Just to recap, the old mnemonic I-D-E-A-L spells out the 5 reasons why real estate is a great investment, and we covered each of them briefly in the previous blogs.
We also added M for Motivated (sellers, that is), as a sixth reason real estate makes a dandy investment vehicle, making the full mnemonic M-I-D-E-A-L. (Thanks to Andy Tolbert for this ... who is that? Google her.)
So let's talk about those Motivated Sellers and that will wrap up this topic.
A few blogs back, we talked about foreclosure rates in Florida and Sarasota. They are high, and that means a few things for investors.
First, those foreclosure filings mean that the lenders are having to take those properties back from the borrowers, who aren't making the payments anymore. Banks HATE to hold real estate; real estate is not their business and it's not a business they want to get into if they can help it.
The banks' business is to borrow money from the Federal Reserve System at one rate, and re-lend it at a higher rate, thereby pocketing the difference in the rates as profit. Period.
How much can the bank borrow from the Fed? Well they'd like to borrow as much as possible, lend as much as possible, and pocket as much profit as possible. They ARE required by the Fed to have a certain amount of cash on hand as reserve. The more cash in reserve they have, the more they are allowed to borrow (and re-lend).
Anything that reduces their reserves is bad, and that's where foreclosed property comes in. Bank-owned real estate (REO, for "Real Estate Owned") shows on their balance sheets as non-performing assets, and it reduces their cash reserves, and that is, as we just said, bad. Enough said.
So banks themselves are one type of very motivated seller. Nearly all of the banks use Realtors to sell their "REOs," which means they appear in the Multiple Listing Service right alongside other properties. They are usually well-priced, and the banks will usually negotiate significantly off the list price, especially if you can close quickly.
On the topic of quick closings, it helps to know that the banks' financial statements are prepared every quarter, so if your offer points out that you can close by the end of the current quarter, it can make it more attractive, especially if you are near the end of a quarter (as we are right now in the last month of the second quarter). They just might take a lower price if it means they can get the property "off the books" in time for the quarterly numbers!
The point of all this is that when foreclosures are up, there are lots of motivated sellers (not just banks, but those who are hoping to avoid foreclosure with a quick sale). And that means opportunity for investors. In the run-up of prices in 2004-2005, rental properties stopped cash-flowing and many true investors stopped buying. (some folks -- speculators -- continued to buy, thinking that appreciation would always make up for the lack of income -- and many got bitten on the butt when dropping values left them hurting).
Now it is just beginning to look possible to buy properties at properties that allow cash-flow, thanks to these motivated sellers. Investors therefore are soon to return (speculators, not so much).
If you're anywhere on the investor-speculator spectrum, or are considering joining the fray, there is a great resource I have mentioned before: the writing of John T. Reed (www.johntreed.com). He is a true nuts-and-bolts guy who analyzes the various real-estate investment strategies (dozens of them) with an eye untouched by hysteria, sensationalism, or hype. His book, How to Get Started in Real Estate Investment, is probably the straightest-shooting book on the topic anywhere. (I have no relationship with Mr. Reed except that of fan, and I don't make money if you buy his books!)
So ... so much for M-I-D-E-A-L. Whew. On to other things!
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