Article Contributed on: 12/1/2007 4:02:26 PM
Your Castle Real Estate, where I am an associate broker, held a free seminar this morning in Westminster. The focus of the seminar was on how to buy positive cash flow properties.
The best opportunities where you can buy depreciated single family homes that will rent for a significant amount more that your mortgage payment is in neighborhoods that have had a high percentage of foreclosures.
Lenders made bad loans to unfortunate souls who lost them when their adjustable rate mortgages reset. Investors are now pouring in to snatch them up. Some of these investors want to buy them, remodel them, rent them and wait for the neighborhood price appreciation to take the values back to those pre-crisis.
There is another type of investor who is interested in the "fix and flip" strategy. They buy at discounted prices, remodel, and, instead of renting, they sell. These investors' biggest problem is finding qualified buyers. Some fortunate few have found some low to moderate income families that have FICO scores above 700 and have the 10% down payment.
These buyers face another problem, however. It is the valuation of the neighborhood. The lenders' appraisers and underwriters are taking a negative few toward properties in these neighborhoods where they so earnestly loaned funds in the past.
Many lenders are saying that, for example, if a neighborhood has had falling real estate values they will not loan up to the typical 90% loan-to-value ratio. The effect of this is that the potential home buyer will have to come up with a larger down payment. If the neighborhood were different, one without a high foreclosure rate, for example, they would not be required to have the extra funds.
So these neighborhoods that have suffered with shoddy lending practices are doomed to further financial abuse because the qualified buyers cannot get the traditional LTV on their loans.
What will happen to the properties in these neighborhoods? Will the banks reluctance to treat them like other neighborhoods drive values down further?
I think so. This makes predicting the bottom of hte market very difficult. A word of caution to potential investors: understand what the leanders are doing in the neighborhood where you want to invest.