First, there may not be a real estate "bubble." Even real estate
investors (more on that in a moment) don't think there's a real
bubble. However, some markets are overheated, and prices will slip
some. But nothing like, say, the dot-com bubble of the 1990s.
However, it's reasonable to assume that prices in some markets will
flatten or even decline somewhat. (Yes, they may drop sharply. The
strategy below will work then, as well.) Now, if you're remaining in
your own home and can afford your payments (say a fixed-rate mortgage
and you haven't lost your job), it really doesn't matter whether
prices are rising, flat, or dropping. You're still paying your monthly
PITI, you've got a roof over your head, and all's well with the world.
The problem arises if you, for some reason, have to sell. Maybe you
can't afford your home any longer because you've lost your job.
Or--and this'll happen quite a bit--people with adjustable rate
mortgages will see their monthly payments climb radically. You'll also
have the regularly occurring divorces, job transfers, etc. In any
event, the situation is that you have to sell but prices are flat or
are declining...and you bought near enough to the top that you can't
sell without incurring a loss. And because of your circumstances, you
can't afford a loss. (Just making numbers up here, but let's say you
bought a $500,000 home...initial PITI was $2,100. Prices drop and your
adjustable rate goes up. Now you're paying $4,000 a month, which you
can't afford, and the house will only sell for $450,000...but you
don't have $50,000 to bring to closing when you sell your home.)
How do you make money? A couple of possibilities.
First, learn about "short sales." It's buying a home for less than the
existing mortgage. You negotiate with the lender. Even better if
there's a second mortgage on the property. You can often "buy" (that
is, get rid of) the second mortgage for pennies on the dollar. So,
that $500,000 home might have a $400,000 first mortgage and a $100,000
second mortgage. You persuade the second mortgage holder to take maybe
$5,000 or $10,000 (at most) for the second...because, otherwise, he's
going to lose everything. You negotiate with the bank for a smaller
first, or at least a restructuring of the mortgage.
It works even better, of course, if there's some equity in the property.
Another possibility is to do a long-term lease-option. Maybe the
current owner can't afford $4,000 a month, but can afford $1,500 a
month to save his credit and to avoid losing everything. There are a
number of ways to work this--safest for you to put the property into a
land trust--but in any event you make a deal with the owner. You do a
lease option. The lease specifies that you can lease his house for up
to 7 years at $2,500 a month. He's paying $4,000 to the bank, and
eating $1,500 a month. Meanwhile, you have an option to buy the
property for $500,000. Then lease the property out (a "sandwich
lease") to someone else for something slightly over $2,500 a month.
Collect an up-front option fee (maybe $10,000) from your tenant-buyer.
Give the tenant-buyer the right to purchase the property for $550,000
in a year or two. You receive $10,000 up front, slight positive cash
flow, and $50,000 if/when your tenant/buyer exercises the option. The
option fee is non-refundable. If your first tenant-buyer chooses not
to exercise the option, you repeat the process--another up-front
option fee, slight positive cash flow, and profit at the back end. You
can sweeten the deal (yours as well as the tenant-buyer) by getting
some lease credits from the seller (say $500 a month), and giving some
lease credits to the tenant-buyer (say $200 a month).
There are lots of other ways to make money in a down market. Many real
estate investors are really looking forward to the next few years. |
