The September 2012 Fannie Mae Housing Survey shows that there is still a strong desire for home ownership, in spite of housing’s ups and downs over the past few years. The “American Dream” of homeownership is alive and well… Well, at least the dream part is.
Almost half of all renters surveyed indicated that they would prefer to own a home. But half of that number also said that their income has gone down over the past year while their household expenses have gone up. As a result, renters are less able to save for a down payment to buy a home. Further, almost half of all renters surveyed indicated that they have credit issues that would probably keep them from being able to qualify for a home mortgage.
On the one hand, it’s plain from this data that a general housing recovery is being hampered by a combination of economic factors – falling incomes and a rising cost of living, combined with lots of folks who have seen their credit damaged by delinquencies or foreclosures. It’s a tough combination that is sure to dampen any hopes of a general housing market recovery.
But, that being said, what I see developing here is a major market opportunity for real estate investors who are willing to consider creative seller financing strategies or private lending. Indeed it is arguable that creative seller financing is going to be a growing future trend to accommodate a a vast market of potential and motivated buyers who can no longer access institutional credit sources.
We need roughly 1.5 million more homes sales per year than we currently have, to get to some sense of a “normal” housing market, based on historical averages of around 4.5 to 5 million home sales per year. There are, I’m guessing, probably 5 million tenants currently renting an apartment or house that would prefer to own their own home. The demand is there, but they need funding from non-traditional sources in order to make it happen.
Private investors have an unusual opportunity here to increase cash flow and net return on investment by stepping in with seller financing or private lending to accommodate this growing market segment.
Creative finance techniques are nothing new to real estate investors, but they are most often taught as a way for an investor to buy a home, and rarely taught as a way for an investor to sell a home. Yet the cash flow potential is significant, especially in a world where earnings from more traditional savings and investments has been falling.
Individual real estate investors or large, well funded capital companies that are already buying individual foreclosed homes could realize significant returns from creative seller financing. And there are a number of creative strategies that are already commonly used: “Lease with an Option to Buy”, “contract for deed”, “subject to the existing mortgage”, “taking back a note” and many more. I’d be willing to bet that for companies that plan to buy and rent large numbers of homes, selling with financing is likely to produce a much better return on investment than renting will, simply because a selling strategy alleviates the need for property management and maintenance expenses.
For individual “mom and pop” investors, properties sold with creative finance strategies are being used to generate income for specific purposes. For example, a local investor that I know personally has purchased a foreclosed condo in Florida with plans to sell it creatively and use the cash flow from that particular property to fund his daughters college expenses in a few years. Another friend who is not even a full time investor has used a beachfront property he inherited after Hurricane Katrina nearly destroyed it, to retire at the age of 56. He renovated the property, and lives off of the substantial income it generates as a vacation destination.
Few business models offer the flexibility and potential return that creative real estate finance does, for both buyers and sellers. This could be a great way to fill a pent up demand for home ownership that has been effectively removed from the traditional housing market.
Donna S. Robinson is a real estate industry veteran, real estate entrepreneur, author and market analyst located in Atlanta, GA. Follow her on twitter at donnaconsults and read her blog at www.RobinsonRealEstateReport.com