to create bidding wars for their properties. If several buyers submit offers at the same time, the buyers might be asked for “highest and best”. Meaning, it’s back to the buyers to better the deals with higher prices, shorter inspection periods, or removing contingencies.

Buying a foreclosure can be frustrating, but well worth the extra effort.

Rental Property Management: Guidelines for Success

rental property

Successful investors will manage their own properties. For the maximum money to be made on rental property, self-rental property management is a must. Many investors with multiple properties will choose to hire a rental company. Online rental property management companies are becoming more popular with a rise in demand by successful and talented investors.

In order to understand and self-train as an investor on rental property management, many will take jobs as landlord property managers at an apartment complex. It is always wise to have prior rental management skills before buying any kind of rental property.

Whether jointly or individually, investors who have prior rental management experience will first know if they can handle tenant problems with little stress. Rental management is high stress, long hours and low pay in many instances. It is imperative to achieve some business sense prior to purchasing any investment rental property.

Rental Property Management Companies

There are two choices for an investor: one, he manages the properties himself and two, he hires a landlord property management company. By doing the rental management himself, the landlord saves money, but he gives up his time. Time can be very valuable for any investor who owns several rental properties.

On the other hand, hiring a landlord property management company can take most of the profit from the apartment complex. Finding a competent company can be achieved by looking for local references or hiring an online property management company. Some of the largest rental companies available are online. They are very efficient and nationwide. By hiring an online management company, the investor has the opportunity to attract people transferring into his city and location.

How to Locate an Online Property Management Company

Propertyware.com is one of the largest online rental property management companies available with state of the art technology. Know in a few minutes the credit worthiness of all potential tenants. They offer live online chat and a 15 day free trial to try their services. The credit tracking is through Transunion.

Rentometer.com Pro is also a top award winning rental property management service. This company offers rent comparisons, rental management, tenant screening and more. Rentometer has received many awards and is recommended by many. Check out their site and compare their services with the others being considered.

Rental Property Management by Investor Alone

One of the top ways for investors to become successful is to do the rental management themselves. This gives total freedom and puts more money in the pocket of the investor. Arranging with several teams to work as one just may put enough money in the investor’s pocket to purchase additional properties.

In order to make the management process as easy as possible, there must be some advanced work done when contemplating owning an apartment complex. Here is a list to consider:

  • Hiring a gardener and lawn maintenance crew.
  • Discovering a maintenance man for repairs.
  • Hiring a Real Estate Agent to screen potential applicants.
  • Locating professionals in electric, plumbing and sewage.

After the investor has assembled his team, then the work of management is easy. Hiring a Real Estate Agent to run the credit applications and screen the tenants will help free the investor for other things. It is now possible not to have an on premise manager. The tenants simply mail in the checks monthly to the investor. The only time the investor needs to be called is when there is a problem.