It’s time to re-evaluate your real estate investment strategies and holdings. The market has already made a fundamental shift that has changed the entire industry. The smart money has already reacted to this and will reap huge rewards as a result. If you wish to take advantage of these market changes, like the smart money already has, you must first identify what these shifts are.
Fundamental Change 1: Banks, FNMA, FMAC, FHA & HUD have shifted away from foreclosures and to selling the debt
Evidence of a market shift from REO and foreclosure sales to note sales are popping up everywhere. For example, Michael Bull, host of the popular “Commercial Real Estate Radio Show” recently interviewed Charlie Brake of Hartman Simons (Atlanta based Commercial Real Estate Law Firm), who said this: During his appearance, Brake noted that when faced with non-performing loans, lenders often prefer to sell the note rather than go through the foreclosure process for a variety of practical and financial reasons. Selling a note often is a quicker process than foreclosure for a lender, and it also enables a lender to avoid paying insurance and real estate taxes on a foreclosed property, he said. Furthermore, “by selling the notes, [the lenders] don’t get in the chain of title, so they don’t have to worry about any environmental issues or any other sort of issues that might arise from being in the chain of title.”
Fundamental Change 2: Hedge Funds and other Cash Buyers are investing Billions right now
Billions of this “anxious money” has found its way to hedge fund companies. You may not realize this, but hedge fund companies have been the biggest buyer of real estate for years. The individual investors don’t even come close. Hedge fund company managers are highly paid individuals who have some of the brightest minds in the financial markets. So what are these hedge funds buying today? Performing and Non-performing Notes. Sue Allon, CEO of a Denver-based company that specializes in examining toxic assets and determining their present value, said this in a recent article: “I can name at least 12 hedge funds with $30 billion who are ready to start to buy them [non-performing note portfolios]”. Allon figures the banks could “quickly find buyers for more than $1 trillion worth of the stuff.” Hedge funds are here to stay. The real estate investors who don’t realize this are in for some tough times ahead. In addition, many individual investors, fearful of the stock market and precious metal prices, are now looking at alternative investments. Over the past two years, real estate has become an attractive alternative investment as evidenced by the 4+ million homes that sold for cash from 2010 to 2013. The vast majority of those sales were purchased as investments not residence. That trend has slowed for several reasons: 1) The supply of REO properties has dwindled making the prices go up, 2) Many investors simply don’t like the hassles and liabilities that come with property ownership. What about the money though? Are there still cash investors’ anxiously looking for higher returns? According to the Federal Reserve Statistical Release on July 2013, there is now approximately 10.2 Trillion dollars in cash accounts (called M2 supply). That is an absolutely staggering number. Consider this; a trillion seconds is 32,000 years! By the way, that cash account number doesn’t even include retirement accounts.
Fundamental Change 3: The Discounts on Notes are Dramatically Greater than the Discounts on Property Sales
The discount prices on both performing and non-performing notes are so great right now that you don’t even need a calculator to know you are going to make a huge return on investment. While most real estate investors are happy buying at around 70 cents on the dollar, Note buyers are buying at 30 cents on the dollar or less; In some cases, much less. As previously stated when you buy a note for $2000 and can cut the loan amount due down to $60,000, you don’t really need a calculator to see if that works! The opportunities have never been better. These industry changes have formed the perfect storm for note buyers and brokers.
Article provided by Eddie Speed, a veteran note investor, who recently spoke at the Real Estate Association of Puget Sound monthly meeting.