Wholesale houses in the current recession
As the housing market grew in the early 2000s, mortgage companies wanted to take advantage of the bull market. One way they did this was by creating and selling exotic mortgages that virtually ignored the applicant’s creditworthiness.
Why did they do this? Because these companies just sold the mortgages to the big banks, which means they didn’t take any risk. They did not care if a person could not make his payments because if he did not pay the loan, it would be a problem for the bank that now owned the mortgage.
When the housing market weakened, prices began to fall. At the same time, the interest rates on millions of adjustable-rate mortgages rose, and very soon many people were not only unable to make their payments, they often owed more than their homes were worth. People started defaulting on their loans, and because the big banks bought millions of these loans from the mortgage companies, their balance sheets were suddenly in the red.
Home prices have fallen dramatically in recent years. Since their peak in 2006, home prices have fallen 27% nationwide. And they keep falling. With the roots of the current economic crisis firmly planted in the housing market, it may be natural to assume that the entire market is toxic and investors should stay away.
Could not be farther from the truth. Regardless of the economic conditions, regardless of the industry, there is always a lot of money to be made if you know where to look. Today’s real estate investment market is no exception.
For the wholesale real estate professional, the keys to success have always been finding the right property at the right price and then having a list of buyers ready to take on the contract. The challenge today is not that there are not enough properties (there is an ample supply that is growing every day) or prices (banks and individuals are desperate to get rid of these properties). The difficulty today is finding reliable buyers for these properties.
Properties and Prices
Home prices continue to fall. With banks, mortgage holders and cash-strapped homeowners desperate to get rid of their “toxic” mortgages, the opportunities for wholesalers are exciting. In Los Angeles, home prices are expected to drop another 22% in 2009; Miami 21%, Phoenix and Las Vegas 20%, New York 19%, Boston 15% and Seattle 14%. Of course, these are among the most challenging markets in the country right now, but rest assured, there are plenty of opportunities available across the country right now.
This is where things start to get a little dangerous. The economic slowdown has its roots in the real estate sector, but the effects have reverberated throughout the economy. Banks, hit by their mortgage losses, have begun hoarding cash, freezing credit markets.
With financing becoming harder to come by and people nervous about losing their jobs, many are unwilling to make major purchases right now. This has many real estate investment professionals and buyers scared.
Wholesalers need to be creative in today’s market. Wandering through a foreclosure-ridden neighborhood could net you a huge amount, but who’s going to buy it? You’re better off looking in more established areas where fewer properties are available, but have a better chance of a quick sale.
Real estate wholesalers may also want to look into market alternatives, especially rental housing/apartment buildings (all those foreclosed families will need a place to sleep!). Positive rental cash flow presents attractive opportunities.
But the most important thing to keep in mind is that as a wholesaler, you are not trying to sell to the general public. You are selling to professionals, people whose business is investing in real estate and have the capital to weather market downturns. Therefore, a solid buyer list is of the utmost importance.