Bear Market Real Estate Strategies
2020 has become a life-changing event for many. For the last 10 years, the Real Estate market has been on a phenomenal bull market run with prices continually climbing and an extremely competitive buyers market. Up until now for many investors its been difficult to not make money in the real estate market. So many Bull market strategies to choose from. Wholesaling and Vacation market rentals are just some of the Real Estate strategies that really evolved and flourished during this most recent economic cycle. Although these strategies will never get old they will become more difficult and maybe not so practical in a bear real estate market.
Currently as of the date of this article 40 million people are delinquent on their mortgage and rents. Thanks to the CARES ACT there has been a moratorium on foreclosures until the end of the year. This will create a whole new real estate type of bubble and boom at the same time. As the inventory of houses increases and buyer demand decreases, the value of homes and real estate, in general, will decline. At the same time, there will be an increase in activity and movement from fed-up landlords, evicted tenants, and the everyday commerce created by the real estate industry.
This being said it's safe to say there will be a shift in the real estate market and those who were around for the last real estate market correction of 2008 will remember the struggle. During that period of transition, many new strategies emerged. Below I have compiled a small list of a few of the strategies implemented during the previous real estate downturn and new ones that will also be beneficial in the present.
Short sales
Short Sales became super popular in 2008–2013 due to the large inventory of foreclosed homes and distressed values. An influx of cheap and abandoned homes flooding the market caused the real estate to drastically depreciate. In order to liquidate inventory, many lenders accepted less than the amount owed.
A short sale is a sale of real estate in which the net proceeds from selling the property will fall short of the debts secured by liens against the property. In this case, if all lien holders agree to accept less than the amount owed on the debt, a “short” sale of the property can be accomplished.
Shortsales are very timely and tedious but they can create quite a workload and cashflow if managed correctly. Many of these homes become abandoned leaving many viable acquisition options available for seasoned investors with little or no money down.
In 2009–2012 the short sale flip evolved, in where an investor can acquire an abandoned home and would negotiate a short sale with the bank. Once this was achieved the investor could then sell the property for a higher amount. Of course, there are many details involved to have a successful end result.
“Subject-to”
Another strategy used for acquiring properties without a mortgage and very little initial investment required. When you acquire a home “subject-to” you are acquiring the existing mortgage along with the property, and property rights. It means the seller is not paying off the existing mortgage. Instead, the buyer is taking over the payments. The unpaid balance of the existing mortgage is then calculated as part of the buyer’s purchase price.
Under a subject-to agreement, the buyer continues making payments to the seller’s mortgage company. However, there’s no official agreement in place with the lender. The buyer has no legal obligation to make the payments. Should the buyer fail to repay the loan, the home could be lost to foreclosure. However, it would be in the original mortgagee’s name.
Although these are risky for the homeowner, They are beneficial in a circumstance where the home has been abandoned and the homeowner has already assumed the risk, and this strategy may actually improve their credit. One can acquire these for very little out of the pocket expense. They also come with a level of risk to the buyer with the due on sale clause but as usually sophisticated workarounds were implemented.
These were also very popular coming out of the 2007 recession. This is a great and easy way to take control of a property without acquiring a loan. In Some cases, a mortgage that has fallen behind can be brought current with a forbearance agreement or to simply pay the payments in arrears and continue to make the mortgage payment.
Trading default notes
Trading mortgage default notes can be an easy way to generate income in a bear market. Although I have never personally traded notes, I have heard that this can be an extremely lucrative endeavor. Local banks are always looking to cut their losses as soon as possible. Talking to your local commercial bank broker can lead you to some very lucrative trading. Back in 2009, I would often eat lunch with one of my coworkers who was actively trading these high-value assets and doing very well, while other agents were struggling to sell homes at fair market value.
There are several levels of note trading and note trading platforms. As in any endeavor do your own research and see which of the platforms caters to your level of risk and reward. One of the biggest setbacks for the novice or shoestring budget investor is the amount of capital required to acquire the security. But this does not keep someone from locking it in with an option and arbitrating at a higher price for a profit or spread.
Sandwich lease options
This is a great strategy to employ in the case of a default apartment building or Hotel. If one can find an apartment building in default and manage to negotiate a resolution with the mortgage holder or service provider, then the investor can cash flow from the property while trying to trade it. Depending on the terms of the agreement, an investor can make repairs and create the added value. Another term for this type of strategy is known as the Master lease option.
These are even common today everywhere and saw this going on all over Puerto Rico. Spurred by the vacation rental boom. Investors can grab the lease dirt cheap and then instantly pull out equity by converting to vacation rental.
Alternative expenses are usually required like repairs, furniture, utilities, and covering any amenities that will attract the intended tenants.
Investing in Vulture Fund ETF
Investing in the funds takes more analytics and leg work out to the equation, at least less on Property acquisition and development, but more analytics are required for fund performance development. These are for investors who want to invest in Funds and securities that are on the prowl for default and nonperforming assets. Although these funds may be a little riskier right now they are propped up with trillions in capital waiting to invest in the upcoming recession.
There are several funds to choose from and this is not investment advice. Any investment comes with levels of risk that every investor should consider and research prior to investing.
Hope you enjoyed this brief summary of some of the bear market strategies we will be implementing in the coming recession. If you are interested in Investing with us or for more information please feel free to email me at Luis.delmazo@yahoo.com. Happy Investing!
References:
Luis A. del Mazo
www.internationalreadvisors.com
Usrealcoin Investments
787–220–0886
