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Creative Real Estate Investing News – June 2017

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IN THIS EPISODE – 1.) The Beginning of the End for Dodd-Frank, 2.) Home Equity Hits a New High, & 3.) Home Ownership at a 50 Year Low.

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The Beginning of the End for Dodd-Frank?

Real estate investors who are actively involved with owner financing properties (also known as seller carry-back financing), selling on contract for deed, or even lease options have probably been paying close attention to the effort to make significant changes to Dodd-Frank.  However, those who simply flip houses or buy, hold, and rent should also be aware of the possible changes as they have the potential to drastically affect the overall mortgage market which will impact us all in one way or another.

The House of Representatives passed HR10, also known as the Financial choice act of 2017, on June 8th with a vote of 233-186.  The vote for the bill was almost entirely along party lines, with every Republican but one voting in favor of the bill, and every Democrat voting against it.  One of the main goals of the measure is to severely weaken the power of the CFPB by limiting the areas in which it can appropriate funds within its budget.

Home Equity Hits a New High

Recent data released revealed the American homeowners experienced a 766 billion dollar increase in their equity from the 1st quarter of 2016 to the 1st quarter of 2017.  That’s an average of approximately $14,000 per home, which could have a significant impact on how consumers respond in the marketplace, possibly deciding to sell, refinance, or take out a home equity loan for home improvements or other purchases.

For investors, this could also be some positive news as well, and could also steer some of your marketing dollars in a different direction.  For years, many investors avoided sending direct mail to homes purchased right before the nationwide housing market collapse, due to the assumption that many of those homes were in a negative equity situation, making it more difficult to negotiate an attractive deal.  However, with the rapid increase in values, along with 10-12 years of monthly payments and principal reduction, these homes may now be a great target for your next marketing campaign.

Home Ownership at a 50 Year Low 

While the increase in home equity could be a great thing for existing homeowners, the number of people who are experiencing the benefits of home ownership is at a 50-year low in the United States.  The National Association of Realtors recently commissioned a study to try and find out the problem, and the report found the following 5 reasons to be the biggest impediments to potential buyers entering the housing market:

1.) Post-Foreclosure Disorder – Many of the millennial buyers who now have jobs and have the financial ability to purchase a home are reluctant to do so, because as teenagers they witnessed their parents lose their home to foreclosure during the financial crisis.  They know associate homeownership with pain and potential loss, and so many have decided its in their best interests to rent.

2.) Higher Credit Standards – During the real estate boom of 2005-2007, the only thing needed to qualify for a mortgage was the ability to fog up a mirror with your breath.  No income, no asset, no job loans made a mockery of the mortgage qualification process, and in 2008 the pendulum swung way back in the other direction.  While it’s not nearly as difficult to qualify for a mortgage as it was immediately following the great recession and housing debacle, it’s still not as easy as it once was.

3.) Student Loan Debt – College tuition costs have been increasing faster than inflation, average household incomes, and just about any other metric you could possibly compare it to.  College students are graduating with more debt hanging around their neck than any previous generation, making it extremely difficult to qualify, let alone AFFORD a home of their own.

4.) Housing Affordability – Numerous factors have led to houses becoming even less affordable for the average homebuyer, including lack of inventory (see #5), rapidly increasing home prices, as well as the difficulty in saving for the down payment for younger borrowers (see #3).  Recent studies show that 5 million less people will be able to afford a median-priced home in their area by 2019.

5.) Lack of Inventory – Home building came to a screeching halt after the financial crisis of 2008/2009 and has yet to catch up.  Lot prices and construction costs have gone up, and the availability of skilled labor has gone down, making it increasingly difficult for builders to keep up with the massive demand for new homes across the country.

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Are You Ready for the Return of Institutional Investors?

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According to a recent report, data shows that purchases by institutional investors are trending upward, after steady declines over the past few years.  An institutional investor is defined as an investor who purchases 10 or more single family rental properties in a calendar year, someone that is actively engaged in the business of real estate investing.  This is in contrast to your “mom & pop” investors, who typically engage in real estate activities as a side business or wealth building or retirement strategy.

During the real estate meltdown of 2008 & 2009, many “vulture funds” made up of institutional investors began to quickly form to take advantage of the opportunity created by the housing glut, which brought down prices dramatically while rental rates continued to rise.  Even Warren Buffett, one of the most respected investors in the country, said if he had the people to manage them that he would buy 10,000+ single family homes immediately.

This rush to buy real estate by institutional investors hit its peak around 2011, and then began a slow and steady decline over the next few years as real estate prices went up across the country, lowering rates of return on investments in single family homes across the country.  However, for the first time in 5 years, 2015 once again saw an increase in purchases by institutional investors, as a flat stock market has sent the “smart money” elsewhere to find adequate returns.

If you were fortunate enough to purchase a rental property at a discount in the 2010-2013 time frame, you may want to consider selling that property today.  Due to high demand, you can likely get close to retail value, and then convert that single property with marginal cash flow into multiple properties with great cash flow, by purchasing from one of the many wholesalers in your area at 70% of value (or less). 

And if you are in the wholesale business, you should be analyzing the local market data for multiple cash purchases in a given year by a single investor, and adding them to your buyers list.  They are used to buying property close to retail, and so you could multiply your standard assignment fee by 2 or 3 times (thousands of dollars) compared to what a rehabber might give you for the same property.

Thoughts? Opinions? Let us know in the comment section below.  For the full story, and even more recent real estate news, check out the video below!

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Entry Level Homes Still the Best Bet for Flippers

While many investors are enticed by the larger potential profits of high-end real estate, statistics continue to show that your best bet is to stay in the entry-level price points sought after by first time homebuyers.  More experienced investors might find success from time to time in the luxury space, but when analyzed on a percentage basis, high end homes rarely return the profit margins found in “work-force” housing or entry-level properties that fall at or below the median home price in your area.  Recent news regarding inventories on entry level homes brings this point into much better focus.

Recent data reveals that there are currently 10.4% fewer entry level homes on the market today than there were at this time one year ago, and those inventory constraints are driving prices up even higher on homes in these price ranges.  While recent price appreciation has been in a healthy 5-6% per annum range, the MAJORITY of that appreciation has come in the 1st time home buyer range.  Homes in the “move-up” and luxury price ranges have been rising at a 2-3% clip in most areas, while their entry level counterparts have been jumping at rates near 10% per year.

New investors will find that their is significantly less competition in the luxury market, but it can also be fraught with risk for even the most experienced flippers.  If a real estate rehabber doesn’t have at least 10 deals under his or her belt, it’s advisable that they continue to stay in the 1st time home buyer range to continue to build confidence and much needed capital before taking on more expensive projects.  The “get rich slowly” method might not be as exciting, or land investors a show on HGTV or DIY network, but those who read the book, “The Tortoise & the Hare” will find that the same character wins every time.

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Rehabbing with Baby Boomers in Mind

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As an entire generation of home buyers begin to hit their retirement years and start looking to downsize, it’s important for real estate investors and home flippers to stay up to date with what this massive block of home purchasers is looking for in a home.  The National Association of Home Builders recently did a survey to find out what attributes and amenities were important to this demographic, and this is what they found out:

63% of baby boomers desire single story, single family homes.  They don’t want to be in a  multi-family community with neighbors on either side of them, and they definitely don’t want anything with stairs due to the increased potential for falling, or the possibility they may be in a wheelchair in their latter years.

63% of baby boomers want a formal living room.  Sometimes in the frenzy to “modernize” a house, or make it more contemporary, rehabbers look to “open up” spaces to resemble newer construction.  However, if you’re in an area or a neighborhood with a lot of elderly buyers, you would never want to sacrifice a formal living room in order to open up a space, as it will eliminate a large part of your buyer pool.

93% of all baby boomers want to be in the suburbs or a rural area, away from the hustle and bustle of the city center.  And lastly, only 13% of baby boomers are willing to pay extra for “green” or environmental features, so don’t waste your money on them if you’re targeting retirees in your market.

Do you have any experience rehabbing and selling to baby boomers?  Do your experiences match up to the above survey?  Let us know your thoughts in the comment section below!

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