What Effect Will the Bailout Have on Real Estate Investors?
Posted by: Carleton Sheets in Credit crunch, Creative Financing Techniques, Bailout on Sep 28, 2008.
I've been asked my opinion about the current government bailout and how it will affect real estate investors. If you are currently a real estate investor, you may have noticed that it has been more difficult to get credit---even if you have excellent credit! Banks have tightened their lending standards, lowered their LTV (loan-to-value) limits, and are very cautions about who, what, why, and how much they are lending. This affects liquidity and, as investors, we need liquidity for when the next deal comes along.
For example, say that you purchase a foreclosure property at a discounted price, rehab it, and rent out the property---with the intention of refinancing it and using the cash to purchase your next property. Not so fast! Not only will you receive less cash when refinancing---in the current market you might not qualify for anything at all. That means that you have less money to invest, and can become strapped for cash. Although the foreclosure property may be bringing in a nice positive cash flow, it may be difficult to use the "buy, rent, refinance, and purchase next property" technique in this market.
So, in this regard, I am in favor of the bailout because it will loosen up credit and allow real estate investors and other small-business owners to get back to doing business as usual. However, I am opposed to footing the bill for the mistakes made by the lenders---and I think this is the "sticking point" that most Americans agree with.
Higher taxes will tighten consumers' budgets and, by funding this bailout, consumer liquidity will begin to dry up. In the meantime, a glut of homes continues to sit on the market, and buyers are few and far between because of tightened lending standards by most lenders.
I suggest that the time is ripe for creative financing techniques. If you were a seller who had been transferred out of state and is paying two mortgages, what would you do? Become one of the growing numbers of homeowners being foreclosed on? Wait for a traditional buyer? Or perhaps come to an agreement with a buyer using creative financing techniques?
[Editor's Note: It was announced this afternoon that the House has rejected the bailout package. We can only hope that legislators can work together to solve this impending financial disaster soon.]
