By Elizabeth Razzi
Sunday, November 2, 2008
Bring on the vultures. I mean that in the most flattering way possible, you dear deep-pocketed real estate investors with access to credit.
We need you.
Without investors, it will be nearly impossible to get rid of the glut of unsold homes, especially the ones in the worst shape. Eager but cash-strapped first-time buyers aren't the ones who will buy a foreclosure and spend tens of thousands of dollars to rehab it into a home.
Investors, the buzzards who clean up what others won't touch, do that for the real estate market.
It looks as if they were circling over Prince William County, and Manassas and Manassas Park, in September. The number of units sold that month shot up 221 percent year over year, according to statistics from Metropolitan Regional Information Systems, the local multiple-listing service. The median price plunged 43 percent. That followed two months in which sales increased by more than 100 percent vs. the year before. That means prices finally fell low enough to lure buyers.
More people are tossing around the idea of picking up an investment property, lenders and real estate agents have told me. "I'm finding a lot of people asking about them," said Jerry Bartlett, owner of a Jobin Realty brokerage in Kingstowne. Not many can pull it off, though.
Bartlett sends them to get financing before he will even start working with them. "They come back distraught," he said. The lines of credit they thought they could tap may not be there anymore; the credit rating that they thought was pretty good may not be high enough now; their down payment may be shy by 10 percent or more.
Lenders aren't in much of a risk-taking mood these days, to put it mildly. And there's always a risk involved in real estate investing. But if you have cash, access to credit and more courage than the rest of the flock, you stand to profit from the market's weakness.
The first requirement is cash. Rick Eul, a vice president with Bank of America Mortgage in Annandale, said investors need at least 20 to 25 percent of the price as down payment. "Two years ago it was like, 'Do you have a pulse?' " he said. No longer. It's back to the pre-boom standards of creditworthiness -- or even a tad tighter.
"A lot don't get in because they don't have the cash," Eul said.
You will have to prove to the loan officer that you have enough income to handle monthly payments on both the investment property and your own home.
If you have a signed lease and have already cashed your tenant's check for the first month's rent and the security deposit, you will still get credit for no more than 75 percent of the rent as income. (That's all you should count on. The remaining 25 percent normally gets eaten up by repair expenses, vacancies and other costs.)
You will also need a credit score of 720 or better, Uhl said.
Plan to pay a higher interest rate than on your own home loan. Interest rates for investors are now running about one percentage point higher than those for owner-occupied homes.
It will be up to experienced investors to clear out the bulging inventory of trashed and abandoned foreclosures. Those people look for the properties that scare away buyers who want a home of their own.
"The uglier the house, the better the opportunity is for the investor," said Frank Sharp, managing director of Watershed Renovation Capital in Alexandria, which specializes in short-term loans to real estate investors in the Washington metro area.
"We expect them to buy and get renovations finished in no more than three months, then get it sold or refinanced within three months," Sharp said.
"If you pay too much for a property in the beginning, it's very hard to recover from that in a market where prices are continuing to decline," he said.
"In Prince William, prices are still declining 3 percent a month," he noted.
High interest rates are another reason investors want to get in and out of these deals quickly.
According to Watershed's Web site, it charges a 12 percent annual interest rate for the first three months, 14 percent on the second three months. After nine months, the rate goes as high as 18 percent, plus fees. These are not mortgages made for dabblers.
Most of Watershed's clients are full-time, experienced investors, Sharp said. But if a newcomer wants to give it a try, he said, he will pay close attention to the contractor that investor has lined up and will expect that investor to pay a fee to a mentor for investing guidance before approving the loan.
His company's average loan amount is $200,000, Sharp said, which includes the cash needed for repairs. After renovation, the properties sell for an average of $300,000.
"These are not social workers, but they are doing good stuff," he said. "They're really adding something to the relief of this post-foreclosure debacle."
Opportunities are not limited to Prince William County. In September, prices fell 25 percent in both Loudoun and Fairfax counties compared with a year ago. Sales volume shot up 57 percent in Loudoun and 72 percent in Fairfax.
There's still way too much left on the market, with new foreclosures and short sales still coming. There were more than 15,000 active listings in those jurisdictions in September, according to MRIS. If you're thinking of investing, you have the time to give it proper study.
"If you call it a light at the end of the tunnel, you need to remember it's a pretty long tunnel," Sharp said.
E-mail Elizabeth Razzi atrazzie@washpost.com.
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