With the subprime lending market in flux, defaults and foreclosures have been on the rise. For real estate investors this should prove to be a time of great investment opportunity. As investors begin to lick their chops, here are a few watch outs they need to be aware of.
Banks Looking to Bail out Borrowers in Default
Unlike many other times of high default, Banks will be actively looking to avoid foreclosure. This means that while many borrowers may be in default, foreclosure may not follow. If you have not been actively tracking this situation, Congress and other organizations are pushing banks to work with borrowers. All parties are trying to avoid the mass defaults typically associated with increasing mortgage rates couple with higher than normal consumers in Adjustable Rate financing. For more on this, check out the article Banks to the Rescue.
Additionally, investors, who buy foreclosures properties, may have sellers knocking on their door for their property back. In many states borrowers, who are foreclosed on have a certain time period to repay the taxes and other fees owed and reclaim their property, even after it is sold in a foreclosure auction. Investors should be aware of the laws in their state and understand that the risk of this happening is higher now than ever.
Falling Real Estate Prices
Naturally, with increasing defaults comes some decline in overall real estate pricing. Unfortunately this is being coupled with a tighter lending market, making it harder for more consumers to obtain financing. Expect this to keep prices down in even some of the hottest markets. In some markets in California, subprime lending accounted for 1 in 4 homes purchased. Taking subprime lending off the table will result in a 25% decrease in demand in these areas. While the demand drop off will probably not be this significant in most areas, it is certainly something to be aware of in the next year or two.
Furthermore, with banks supporting many borrowers in default, there may be low cost supply on the market. While this will be good for current homeowners, it could mean that more investors will be competing over few default properties. Competing is always a losing proposition for investors, so it might be a good idea to look in less populated areas.
Even though there has been a major blow up in the subprime lending market, investors still need to be wary. This will not be the traditional feeding frenzy investors are accustomed to after a major real estate collapse.
