Mortgage Mess and Real Estate Investing

I bet it would be impossible to find a real estate blog that didn’t post anything about the mortgage mess today / over the weekend. It’s not that the credit crunch / mortgage industry collapse hasn’t been on everyone’s mind since a year ago. But a new wave of panic is sweeping us today, after IndyMac failed on Friday, and Freddy and Fannie are so unstable (after a precipitous slide in their stock price) that they need to be propped up by the government. So naturally, I ponder what that means for the real estate investor.

First of all, let’s take a step back. Why did IndyMac fail? Well, because like other banks in a similar situation, a large portion of their business was subprime loans. If you make loans to people who can’t afford the house, as long as they say they can and state that they make enough money to buy it, which part of this approach is sound strategy, exactly? Unfortunately, the mortgage markets weren’t too concerned with the future.

So as the market started crumbling and the bottom fell out from under, why did the banks still refuse to do short sales?  (A short sale, for those who don’t know, is a deal that a buyer (retail buyer / investor / etc) negotiates with the bank, for a sale of the property for less than what’s owed on the property).  This was a very necessary step, in my opinion, as values had dipped under the amounts that were owed.  If only banks worked with these buyers to do these short sales, along with mortgage workouts, it would have largely mitigated the mess, and banks would be straddled with a lesser inventory of houses. And as we all know, banks need liquidity, not houses, to exist. The idiotic thing is that these same properties, if no one buys them, get foreclosed on (huge expense for the bank), get seized and get auctioned off for less money than the proposed short sale. If I have an outstanding loan of $10, wouldn’t I rather take $7 from a buyer today, than sell it for $5 tomorrow?  Duh! Instead the banks made it so difficult for an investor to do these short sales, with the process dragging on for months. With such an abundance of foreclosures and deals to be had, no wonder so many properties end up going to auction. From my personal interaction with real estate investors, the frustration with the banks’ loss mitigation departments (those who end up working out the short sale deals) has been palpable. I spent some time perusing blogs and blog comments written by investors, who lamented that IndyMac exhibited many of the same behaviors. IndyMac had a chance to recoup some of the money they ended up losing due to the bad paper, and they squandered it. I am not, in any way, suggesting that short sales are a cure-all. I believe that it was important to pursue all avenues, one of which is short sales, one is mortgage workouts / loan modifications, and other steps. Hopefully, the next bank straddled with foreclosing properties, will be a bit better at short sales.

So now that IndyMac failed, and other banks with similar patterns are likely to fail, for the same reasons as stated above, the credit problem is only going to get worse, and the panic is going to get out of control.  Which concerns me as an investor and as a technology entrepreneur building a web-based resource for investors. If there are no funds available for investors to buy investment properties, the investment industry is going to go the way of the mortgage industry.  But not so fast! Investors, the good ones at least, are extremely creative, nimble and entrepreneurial ; they find opportunities at times when everyone runs and screams that the sky is falling. The deals are abundant. And yes, prices will likely keep decreasing, especially as the mortgage mess shrinks demand (many homebuyers who were in the market for a house, now will have to go back to renting, because they can’t get a loan). However, an investor who is good at doing the short sales, and other such strategies, can max out the deal anyway by getting it at very low prices. To finance these properties, a creative investor will look to non-traditional avenues, such as seller financing and private money. As far as my business, MeetMOJ,O is concerned, we are going to do just fine, as we extend our matching model to private money lenders and other alternative sources of capital.

So next time someone asks me what I am doing, and I answer “I am building a web-based community for real estate investors”, and that person looks at me like I am insane, I am going to insist that this is a great time to be an investor. If you know what you are doing, of course.

Rents in Manhattan

In one of my recent blogposts I discussed the effect of Wall Street’s troubles on demand of rentals as well as for-sale properties.  Per this Fox News report,  rents for 1- and 2-bedroom apartments have already started dropping in Manhattan, while price of studios went up.  This, I believe, points to lessened demand for larger, more expensive housing units, and an increased demand for smaller, less expensive units.  As I discussed in my previous post, many Wall Streeters and other NYC employees may be opting to reduce their lifestyle in the light of general economic malaise / recession, and very possible layoffs.

So if 1-bedroom units decrease in price, and studios increase in price, they just may become equal in price over time.  At which point, renters will move back into 1-bedroom apartments.  To all my renters, I say, get a short term lease for a 1-bedroom (if, in fact, there are deals out there), and go back out hunting for even better deals in 3-6 months.  If they started to drop, I think they will continue to do so.  And then, once you believe the rental market is at the bottom (largely depending on how this recession scenario plays out), lock yourself into a nice permanent low-priced lease (well, low-priced in Manhattan terms, that is).

To all my landlords, current and aspiring… Rack up on low-priced properties over the next year.  There are a ton of foreclosures. There are also a ton of non-foreclosures that have been on the market for quite some time (I think the average is 11 months nationally and 2 months in Manhattan, but don’t quote me on that).  So if you are buying on the island, I would wait until Manhattaners become more desperate to sell, as they are everywhere else.  Even though rents may be decreasing in Manhattan, they will surely go back up: the cultural, intellectual and financial appeal of the Big Apple is hard to beat).  Nationally, rents are up quite a bit, driven by increased demand (because people still have to live somewhere after they lose their homes, and foreclosures are only going up).  So now being a landlord makes more sense than ever: buy cheap, hold for a while, realize appreciation and rent out for cash in your pocket monthly. Perhaps we will see a similar trend towards smaller and cheaper apartments nationally.  So picking up some of those would be good  now.   But also don’t forget that you are buying for the long term, and rents will keep increasing over the years, while your mortgage will stay the same. Which means…  cash flow!!  A good and diversified assortment of properties will keep you well-covered, should demand swing towards smaller units, back to larger units, and whichever way it chooses to go.

Happy renting and landlording!