The sub-prime market is gone. Traditional conventional financing methods have become more difficult to obtain. Higher credit scores are required, and more upfront cash is being demanded. Hard Money Lenders now require you to have skin in the game – meaning your cash, or someone else’s. Their interest rates have risen, & their broker fees have gone up. Their terms have been shortened, and they require payments while you do the rehab.

Now, here’s the good news. Texas still has the top 5 real estate markets in the Nation. We have had the lowest decrease in prices overall, and sales are up once again. Employment in Austin is rising. All of this spells a healthy market right here.

So here’s the sad truth about today’s market.

There are 115 million households in America. Everyone else rents.
60 million people, who want to buy a home, have sub-prime credit for one reason or another.
Another 24 million people are self-employed, just like most of us.
There are no loan programs for 84 million potential buyers. Do the math.

So, what does this mean? It means that, in today’s market, a house is only worth the financing that is on it today. We can no longer buy houses, we must buy financing. A home that has a good interest rate and payment is worth more than any other house out there. Even if you do get fix-up money, how long will it take to sell your project after you are finished?

Ok, enough of the bad news. What’s the good news? The good news is, there’s a big wave coming. The big wave is the buying and selling of homes with little or no equity, sold in neighborhoods for zero down, in the last 5-7 years. Look at all the REO’s and foreclosures. They are prevalent in subdivisions where prices have not gone up since they were built. What does this do to existing house prices in other neighborhoods? All prices sag.

Look at a seller who needs to sell. He owes as much as his house is worth. But, he has a great loan in place. What are his options?

1) Cash buyer – who will only pay $.70 on the dollar.

2) List it with a Realtor, who will either raise the price more, or tell the seller he has to bring about $15,000 to closing – if they find someone who will pay above market price for the home, and can get an appraisal and a loan.

3) Enter a short sale program, in which case they get nothing at closing, except bad credit.

4) They can walk away and let the bank have it, which gives them 10 years of the biggest credit glitch you can get.

There is another option!! Here’s a buyer who has $5-10,000 saved up to buy, but can’t get loan approval. You, as an investor, know someone with a house that has no equity, and is desperate to sell. What do you do? You can’t do a lease purchase, contract for deed, or rent to own. All are illegal.

If you know a buyer who has money to buy with – say $5-15,000, and a seller who needs to sell a house that has little or no equity, here’s what other investors are doing. They do what a Realtor would do.

In a normal market, a Realtor would list the seller’s house – which would have equity – and sell it through MLS. Another agent would bring a buyer; they would contract to buy the house; and when the transaction closed, both sides would get paid, right?

Well, this is not a normal market. In today’s market, that same house has no equity; the sellers are down to one income, or no income, and need to get out from under the mortgage. As I stated earlier, they have 4 options – none of them good.

 

Today’s investors are doing what Realtors usually do, but with a twist. They are buying these houses “subject to” finding a buyer with cash who wants the house. It’s like a listing agreement, only with an investor it’s an option to buy the property for the same “listing period”. When the buyer wants to buy a house that an investor has an option on, he assigns the contract to the buyer for an assignment fee – instead of a realtor commission - of whatever is negotiated. If one investor has a seller’s house under contract, and another investor has a buyer, then the two investors agree on a split, and close the deal. The seller gets out of the deal that could not be sold by a Realtor because there was no equity to pay anyone with. The buyer gets a house that already has a great mortgage on it, that he couldn’t get approved to buy. The investors split $5-15,000 at closing, and walk away happy. No license required.

I spent the weekend with a couple of investors who have done this more than 1100 times in the last several years. I am a very knowledgeable Broker, but I wasn’t thinking out of the box. After 27 years of doing this business, you get into a rut just like everyone else. These folks have put together over $10 million in real estate holdings by buying the really good deals, and selling the rest.

 

As investors, we have to adapt, adjust, or die. This wave of unsellable houses is going to be sold to unloanable buyers, for the next 5 years. We can either “make things happen, watch things happen, or sit back and wonder what happened”.

 

So, why am I sharing this valuable information? Well, after I got over feeling stupid, I realized that one guy beating the street for deals, could not cover as much ground as a bunch of guys beating the streets for deals. So, I want to entice all of the investors and contractors I know, to start trying to do deals that can be done, instead of trying to use their own money to get financing from Lenders who don’t want to lend. Then, you have to wait for a buyer to come along who wants to buy your project, and can actually get a loan. That costs money too.

 

Here’s an even better reason to work together. As a Realtor, I have access to MLS, statistics, historical sales, rents, and homeowners who have no equity. I am prohibited from talking to them directly, but you are not. If we all work together to find deals that can close in as little as a week, we can build our own cash reserves, and do any other kinds of deals that everyone wants to do. But, this one is pretty easy once you know the mechanics, and you don’t use hardly any money of your own.

 

This process has no loan limits, income limits, or price ranges. Some of their deals were in the $300k range, and they collected 10% at closing - $30,000. That’s not bad. Many rehab deals don’t net as well.