Real estate markets are cyclical and are easily predictable, just like people can be. The homeowners always indicate that it is a seller’s market. Meaning demand is high, and the supply of properties is low. They lead homeowners to believe that it is a seller’s market. However, neither homeowners nor real estate brokers dictate the need, the money does. The money we are talking about here is the interest rates. Therefore, if the Federal Reserve lowers the interest rates and the banks reduce their interest rates, they know that will increase buying power and decrease buyer’s remorse from paying such high prices.
What does this do to the real estate market? This type of interest rate monopoly coupled with artificial appraisals will increase the number of people who want to get loans, especially home mortgage loans. This leads to the vast misperception that these markets are “seller’s market” because more buyers have access to more money at cheaper rates. In these scenarios, the logic used to justify this by the masses is that sellers will now spend more on properties during these low-interest-rate environments.
However, we face a time when these same lending institutions have removed loan programs from those who once qualified for these mass purchases. Many real estate investors find it more challenging to be eligible for mortgages to purchase properties and become homeowners in this real estate market under the current lending environment.
The difficulty lies in the lower number of loan approvals for buyers with less than perfect credit, income, bank account balances, and work history. Many retail buyers have their financing fall through due to these Non-QM loans (non-qualified mortgage loans) that investors initially designed. They provide creative financing solutions to purchase properties with less paperwork, less time, and less lending restrictions.
Right now, there are no longer many, if any, Non-QM lenders still in business doing loans. In return, you no longer have a “seller’s market.” Since supply is high, real estate prices are high, and demand is high from buyers. Those same buyers cannot purchase properties like they did pre-COVID since those programs no longer exist.
What type of real estate market does this create? It does not create a real seller’s market, but it breeds a longer-term buyer’s market. The buyers that are in the market are those that have sufficient liquidity and capital reserves. They can act fast on deals while not having a financing contingency or problem. Cash, in these market cycles, or access to it is king. Cash buyers can close deals that traditional retail buyers and even investors cannot.
A-Paper borrowers, meaning the borrowers with high credit scores and high loan amounts (also known as jumbo loans), give birth to another pandemic. The foreclosure pandemic has become the second wave of foreclosure. The A-Paper, the properties with $1,000,000+ home values, are now flooding the real estate market to flea the face of foreclosure by listing their property for sale due to COVID disguising the rapidly failing economy and credit crisis happening behind the scenes. What that does for the market is to keep the market locked up. All of that because you don’t have people that can qualify as A-Paper enough to go in and procure these big loans. So when people say, or agents say, “it’s a seller’s market… well, yes, everybody wants to sell their property because they want to cash out when real estate prices are high; they need that money to sustain their living and lifestyle.
Conversely, cash buyers aren’t necessarily jumping to buy everything, even if you are just sitting on money, because the truth is, everybody wants to sell their property at an artificially inflated price now. It’s a buyer’s market. The average homeowners actual home value is so far under market value from the sticker price that is presented because the real estate market has been hit by at least 20%. The major ones that homeowners and investors rely on to refinance their home loans may now be in a bind when their refinance loan application is denied because of all the big banks’ new stipulations and ultra-conservative approach to lending. A refinance loan, and the appraisals for it are so backed up that you’re sitting on money around 4 to 6 months to get deals closed due to these longer underwriting times required to get loans funded and closed.
If you’re buying distressed properties, especially if you’re buying them when being represented by a less than knowledgeable broker or agent who is not familiar with the short sale, REO, and auction properties you’re looking to procure, you’re in for an even longer hold time. If the agent or broker you’re working with doesn’t know the distressed sales system, including short sales, then that deal will likely not close.
This is the strain on the system being locked up right now. So when people say, “it’s a seller’s market,” again, yes, that may appear to be confirmed on the surface to the optimistic person selling their property and seeing surprisingly higher surrounding home values. However, the real investor that’s buying the property, fixing it, and holding it as a long term rental in their portfolio, this is the prime time for these cash buyers, not the homeowners.
If it’s a seller’s market and you’re doing four or five deals a month, that means that there’s money in plenty in the market. There’s money in plenty, but COVID has the real estate market locked up of what you can do with tenants’ moving. Getting them in and out affects the structure of deals and that affects the contracts’ value. Now that residual income from the tenant has stopped cash flowing to the homeowner, and the homeowner is being forced to eat that debt. If you purchase the tenant-occupied property as an investment property with tenant issues and not cash flowing, then the new owner would start eating that negative debt service as well.
Sophisticated and professional investors do not believe the hype of promotion. Instead, they are cautious when everyone is greedy and greedy when everyone else is cautious. You have to focus on the natural market cycles and learn the signals to know the one you’re in. Then, you can proactively get on the right side of the board to play this game. Otherwise, homeowners face a harsh reality and a broken reality like those financially ruined by the market crash in 2008. Why did that happen to those homeowners? Well, it happened because they were sitting on the wrong side of the table.
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