Subject to investing after COVID – is this the next big opportunity?


The next wave of motivated sellers is coming !!! Well that’s what I’m hearing anyway. We talked about this and other COVID-related tips on our YouTube channel. If you haven’t verified it, please do. One short video per week to help real estate investors like you make more money. While you’re at it, do me a favor and watch our videos on YouTube, subscribe. The more subscribers we have, the more people will see our videos and the more we can help.

I am regularly asked what the next opportunities will be for real estate investors. Especially in these difficult times. Last month I opened up and discussed my opinion on what to watch out for. I mentioned that I don’t think the lease or lease option transactions will be the fruit at hand. At least not in the short term. Don’t know what a subject or rental option is? Check out this article.

Other super smart real estate investors disagree with me. Their argument is that when there are sellers in difficulty, there is more motivation and the sellers will be more open to your creative offers. While I don’t disagree, I think most of these sellers will have other options. The subjugation and lease options are most often used when there is a highly motivated seller, the one who has to sell, but does not have the capacity to do so. It could be an impending foreclosure, but more often than not it is when they don’t have the equity to properly value the property and pay all of the closing costs and commissions. If they are unable to make the payments, interest and late fees continue to accumulate, taking them further and further away from a successful closing. The sublease and lease options are quite safe for the buyer, but they are risky transactions for a seller. With these transactions, the seller remains on the underlying loan. They are still responsible, but they rely on someone else to make the payments. These transactions are perfect for solving the seller’s problem when they have no other option.

There are two reasons why I think it will be some time before I see any real traction with these buying strategies.

As mentioned, these creative buying strategies work well with motivated sellers who don’t have the equity to sell in a more traditional way. In most markets, the rate of appreciation has exploded in recent years. Anyone who has owned a home for a while is likely to have equity with appreciation alone. Add to that the fact that the credit crises of 2008 virtually wiped out poorly or unpaid loans. Unless the buyer used VA or FHA, chances are they will have 10% or more as a down payment. They’ve had equity since the day they bought the house. The interesting thing about VA loans is that they have a low default rate. VA borrowers usually do not encounter any problems because the debt to income ratio to qualify for these loans is low, which means that the borrower has more than enough income to support the debt. You also don’t see a ton of VA loans unless you’re in a military town. So that leaves us with FHA loans which represent less than 15% of total loans. FHA loans can be risky due to loose guidelines and the 3.5% down payment requirement.

We have talked in the past about the risks of forbearance agreements and how these might trigger a pin-up supply. When these start to expire, we could see a wave of defaults. While this is true, according to Black Knight, only 9% of forborne loans have less than 10% equity. Even the most distressed loans, those that could trigger a crash, have equity and should be able to sell with a real estate agent if needed. The only interesting argument is the recent refinancing frenzy. With rates at record highs, people have dipped into their equity. While this is the case, the LTV guidelines for a cash refinance are still low, so even these borrowers have retained the equity in their homes.

The other reason I don’t think we’ll see a wave of lease or lease option opportunities is interest rates. These strategies work very well in a high rate environment. If the real estate investor can take over another loan at a low rate, he may pay more for the property. In a low interest rate environment, like the one we find ourselves in now, investors can lock in rates with new loans that are similar or greater than the repossession of a seller’s loan. There is little incentive to pay more for a property. The Fed has already pledged to keep rates low until 2021.

Having said that, I don’t want to discourage you from keeping an eye out for these buying strategies. As many of you know, I’ve done over a hundred and that’s how I started as a real estate investor. I really like these strategies. They both work well in any market and there will always be sellers that this type of offering is perfect for. I just wanted to explain why I think investors who expect this to be the next big opportunity might have to wait a long time.

Source by Kevin Amolsch

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