Tuesday, April 29, 2008

Investing in real estate getting harder

The market crash has a lot of amateur investors all giddy with the prospect of making a killing by either buying rentals or buying REOs on the cheap and flipping them for a quick profit. The potential for making a plan like that work is developing, but can they pull it off. If they are flush with cash or have cash backing the chances are good they can. But if they are small time investors thinking they will finance these projects they are in for a surprise. With the crash of the credit markets, finance money for investment properties is drying up faster than beached whale. Most lenders are already requiring very large down payments for investment purchases. In addition, there is more bad news from the mortgage insurance end. Starting next week the largest insurer will stop issuing insurance for loans in declining markets. In many cases, no insurance means no loan.

Here’s the news report from Realty Times.

Call it the backlash after the boom: Major lenders and mortgage insurers are turning off the money spigot for investors who want to buy rental houses or condos with minimal downpayments.

The most dramatic cutback takes effect next week, when giant mortgage insurer United Guaranty -- a subsidiary of AIG International, the world's biggest underwriter -- says it will stop covering loans to investors in any of the thousands of Zip codes from coast to coast that it defines as "declining" real estate markets.

The ban includes all non-owner-occupied rental houses or condos -- including "mom and pop" two-to-four unit properties where the owners occupy one and rent out the rest.
United also is cutting off coverage of all condominiums and cooperatives - whether owner-occupied or rental -- plus all second home purchases. It's even refusing to look at loans to investors or owner-occupants that have limited documentation in any market, whether declining or not.

Other major mortgage insurers are expected to follow some, if not all, of United's tough new restrictions in the coming weeks.

Bottom line: Easy money days for investors, especially anybody looking to pick up condo units are over. Don't hold your breath waiting for the return of nothing-down, no-doc financing for speculators looking to flip condo contracts for quick profits.

How much of an affect this will have on the SoCal real estate market is anyone’s guess but it’s obviously not going to help it. At this stage in the collapse removing another pillar from the foundation of buyers is a dangerous move. After all the investors are the ones that are supposedly going to stop the fall by purchasing all the homes once the rent/buy ratio turns positive. If those investors are removed who is going to hold the net?


monkeyking79 said...

you also mentioned the investors in single houses' market. what do you think they will affect that price?

Peppermint Hippo said...

This is going to put more downward pressure on prices, which should accelerate the correction process. Good in theory, but there's going to be alot of collateral damage. It's good when housing is more affordable, bad when the economy tanks for more than a couple months. Makes you realize how overly dependent our economic growth was due purely to housing in this last bull cycle.

house said...

not just investors. about 2 months ago....we pre-qual'd for 425k. we went to buy a house last month. it was 389k. i can not believe how much extra paperwork they wanted for our primary residence! in the end, they wanted us to put an additional 10% down (for a total of 20), and wanted us to be able to prove that my husband's income would continue for at least the next 3 years. who can do that? we didn't get the loan. and we continue to rent. wth? this market is crap! i think they just wanted a bigger down out of us...but let's face it, it is a horrible time to buy anyway, i'll keep my money in the bank and wait until that same house is 100k cheaper, maybe then i'll put 20 down.

nmoerbeek said...

Its amazing how my down payment grows (in terms of percentage) without even having to do anything.

This is great news though. The bad news is there are still alot of stupid people with lots of cash who all are jr donald trumps. Now if we can just keep them out of the market then I will be able to get my 2 bedroom shotgun shack for cheap!

golfer_X said...

a few months ago only 3 out of 10 pendings were actually making it to closing. I wonder what the ratio is these days with the increased tightening of credit. It might be a little better since there are so many lower priced homes selling but I'd love to know what it is these days.

House, it was probably a blessing in disguise that they drove you away from that deal.

BrianH said...

nmoerbeek said...
This is great news though. The bad news is there are still alot of stupid people with lots of cash who all are jr donald trumps. Now if we can just keep them out of the market then I will be able to get my 2 bedroom shotgun shack for cheap!

I would love to hear you extrapolate on this. Just for fun I'm calling you out on the mat and hope you are man/woman enough to go into detail on just how such people are supporting the home prices as you indicate.

Thank you

BrianH said...

or how these types are keeping you from getting your house.