Investing in real estate has changed in many markets in our country. If you are like me, you live in a real estate market that has gone soft. There are still some areas in the country where homes are appreciating nicely, but not like it was just a few years ago. There were a lot of self-proclaimed real estate gurus that popped up during the boom times telling you how to make HUGE PROFITS in real estate. Back then, during the up cycle, investing in real estate was so easy. You could throw money at almost any piece of real estate and be practically guaranteed to make a profit! It seemed like anyone who had flipped a couple of houses and made a profit was an “expert” investor.
Times are different now. Investing in real estate takes a little more effort. Investors that haven't weathered down cycles before are struggling because all they know are massively appreciating markets. All too many of those self-proclaimed gurus lost their shirts when the markets changed. Those ads that say, “I made $256 Million in real estate in 4 weeks with no money down” are a whole lot less believable. Okay, $256 Million is an exaggeration, but you know what I mean.
So, the question is, “How do we still go about investing in real estate and make profits?” Can it be done in these soft and declining markets?
The answer to that question is quite simple. I can say without question, without hesitation, the answer is: YES! ABSOLUTELY!
I have been investing in real estate for more than 20 years. I have seen up cycles and I have seen down cycles. I have made money and been successful in both. I can tell you several things about down markets that may surprise you.
First, experienced real estate investors will tell you that more money is made in down markets than in up markets. It's true, MORE MONEY is made in DOWN markets than in up markets!
Second, experienced investors PREFER to do the bulk of their investing in DOWN markets. There are a number of reasons for this but the big ones are that there are more motivated sellers in down markets and the competition (other investors) pursuing these motivated sellers is LOWER. It's a double bonus.
Down markets produce more deals and less competition to get those deals.
One of the investing techniques I specialize in is Lease Options. Lease options are one of the absolute best techniques for investing in real estate in down markets. I'll say it again, because if you are looking for ways to get involved with real estate investing you need to know this, Lease Options are one of the absolute best techniques for investing in real estate in down markets.
Let's take a look at why.
I've already said that down markets produce high numbers of motivated sellers. Right now in Michigan, it's very common to see a house listed on the market in two ways, both for sale and for rent. They are listed this way because the sellers KNOW how bad it is and they want someone, anyone, to cover their mortgage payment. These double listings SCREAM “Motivated Seller!” Now, not every single one of these is going to be an excellent lease option deal. But you know what? That's okay; there are plenty to choose from!
The critical part in selecting your lease option candidates, in an up market or a down market, is creating WIN-WIN-WIN situations. The seller must be satisfied with the deal, you must be satisfied, and the end buyer must be satisfied. When investing in real estate, this is what makes us successful.
How To Create A Win-Win-Win Scenario
To create a WIN for someone we must meet their core need. A motivated seller's goal is to sell their house. Eventually they need their mortgage paid off and the deed transferred out of their name. If they are willing to rent the house as well as sell it, they are telling you that having their mortgage paid each month is more important right now than actually getting the house sold. If we can find a tenant buyer for them we are satisfying their core need of paying the mortgage each month and eventually selling the home. This is a WIN for the seller.
Our end buyer is looking for a home to own. Their current situation prevents them from getting a mortgage immediately but they plan on being able to get a mortgage soon. They want a home now. They don't want to wait to get their house. By allowing them to lease and then purchase the house we are meeting their core need. This gives our buyer a WIN.
Before we talk about what makes a WIN for us as an investor let's talk a little more about mortgages for our end buyer. There has been a lot of news lately about sub-prime lending woes and how lenders with riskier loans are facing high rates of foreclosure and may be going bankrupt. As a result it is getting much harder for people with poor credit to obtain a mortgage. It is also getting harder for ANYONE to obtain a mortgage with 100% financing (i.e. no money out of the buyer's pocket). This may sound crazy, but this is actually a good thing for us when investing in real estate.
When investing in real estate by doing lease options it is harder for us to find quality tenant buyers when almost anyone who can fog a mirror can get a mortgage. Not only that, but because it was so easy to get 100% financing most buyers save nothing and are unable or unwilling to pay much for an option fee. With the lending companies tightening their belts I expect we will see a growing population of QUALITY tenant buyers who are able to pay HIGHER option fees.
The flip side of this is that because lenders are tightening their belts your tenant buyers will need to work harder to restore their credit. It may take as much as 2 to 3 years for some tenant buyers to be able to qualify for mortgages instead of just 1 year as we had seen before.
The bottom line is when investing in real estate by using Lease Options the difficulties of the mortgage lenders are just another reason why this down market is a GREAT time for us investors.
Part 2 of this article will cover more details about Soft Markets.