If you watched the talking heads on the news shows this weekend you might have noticed a little excitement. Retail sales news was better than expected. Have we hit the bottom, are we headed back up?There are some that say ‘beware’. This could be a false bottom and we might be headed for more heartache. These cautious pontificators point to the horizon and say we should look out for another waive of foreclosures to hit us very soon.
What they are talking about is something I mentioned in my last Monday Cup article. The coming waive is two fold.
First, on the residential side there will be many of the so-called Stated Income or ‘liar’s loans’ converting from a fixed ARM rate to adjustable. There is also the specter of Option ARM loans being called due.
The Option ARM loans are the scariest. These loans give borrowers four options to pay each month. One of the options is what is called a Minimum payment. This minimum is less than the amount of interest that has accrued on the loan.
The fear is that many people only made the minimum payments. This caused the loans to negatively amortize. Simply put …the borrower now owes much more on the loan than they originally borrowed!
Uh oh! With the recent precipitous drop in home values, many lenders will exercise a clause in the contract that says if the equity in the home drops to a certain level then they can immediately call the loans due. Guess what that means? Foreclosure!
The second part of the next waive of bank problems is in what is called the CMBS market. CMBS stands for Commercial Mortgage Backed Securities. These are loans made to small operators of commercial buildings.
These loans are on every type of building from small apartment communities to retail strip centers to small B & C class office space. Many of these operators are hurting right now and many of their loans are about to enter a ‘Call’ period.
A Call is when a borrower is required to re-qualify for the loan that they currently have. Even if they are still making payments, if their economic situation has worsened the lender can chose to lessen their risk by forcing the borrower to repay the loan.
This is similar to a situation that happened to the S&L failures in the late 1980’s. That debacle necessitated the creation of the Resolution Trust Corporation and the bailout of many banks and trusts.
Making Sense of It All
So what does all this mean to the everyday real estate investor and how should real estate investors proceed in the operation and growth of their business?
I say stay the course. Remember that the proper strategy is critical in unsure times like these. The proper strategy for today’s market place is buy and hold. There is only one exception to this rule.
When you are an all-cash buyer and you can purchase the property and rehab it without a loan, then and only then can you attempt some quick turns. Again, in this market you must adhere to a specific strategy.
Quick turns should only be attempted in the first time homebuyer range of $95,000 to $165,000 and even then you should be prepared to only buy homes you don’t mind holding for the long-term. Pay cash and get in and out as quickly as possible.
For those seeking to make a transition from Residential to Commercial real estate investing, the coming tsunami could be a real opportunity. But first you must get your financial house in order.
Commercial loans require capital input and they require an overall healthy financial picture. Get with your CPA and a good commercial lender/mortgage broker and get a financial check-up and then do the tough work to make sure you are ready to pounce on the first opportunity.
Next week we’ll try to delve a little deeper into whether we are in the bottom of the trough or headed for better financial times. This week do your homework and start repositioning yourself for the long run. Times have changed, time to change with them.
