Posted by: Todd Long | July 8, 2008

Real Estate Crises Averted

Let’s recap what we know about the real estate market:  Homes for sale are on the rise and buyers are reluctant to buy.  Homes for sale are on the rise largely in part to foreclosures being on the rise.  If the only people selling in this market were sellers who are moving to another home, which they often buy, the inventory would not be on the rise at record speed. 

Buyers are reluctant to buy because they want a good deal and want something they can move into without a lot of fix up cost or hassle.  A “good deal” is perception!  If the market were appreciating in price, nearly everything would be a good deal looking into the future.  But that is not necessarily the case right now so a “good deal” is hard to recognize.  Foreclosures don’t often offer a buyer an opportunity to buy a home with little fix up.  Let’s face it, when an individual is getting foreclosed on by a lender they often abuse the home and rarely, if ever, keep up with routine maintenance.

Here’s a novel idea; create incentives for investors to buy the foreclosures.  They want to fix them up and either rent them or flip them back into the market.  This is an investor’s specialty.  Let them do their job!  They can provide a needed turn key home to buyers who want to buy and move in!  For those that are waiting on the sidelines or have fallen on hard luck and have been foreclosed and need a rental, an investor can provide this service.  The government has been providing investment incentive for years such as 1031 tax deferred exchanges (another subject for another time) to investors.  That particular program won’t help us in this case. 

Now we need an incentive to move investors into the market and buy up foreclosed inventory.  Specifically, the ones that are in need of repair.  Ideas you say: 1)  A loan for 100% of fix up value.  The purchase price is a fixed cost at a fixed market interest rate but the loan on the fix up is forgiven at a rate of say 10% per year.  That way if the investor fixes up the property and flips it into the market within a year they owe 100% of what was loaned.  If they keep the property for say 5 years as a rental property, to provide suitable housing for someone in need, then 50% of the fix up loan is forgiven.  Idea number 2, a 100% loan on purchase price plus fix up with the fix up cost being interest only for 2-3 years.  This will provide an incentive of a little more cash flow from the rental income. 

I could go on all day with ideas like this but the point is the investor needs to be able to qualify for loans that don’t require 10-20% down and perfect credit.  Does it make sense to still be doing FHA loans at 97% with a 3% gift from the seller (Nehemiah and Ameridream) for first time home buyers and single resident owners who have marginal credit?  We are.  How about we put some of these properties in the hands of professional home owners (investors) who are willing and able to buy multiple properties, treat this like a business and will do whatever it takes to make this work because it is how they make a living!

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Responses

  1. […] portfolio.  Now that has been changed to a maximum of 4.  If you have read my previous post about one option to fix this housing slump you will know that I think our Senate and House leadership are missing […]


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