Since the last real estate crash, I have become a student of the marketplace. I study the trends, write about them, and talk about them on my podcast. I have delivered dozens of State of the Industry addresses at real estate expos and conferences. During that time, I made projections about future market conditions with a high degree of accuracy. This time it is different.
This time we have way too many variables at play to project with any accuracy. Face it; we are in unprecedented times. We have a pandemic, politicized federal and state governments, unemployment, and corporate bankruptcies. Also, we have a changing workplace, new rules and regulations on property and loan owners, and an uncertainty of when we can return to a sense of normalcy. Unfortunately, that has not stopped some educators and trainers from prognosticating on the coming market shift. They sell the one technique that they think will make you successful. And as you know, with all those factors and more, making specific projections is merely guessing.
For example, we know that current market conditions result in loan modifications, forbearances, foreclosures, and bankruptcies. We do not understand the extent. But we do know with a high probability that they will be a part of the coming market conditions. So, it makes sense for real estate and real estate note investors to sharpen their skills in those areas. That is one thing that real estate and real estate note investors need to do right now.
Several of my clients seek out loans that have been through the chapter 13 bankruptcy proceedings. This type of loan can be highly profitable if you know how to get the arrearage account along with your note purchase. Loans purchased after chapter 7 lead to quick and easy property acquisition. Understanding how to get a lift of stay on a loan where the borrower declares bankruptcy while you own it can save thousands of dollars and a lot of time. Studying up on these issues now will prepare you for the future.
When it comes to foreclosure, understanding the cost in both time and money ahead of time will also pay off in the future. It might even change where you look for potential deals. Knowing who to hire for representation in foreclosure in various markets is worth looking into right now.
Forbearance and loan modification are confusing enough for the general-public, but it should not be complicated for you. For example, most people think that they do not have to make payments on any mortgage loans right now. That is not true. Furthermore, many believe that they never have to pay these missed payments back. Also, not true. Seller-financed loans are not federally backed, so are not subject to the forbearance rule. Of course, we can assist people with a forbearance agreement, but I do not recommend doing it the same way as the banks. My clients are writing forbearance contracts where the borrower still makes some monthly payment amount. They do it that way since experience says that if someone develops a pattern of not paying anything, it is challenging to get them to start paying again. Having them pay something makes for a smoother transition to making full payments.
The second thing that real estate and real estate note investors should do now is to understand that selling with financing will be an area of growth. For example, we know that lenders tend to tighten lending criteria after a crisis. Also, we know that many millions have been on unemployment and some will have their jobs eliminated. There is also a historical pattern that indicates creative financing grows when institutional lending tightens.
Using factually known data, we can see that the mortgage credit availability index has fallen. A lower index usually impacts the “affordable housing” borrowers the most. Many real estate investors investing in this space offer seller-financing to re-sell a property quick at top market prices. Most real estate investors want to “cash-out.” Did you know you can create a seller-financed note and “cash-out” as well? Created properly, you can even pre-sell all or part of the loan. By learning this technique, you do not have to worry about timing the market.
Some investors try to time the real estate market. They sit on the sidelines and count on a massive real estate crash. Once it crashes, they will come in and buy up the bargains. But they may be missing out on many opportunities right now. Also, they run the risk of big-equity firms with more money beating them to the punch. It is a bit like timing the stock market, which never seems to work out well. With all the uncertainty it makes more sense to act consistently with multiple options!
That is why “options” along with “wraps” are third on my list of what real estate and real estate note investors need to do now. Buying and selling on real estate options and wraps are nothing new. They fall out of use when financing is easy to acquire. When investors understand these real estate techniques and combine them with real estate note techniques, they can see more opportunities.
In my daily business, I have seen an increase of investors buying a property “subject to” the existing mortgage and then selling it on a wrap-around mortgage. Create the wrap-around properly, and it can sell on the secondary market.
Correctly creating the wrap completes the deal. First, the real estate investor acquires the property without the need for financing by agreeing to make the mortgage payments on the seller’s existing loan. After the renovation, the property is sold quicker and for top dollar to a qualified buyer on a wrap-around mortgage. The new buyer pays on the wrap-around to the selling investor, who, in turn, makes payments on the underlying loan. That investor can keep the transaction the way it is or sell the wrap-around to another investor. Having flexibility keeps you safer by providing more potential exits.
Buying and selling with real estate option contracts also give you greater flexibility. An option is a right to buy, not an obligation. Once created, the option can be sold, expire, or exercised.
I was recently going through an option contract that a client had purchased. The option was created by a real estate investor who had agreed to do a lease-option with a tenant. The tenant would lease the home for six years and then have the right to buy the house with or without seller financing. The real estate investor sold that lease-option to my client in year 5.
The tenant’s option period is upon them, but due to COVID my client offered a 3-month extension. At this point, according to the contract, the tenants can get a bank loan and buy the property, take the seller-financed terms, or vacate the property. The tenant has those options, but my client has other options as well. They are bound to the contract, and my client could hold them to it, or could simply enter a new agreement with them. My client is in the driver’s seat.
If the tenant is not ready for one of the contractual options, my client could ask for additional option money and do a longer extension with increased rent. My client could change the purchase price and terms as needed to complete the sale and then keep or sell all or part of the note. Having this flexibility enables an investor to handle any real estate market condition.
We are in unusual and unprecedented times, so do not buy into all the specific prognostications. It is better to prepare for all potential outcomes. Sharpen or add to your skillset by investing in your continuing education or hiring a consultant. Both are wise investments. There are so many ways to invest in real estate notes today. It makes sense not to wait on the sidelines trying to time the market. You can buy single notes, partial notes, note pools, and even invest in real estate note funds. Our fund, www.MWMfund.com is open to accredited and non-accredited investors.
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Kevin Shortle is an author, podcaster, national trainer/speaker and consultant. Since 1985, he and his partners have purchased hundreds of properties and closed tens of millions in real estate note transactions. His detailed industry research and unique training methods have brought him industry recognition and awards such as 2019 Note Educator of the Year.
His latest book, Real Estate Without Renters, became a #1 Amazon best seller in 4 categories. This forward thinking book combines the best of real estate investment techniques with the best of real estate note techniques.
For more information, visit www.KevinShortle.com and listen to The Kevin Shortle Show podcast on the website or wherever you subscribe to podcasts.