Few felt the financially tragic effects of our economic collapse in a way similar to commission-based real estate agents. Many aim to endure the economic storm with hopes of brighter days to come; however, if agents ignore the market shifts, the sun may never shine again. Changes are many and all of different origin, some direct and others indirect; regardless, time to assess what has happened, forecasting what is to come. In doing so, agents will understand the new dynamics, increasing the ability to flourish in the new real estate climate.
Let’s begin with legislative changes and progress to shifts in consumer mentality. After reviewing both, we will analyze what adjustments in your approach to business are necessary to survival, and moreover, how to take profitable advantage of the situation. The financial overhaul bill (that passed through the senate on July 15th) carries with it a regulation preventing banks from acquiring Credit Default Swaps for mortgages. CDS’s are used to protect banks from default on loans. The protection once allowed banks to provide mortgages to more people with less risk. Next, the new Consumer Protection Financial Bureau will oversee mortgage bonds and examine banks. Our mortgage giants, Fannie Mae and Freddie Mac, who are responsible for 90% of American mortgages, will undergo restructuring, including increased regulation. The government threatens to break apart companies of great size who influence bank lending in some fashion. Do not be misled by the apparent simplicity of these regulations, as the results carry deep influence, penetrating the entire economy.
Since 2007, the state of our economy has crippled and struck fear into the hearts of many Americans, stimulating action from our elected officials. Individuals superficially recognize the steps leading up to our economic misfortune, though a general lack of profound understanding blinds most from recognizing and predicting what such drastic changes will do to consumption spending in our real estate market. Also, there is a heightened fear of home purchase, as many of the players on the way to acquiring a mortgage have been exposed as untrustworthy. All things considered, mortgages will now be much harder to acquire, while Americans are hesitant to buy. The buyers market will be a mere fraction of its previous self.
The turmoil has left real estate sales people caught in limbo, expecting the market to pick up at any minute. However, these new regulations will prevent a quick pickup, regardless of low prices and interest rates. Furthermore, the liquidity in real estate will dissipate. Why? Limiting the actions of Fannie and Freddie constrain the secondary market of mortgages, diminishing a large portion of mortgage activity. Next, removing Credit Default Swaps will force banks to decline individuals who seek mortgage funding – the same individuals who, in the past, would not be concerned with potential rejection. Combined, the effects will reduce the number of loans available to the public AND eliminate the majority of house shoppers, leaving few people with the means, capacity, and willingness to purchase real estate. Regardless, many houses are for sale, and they will eventually be sold. Also, everyone needs a place to live, regardless of mortgage availability. Now that we, in general, see the current and future changes, it is time for my friends, the real estate agents, to capitalize.
Lets rationalize. Loans, for those who can get them, are very inexpensive thanks to the extremely low interest rates. Property is priced very low (thanks to lack of demand), though few can access enough cash to buy. I warn you, DO NOT just blindly expect the market to pick up naturally. Furthermore, when it does pick up, nothing will be the same.
Who are the future buyers?
Cash-rich individuals or companies with strong financial histories will dominate property purchase. The new regulations are designed with a common goal – eliminating risky mortgages to risky borrowers. Expect property purchase primarily from investors. More specifically, investors will dominate the market, as they have the cash to take advantage of low interest rates. Furthermore income property will dominate investment purchase. Investing to “flip” property will no longer be a profitable endeavor, as it will be difficult to find buyers to flip the house to, considering the reduction of the buyers market. Also, houses will trade hands less frequently, so the opportunity to consistently earn commission on sale may fade. Lastly, those unable to qualify for loan will likely become part of the renting population – income property will take over the market! Remember, it’s income property investors who will buy, and renting will increase. Use these forecasts to your advantage.
How to appeal to future buyers
The houses for sale now will eventually sell, though not often, as the loss of real estate liquidity will pit agents against one another in the battle for the dwindling number of listings. In addition, finding buyers will take more time, meaning greater delay between paychecks. Regardless, the easiest sale will be to income property investors.
I suggest situating yourself in an area with a strong renters market – housing statistics are available online for every U.S. city. Find cities close by with many renters. Personally, I suggest areas surrounding colleges and universities, as rental demand rarely declines. Highlight your property listings with the most desirable cash flows. You will serve yourself well to learn to value cash flows with varying rent and occupancy levels. Next, you should learn of the best options to acquire appropriate financing for buyers. The financing terms are critical to ensuring a profitable investment, and if you provide investors with all the info necessary to succeed, chances of sale will skyrocket.
Market your units/houses with detail regarding the cash flows: probable rent, average rent in the area, property taxes, HOA dues, capitalization rate (if done properly) etc. Also, investors are not always located in your area, so advertise online by making your own website and blog, cross promoting with other real estate blogs or investment websites.
Add new activity to your business
It is time to begin managing properties for your investors, for multiple reasons. Firstly, houses simply will not turn over at the rate they once did, leaving you with fewer commission opportunities. Secondly, if your primary clients are investors, the opportunity to manage the purchased property will likely present itself… frequently. Take advantage! With the added income from managed properties, no longer will you claw for sales, desperate for commission checks. Naturally, you will face added competition from real estate agents with the same idea, but provide a competitive advantage by streamlining your management business – use online software. Property management seemingly missed the technological revolution, stubbornly maintaining archaic methods of collecting payment and handling tenant relations. Lower your service fees with increased efficiency. Handle all tenant relations online, and manage your rentals from any locale. Live a good life!
This message is not intended as a means to relish in bad news; the intent is to provide a heads up to those agents still waiting for the old way of operation to suddenly click once again. New laws will not allow your business to operate as it once did, so stay ahead of the game, and take advantage of the recent and upcoming shifts in Planet Real Estate. Rentals, rentals, rentals! That’s what it’s all about now, so make sure to adjust your sales techniques and your daily activity, or be a casualty of this economic battle. This is not a guess or a wild attempt to predict the future – it’s the law. Heed my advice, and, again, live a good life.