Is it a good time to be investing in real estate? According to the media and many of the REO listing agents and asset managers that I talk to there is constant concern about the large amount of shadow inventory that has yet to hit the MLS. If you are not familiar with the term shadow inventory, it is the inventory of all of the homes that are in foreclosure that have not yet been listed for sale by the banks. Since these properties theoretically will eventually end up being listed for sale on the multiple listing service (MLS) the inventory is considered shadow inventory because everyone knows that it is coming but yet you still cannot see it yet.”
No one knows exactly how much shadow inventory there is but there is no doubt that there is a ton of shadow inventory out there. In 2010 there were 1 million homes that were taken back by lenders through foreclosure. In 2011 there might be as many as 1.2 million homes that will be taken back by the banks.
The media forecast for real estate continues to be bleak especially when you consider recently published foreclosure statistics. This is especially the case in hard hit states like Arizona, California, Florida and Nevada. In Arizona, one in every 17 households received a foreclosure notice in 2010. In Florida one in every 18 houses went into foreclosure last year. Many experts are predicting that lenders will take back more homes in 2011 than in any other previous year since the foreclosure crisis began.
All of this bad news in the media gives the average reader the impression that now is not a good time to be buying real estate. Negative news has a negative effect on potential buyers, forcing many of them to sit on the sidelines while they wait for better news. Over the past few years it has been very difficult for homebuyers to get approved for a mortgage which is yet another reason why potential home buyers might sit on the side lines and wait. However, waiting too long could definitely be a mistake.
Real estate investors like myself that are actively involved in buying and selling bank owned properties see an entirely different picture to the one that the media portrays. What I see on the ground on a daily basis is that there are many more cash buyers today than there were in the past 2 years. In 2009 I purchased quite a few houses in the first and second quarter where there were virtually no other buyers to compete with. Back then I would offer a bank $20,000 less than their asking price and still manage to get the house. By the end of 2009 and throughout 2010 more and more buyers had entered the market. Today I am more likely to be paying over the list price and may be competing with as many as 5 or 10 other cash buyers for a house.
Over the past year more than a third of our buyers have been foreign or out of state buyers and we have been fielding phone calls from European, South American and Russian investors. It seems that these foreign investors have figured out something that many local investors have not. Real estate is a screaming buy right now. Real estate is such an amazing bargain right now that I coined a phrase to characterize the current state of the real estate market. “This will be the best time in your lifetime to buy real estate”. Or expressed another way, between now and the day that you die, you will never get another opportunity to buy real estate at such cheap prices.
The prices that some of these bank owned properties are selling for is such a fabulous steal that cash buyers are scooping them up as fast as the banks can list them. Most of the action is in the lower priced lower income homes which in South Florida are the homes that are priced at less than $100,000. Potential landlords are especially attracted to houses in the $40,000 to $70,000 price range in South Florida since the cash flow opportunities are tremendous. One recent example is a student of mine that purchased a house for $37,000, spent $12,000 repairing the house and then rented the house to a section 8 tenant for $1,250 per month. We haven’t seen that kind of cash flow in real estate for at least 30 years if not longer.
Low priced homes will move first because these homes have the most buyers. Potential buyers for these homes are landlords, retirees and real estate investors looking to fix and flip properties for a profit. For the first time in many years homes are finally priced affordably. In many cases, first time homebuyers can purchase a home with an FHA mortgage and have a monthly mortgage payment equivalent to what they were previously paying in rent. There are many opportunities to purchase bank owned properties directly from the banks, do a little repair work and then flip these properties to first time home buyers for a $20,000 to $30,000 profit. For example there are many REO homes that can be purchased for approximately $50,000 where you can spend $10,000 fixing them up and then can sell them to first time home buyers for $99,000. There are also huge returns for landlords to buy fix and rent these same houses since cash flow is so good at these prices. Fixing and flipping to first time home buyers and good cash flow for landlords are two of the main reasons why the lower priced market in South Florida is so hot.
Houses that sell at higher prices still have challenges because so many buyers cannot get mortgages. As long as banks are reluctant to lend, it will be hard for this market to move significantly. However there is still opportunity for cash buyers to fix and flip these houses, although finding a buyer that can get approved for a mortgage is still challenging. Over time, as banks begin lending again this market too will improve.
In summary, now is a great time to be buying real estate. This is a good time to be investing in real estate regardless of whether you are a first time home buyer looking for a great buy, a real estate investor looking to fix and flip a property or a potential landlord looking to buy real estate and hold for the long term Don’t wait for the media to start painting a rosy picture about the real estate market before you start buying. If you do then it will be too late to pick up real estate at these ridiculously cheap prices. 2011 might just be the year when the shadow inventory hits the market en masse. This could be the year which in hindsight may turn out to be the unprecedented buying opportunity of your lifetime. You must take advantage of this and start buying real estate now while you can still get great deals at great prices. If the shadow inventory comes on the market in large numbers you might even see a final dip in prices which might just be the bottom of the real estate market. After all, when there are no more sellers left to sell and when all of the banks are finally done dumping properties then prices can only go one way. And that way is up.
I have been to many seminars, and I can honestly say that I have never attended one that was so rich with real, practical information, and left me with the feeling that "Yes!" this is achievable!
KEVIN TACHER Founder and CEO
Independence Title
I have had the pleasure of completing many closing with Lex Levinrad over the past 8 years. As a title agent, I have personally seen Lex buy, fix, rent, wholesale and flip many, many single family residential homes in South Florida. I have also seen many of his students successfully wholesale their first, second and third wholesale deals with Lex as their mentor. Lex is a full time real estate investor as well as a landlord with millions of dollars of rental properties and he practices what he teaches. Lex can teach you how to buy distressed real estate with no money down, how to wholesale, and how to fix and flip houses. If you are looking for a mentor with real life experience Lex would be a great choice.
