Lending During a Downturn: What to know?

[Spencer Cornelia]

In 2008, I was a freshman in college and completely ignorant to the real estate world, economy, lending, etc.  During the next few years, the big recession happened and the real estate world was hit hard.  Unfortunately, I only cared about throwing parties, playing baseball, and studying for exams so I missed out on studying the economics of a downturn.

For those who were real estate investors during the last recession and others, what is the lending environment like?

I'm asking selfishly as I am curious how I should position myself as a rehabber/flipper in the event that a downturn begins. But I'd also like to know what to expect out of the buyers in the market. If lending constricts, does that mean investors with less than 5 loan exits won't be able to get loans, or we'll just have lower LTV with higher fees, etc.? Are there the same amount of buyers in the market place? Are there as many transactions taking place, but at just a lower price point?

[Michael Ealy]

In 2008, lenders were not lending. Period.

It was very hard. Even borrowers with 700 credit score with 20% downpayment find it hard to qualify for bank financing as no one wants to lend. Rehabbers went out of business - seriously...some went from flipping houses to flipping burgers. 90%, if not more, of mortgage brokers went out of business.

Those who can buy or can qualify for a mortgage are very picky.

The only rehabbers left are the ones who can buy a house cash (no hard money since HML are also hard to find) fix the house to look like new (no paint/carpet rehabs: talking about major remodels) and sell at 10% BELOW market.

The ones who are buying are truly cash buyers. I was fortunate to have cash investors and partners so I not only survived but thrived.

For commercial properties - things were even crazier. I can talk about that but since majority of BP members are into SFRs (and it seems you are), I will just talk about that.

What do you do to prepare for another 2008?

1. Don't tackle long term developmental projects - just short term fix-n-flips

2. Build a good track record now of real estate investing success and get as many private investors as possible

3. Learn how to do shortsales because there is going to be a resurgence of that in the next recession

Bottomline: What you want to do is to BUILD a WAR CHEST - accumulate CASH and LOTS of it. You can then use the cash to buy bargains because others can't buy them because no one was lending.