Calling the bottom
It never caught on of course, but I thought my idea for a new game show wasn’t bad. Named it Call The Bottom. Contestants would be assigned various markets around the country and then asked to predict when the bottom would be found. Dumb idea? You bet. As dumb as some of the silly financing rules we face in the real world? Not even close.
I too, tire of the phrase
Before continuing let’s all agree on what common sense is, in this, our new normal. (You as tired of that phrase as I am?) On one hand we have FHA still allowing credit scores not thinkable in more prudent times. On the other hand we have rules denying Gold Standard borrowers the ability to borrow money to buy real estate. What? Huh?
FHA underwriting is fairly well known, at least to the extent its perception is one of relative ease in qualifying. When buying property as an investor however, objective standards are often the Holy Grail — longed for, but never found. Let’s be specific.
Principles that cannot change
There’s something I’ve called the physics of economics — certain principles that subjective belief cannot change, outside of brute force. The simplest example would be the economic law of supply and demand. If there’s strong demand for a product or service in low supply, the price is driven upward. The obverse is also true. If gold was as easily found, as useful and plentiful as a dirt clod, it wouldn’t be worth more.
Fast forward to the supply/demand for housing
There’s all kinds of supply, and not enough (qualified) demand. Banks are holding on to foreclosures as if they expect them to morph into disguised oil wells. Investors are out there in force, buying what they can afford, sometimes what they can’t.
Some of those investors, maybe not a large percentage of the demand pie, but a very sizable percentage if measured in terms of available capital, are exceptionally qualified. Many of them have $250-500,000 and more, available for immediate investment into residential real estate. This usually translates into 1-4 unit properties.
My company is only a two horse operation, small and inconsequential by any objective measurement. Yet, we have investors from all over the country (that’s all we do, investment) who could literally buy $3 million worth of well located 1-4 unit properties, sometimes more, far more.
“I want to buy $3M in investment properties.” “No.”
Why don’t they? Cuz they wanna borrow money — often up to 80% of the purchase price. What evil creatures they must be? For every client who’s able to do this, but can’t due to Fannie/Freddie lunacy, I can point to half a dozen more investors to whom I’ve talked, who’re rowin’ the same boat and are seething.
According to the rule makers, they’re far too qualified and experienced.
I realize that reads as dripping sarcasm, but I mean it literally. The profile of the clients to whom I’ve referred is impressive:
- Credit scores in the range of 750-805.
- Job incomes of $100-800,000 a year.
- An investment portfolio of 6-35 properties, sometimes more.
- Available liquid reserves in six figures, sometimes seven.
- Cash flow from real estate of $3-20,000 — wait for it — monthly.
- ‘Back end ratios almost too small to mention. (Just had one the other day whose back end ratio was single digit.)
Please tell me that’s not the platinum standard for a borrower.
The lending rule in question
The rule in question is one allowing no more than four loans (including one’s primary residence, go figure.) for any one investor. That rule was it for awhile till even ‘they’ saw the inevitable folly. They then allowed as how ‘qualified’ investors could have up to 10 loans, but with tightened underwriting and other requirements.
Seriously? There are literally hundreds of California investors alone, conservatively speaking, who own a simple duplex or three, who could trade their current, battered net equity for a dozen such duplexes in another state. They’d be going from 0-50% LTV to 70-80% and still be increasing their bottom line cash flow.
Then there are those who already own many properties, 10 or more of which have debt.
They’re long time, long term real estate investors with invaluable experience managing property. Most have the ability to pay off 30 year loans in 8-12 years — and often do. They’re smart. They understand their ability to prudently leverage well located real estate, then free them of debt as soon as possible would lead them to a solid retirement. What an original idea. Gonna write than gem down.
Artificially restrained demand
All over the country there are 1-4 unit properties, SFRs, townhouses, condos, and 2-4 unit ‘plexes’ remaining unsold due to this irrational policy. The irony is the powers that be frame this rule as a safety precaution. If underwriting is back to when I got into the business, 1969, or at least the 1990s, then those qualifying should be allowed to borrow.
Furthermore, given that lenders are willing to lend, and investors are willing to buy the loans — without any form of mortgage insurance — what’s the problem for Heaven’s sake?! I only make mention of MI to underline the fact there’s more than enough initial investor equity (Skin in the game?) to make the groups buying these loans very comfortable. 20-50% down works.
That brings us to the present
Also, consider the economic conditions in force now.
- At or near the bottom for price.
- Historically low fixed interest rates.
- 5-10% or more cash on cash returns immediately for property investors.
What’s not to like?
These investors are found in every market. It’s like dying of thirst in the desert with an endless supply of water sittin’ next to you. When outside forces interfere with the physics of economics, silliness is often the result.
Actually, silly’s not the word we’d like to use, is it?