Is this the time to invest in houses?

I am regularly asked this question - . Should I take my very valuable saving and buy a house, rent it, and hold it for a good return?

The answer is simple; for sure, maybe, probably not, or no way!! I believe that covers it all.

Let us explore these answers and you can decide what to advise or perhaps what to do on your own.

The correct answer directly correlates to risk, expectations, need for money, alternative investments and available time. An investor who wants to buy will have to identify the right asset for a lease / hold strategy and hold it in an investment portfolio as a separate class in the basket. Let’s explore the data and forecasts to help make this decision.

Existing home sale statistics have been rising over the last year but most recently are showing some weaknesses. According to NAR (including SFR’s & Condos) in June sales fell over 5% from May, but are still almost 10% higher then in June 2009. The supply is much higher then we would like to see. But the overall pricing is stable due to such a severe drop. The prices were higher in 10 of 18 metro markets in 2010 versus 2009. Condo values were flat in most markets year to year. In a broad brush approach – northeast values decreased slightly around 1%, Midwest – down 1%, South – unchanged, West was up 1.5%. It does appear that conditions have become more balanced. It is likely that a balance can continue since the tax credit expired and jobs remain a problem. The job situation may be the most important factor in a specific area if we try and forecast future values. This of course is considered along with the release of new distressed inventory by lenders “holding back.” There is also all the recent press about a “double dip” recession projecting future value declines.

Home value volatility and associated risk remain very high. It seems that the stabilization phase with government policy intervention may have run its course now. There is a strong possibility that we could see further price declines as the economy remains weak.

Digging further into values, according to Core Logic’s year to year home price index for June the following is important: The top 5 states with highest appreciation were South Dakota +6.9%, Maine +6.4%, California +5.9%, Virginia +4.7%, Washington DC +4.3%, Top 5 depreciation; Idaho -9.1%, Alabama -3.8%, Oregon -3.5%, Washington -3.4%, New Mexico -3.2%.

There are some factors that show reason for optimism in value expectations. The inventory of new homes being built and released to sell is actually at a very low level. In addition, we have interest rates being offered by lenders that feel like the “limbo” – How low can they go? They are at historical lows and we find 30 year fixed rate loans at around 4.5% to be extremely attractive.

So now having digested the various statistics and investigations, we need to ask if the investor is right for this investment and what a buyer should expect both in return on investment, time commitment, and other issues.

As SFR defaults continue and the housing market seems to stabilize, will SFR lenders increase their strategy to “rent & hold” property rather then dump them or leave them vacant? For many lenders this strategy makes sense even if they are reluctant landlords. A concern for any investor is that these rental homes will become your competitor as well as the multi-family building in the immediate area. Both of these will hold rental values down until the homes are sold and apartments fill-up. This increase in rental unit availabilities can cause a downward spiral for investors holding homes for rent.

As managing director of the Peak Corporate Network, I was recently interviewed by 2 reporters for a cover article in the L.A. Times, August 20th. I was able to provide details due to Peak’s expertise in the default area including our financing products for investors buying houses and our default services. The reporters were responding to reports that institutional investors / funds are jumping into the “trustee sales” investment world. We have seen this directly as we are regularly approached to finance or joint venture in such acquisitions. I believe that the demand to place money is very high now and the property returns on buying at the trustee sale support the “high yield” requirements for many fund managers. I bring this up because it may soon be the case that the way to get the higher “sales price” is at the trustee sales. The same factors that led to previous bubbles with too much money being placed in home loans can lead to too much money chasing the same deals at the footsteps of the courthouse. I can tell you that some of our property loans that have gone to sale have been sold to 3rd parties at prices considerably higher than our analysts advised we wound net at full payoff or as an REO after eviction, repairs and sale costs. This is an interesting phenomenon and will be worth watching. The inventory being acquired may ultimately disappoint the investor and lead to a wave of dumping these homes in 1-2 years.

The days of easy flipping single family homes may be coming to an end according to many savvy realtors and investors. I agree that the markets have in fact “cooled off” as so many remain unemployed and pessimistic. According to one research group, prices will go down even further over the next 18 months by as much as 5-10%. Anyone looking for a short term gain by selling a property is probably heading for trouble. Flipping is going on for sure, but fewer investors will be able to pull it off for a nice profit. Flipping a property requires “cash in hand” with an investment for repairs, holding and selling expenses. The idea of buying it and selling it “as-is” is becoming very difficult to accomplish.

The lenders policies are making it so difficult to close a loan. We regularly make loans for borrowers who simply could not obtain conventional financing in this market even though they are well qualified. Timing is usually the main issue.

Regardless of the roadblocks, investors are buying. The latest NAR figures show that 14% of all transactions in May were by investors. The majority of those being distressed properties that would still be empty if not for the investor.

Is the investment right for you or your client? Investor expectation is the key variable. Banks today are paying from ½ to 2 ½ % for their safer deposits. If we look at real expectations it does not take much of a return to match or beat the alternatives. If one is satisfied with little or no actual net cash flow and is willing to ride out this cycle, we can all agree that values will surely go up from their current levels. The problem of course is where we are in this cycle. I do believe the large downside risk has been stabilized and we are at most within 5-10% of the floor in most major national markets. There could be further declines but some risk is always to be expected and must be assumed. Most properties at these values and current rates cannot throw off cash flow in excess of 5% actual annual returns. In this calculation you have vacancy, cost of funds, repairs, maintenance, taxes, and insurance.

It is a reality that if you are a landlord “things” happen. The same borrowers who had sub-500 fico are now renters. They could not pay their mortgage so why would you expect a good payment record if they are your tenant? This means eviction cost and delays, vacancy, repairs and costs of re-renting. A break in occupancy, even for a short period, will eat up any expected cash flow and probably will result in a “cash call.”

This now brings us to the “time” concern. How available is the investor to handle such issues. Turning the house over to a management company is a solution but it does have a high price tag as well.

Now that we determined that expectations are good and the investor has the capacity to handle the rental I want to give a few tips to help maximize the potential return on investment.

- Talk to top local rental agents about the area and rental conditions.
- Read newspaper ads – How much is being charged for rentals?
- Consider schools and amenities (Shopping / Transportation)
- If Condo – check out HOA restrictions
- Before you rent – maintain it, clean-it up and make it livable.

In conclusion, the concerns are similar if one hopes to flip it or rent and hold. Values are very attractive and if an investor has the wallet to “ride it out” there is a great opportunity to get a very good return at the end. Keep your expectations in line, be ready for surprises and make some money.


Gil Priel, Co-Founder
Peak Corporate Network



Our website: www.PeakCorpNet.com
Join facebook.com/peakcorpnet

Priel's Perspective - “The Light at the End of the Tunnel”

I want to start by saying it is clear to me that there are some buying opportunities in today’s uncertain market.

Many real estate investors, myself included, have been saying that commercial real estate is the next shoe to drop, our next crisis. However, the collapse is actually being held up by a “slow-motion” release of inventory. It is clear that values have declined significantly and many in the industry have serious problems holding on to their investments. The emerging reality is that the idea that an investor can sit idle waiting to buy “Class A” malls or apartments for 9 to 10 caps will not happen during this downturn.

The reasons for this are the “Slow-Motion” release of distressed assets by lenders, the willingness to work with borrowers without regulator pressure, and the fact that there is a huge amount of capital waiting to jump in on any opportunity put out to market.

Now that I made my point clear, I do need to make it equally clear that we are not in a “Boom” market or that I expect values to quickly recover to our 2006 peaks. The “Slow-Motion” idea also applies to any recovery. It will be drawn out as hard times will continue for the short to medium term – buyers beware!!

Many lenders are continuing to play the “extend and pretend” game with their loans and over time will need to take action by disposing of their bad debt and assets. This, in turn, means that these will sell at distressed values and further delay the rebound of investments.

The experts at Strategic Asset Solutions, one of the Peak Corporate Network affiliates, act on behalf of borrowers in debt restructuring on commercial properties. We have seen a significant shift in lender willingness to work with a borrower to reach a new realistic basis for their loans and creating a solid value for both lender and borrower/owner. This is accomplished with principal reductions, rate reduction (temporary and permanent), extended maturity date, funding reserve for property repairs, etc. The bottom line is giving the borrower a reason to stick with the program.

These types of negotiations will increase over the coming years as loans are nearing maturity. Deutsche Bank estimates that more than 65% of the loans that have been packaged in commercial mortgage backed securities (CMBS) will not qualify for refinancing when they become due. Some will be restructured while others will turn into distressed asset sales over time.

Another reason why the commercial real estate market will not collapse is that a bulk of mortgages are held by a single lender (not securitized) that is not under the strict scrutiny of Federal Bank Regulators. This gives that lender ample time to attempt to work out a problem loan in a smooth and orderly manner. The downside, again, is that it drags out any correction for years and of course is a delay for any real rebound is values. A 40% decline in values is not uncommon and it takes a robust rebound to bring it back.

In a recent real estate investor magazine survey, 65% of the responding investors indicated that they plan to boost their investment in real estate over the next 12 months. This is an increase of 30% from last year.

For anyone contemplating making an acquisition there of course remain many concerns that are very real, they include:

- Vacancies continue to increase
- Rental rates continue to fall
- 100’s of properties are in default in most markets
- Sales have plunged
- Appraisals and values are falling
- More equity required by lenders
- Still a disconnect between seller and buyers

These concerns will continue to dominate every due diligence model and challenge decision making by prospective investors over the next few years.

The analysis should be made under an extremely conservative perspective as is required in this very volatile market. This strategy is in the face of what we see as very stiff competition for a very limited supply of distressed properties.

At Peak, we continue to make bids for some of these assets and in many cases competing with as many as fifty “all-cash, quick –close” bidders. We recently purchased a non-performing note secured by two office buildings, in Southern California, with a firm belief that we would ultimately own the underlying assets. In a clear example of money being available, we were overbid at our foreclosure sale by aggressive buyers paying all-cash with little or no due diligence.

I do believe the next 12 months will provide a better flow of deals although many will likely be sold in an auction environment. This requires costly due diligence with a low likelihood of success making it more palatable to the large institutional players who will be the winning bidders with adequate staffing and resources.

As an explanation of the low flow of deals, it seems that the institutions that acquired banks assets during the crisis have had no real reason to sell and no pressure to do so. Now that it is clear that there is a lot of liquidity we feel that change is coming. Currently, Wells Fargo, LNR, and others, are taking billions in loans and assets to market. The capital is available and I would expect an even larger flow of capital looking for safety in the U.S. as economies like Greece and other European countries have their own crisis. Many believe the worst of our crisis is over and the U.S. is a safe haven once again.

In conclusion, the factors I have discussed make me believe that the light visible ahead in the tunnel is not an imminent train wreck, but rather it is the light of optimism.

Gil Priel

Founder and Managing Partner

Peak Corporate Network