The Glass Is Half Full–and Rising (Part Two )

In early September 2007, the headlines keep bringing dark skies.

  • Homes Entering Foreclosure at Record Pace
  • Realtors: Home Price Slump Through ’08
  • Homebuilder Hovnanian Enterprises, Inc. Announces Massive 3-Day Sale in 19 States

More Americans are falling behind on their mortgage payments at a record pace as stagnant home prices and a convergence of weakening economic factors have taken a toll on housing affordability, according to the quarterly survey just released by the Mortgage Bankers Association (MBA).

At the same time, the ever-optimistic National Association of Realtors (in its latest economic outlook released on 9/11/07) finally conceded that home values and housing sales will take an even bigger hit than previously forecast and will not recover to their earlier levels throughout all of 2008, at the least.

Meanwhile, the worst housing downturn in sixteen years led homebuilder, Hovnanian Enterprises, Inc. to conduct a historic “Deal of the Century” sale over the weekend of September 14-16, 2007, offering HUGE price cuts up to 25% on thousands of its homes across the price spectrum, in 19 states.

Making Sense (& Cents) out of the Market

As much a protective maneuver as a panic response, Hovnanian sought to take advantage of mortgage rates that still remain at historic lows, by offering up to six-figure discounts on some of its properties as it attempts to sell its homes–and solve a problem–in a slumping market.

It appears to have worked, sparking more than 2,100 purchase contracts, as compared to only 2,500 all of last quarter!

For most home sellers, price concessions will ultimately be a part of the solution. For other sellers, it may be the only option. Still other unfortunates will have no options.

But if we, as creative real estate investors, real estate agents, as note investors and note brokers/finders are to survive and perhaps even thrive, we must look beyond the obvious solutions to new ways to market and close.

As we stated in the conclusion of Part One, we need to recognize that there are MANY, MANY proven, time-tested options for successfully completing transactions in any market.

Why? Because it means tremendous opportunity for those who practice ethical creative real estate investing and private note investing techniques built on win-win-win principles, crafted around solving problems fairly for both sides of the transaction. Fortuitously, most of these techniques are perfect for times such as these.

But–we need to understand that while financing is a critical part of most real estate transactions–it isn’t the only part, even in today’s market!

The use of financing techniques must include the ability to understand who the parties to the transaction will be (seller; buyer; and/or lender; broker; attorney, CPA, or other); what the objectives of those parties are; and that financing tools will not all ways work the wonders each of these parties desires.

In addition to depending a great deal upon knowledge of the clients’ and/or third parties’ needs, we also need to have a working knowledge of the market constraints these people are operating under at that time!

A story of seven states

Even in the midst of the current mortgage meltdown, not all markets are in decline, nor are all borrowers being shut out. As Doug Duncan, the Mortgage Banker Association’s chief economist, pointed out his most recent report, the delinquency trends are very much “a story of seven states.”

These include:

  • Midwestern states Michigan, Ohio, and Indiana, where defaults and foreclosures are linked to serious underlying economic and job issues, and
  • The once red-hot housing markets of the Sunbelt Arizona, California, Florida, and Nevada, where homes entering the foreclosure process are driving the national increase

But many pockets around the country are relatively stable, or even up in some areas. More metro area markets (97 of 149) gained ground, rather than lost. These include:

  • Albuquerque, NM (up 7.7%)
  • Allentown-Bethlehem-Easton, PA-NJ (up 12.8%)
  • Austin-Round Rock, TX (up 5.6%)
  • Beaumont-Port Arthur, TX (up 11.8%) among many others

And markets can be quite different, though relatively close in geographical terms, as witnessed by:

  • Binghamton, NY (up 19.8%) versus Elmira, NY (down 17.9%), and
  • Palm Bay-Melbourne-Titusville, FL is down 15.0%, while Miami-Ft Lauderdale is UP 2%

Every homeowner does not face the same current loan situation either. According to Realty Times editor, Blanche Evans, in her well-received late 2006 book, Bubbles, Booms & Busts, approximately 40% of single-family homes are currently owned free and clear.

Of the homes that are financed, there are similar, as well as different scenarios that will fall in the groups below:

  • Defaulted Notes – Preforeclosure with good equity, some equity, no equity, negative equity
  • Finance Bubble – Interest rate resets, good equity, some equity, no equity, negative equity
  • Stable – Fixed rate loans, good equity, some equity, no equity, negative equity
  • Performing Markets – Good equity, some equity, no equity, negative equity

Staying alive!

While there are situations that cannot be solved by financing, the individual seller’s situation and objectives and the market the property is in will go a long way in determining what financing alternatives or non-financing deal structures might be used to solve problems before they become too unwieldy.

Creativity is the application of the science of financing. Being creative generally means testing objectives with other solutions looking to see what benefits will occur. Theories that work on paper are only valid if they work in real life. We’ll share the keys to your use of financing as a “problem-solver” in future follow-up articles.

The real estate markets are changing. Are you ready to make it rain?

By CREOnline Contributor

A content contributor to the original