Why is it?

Question

Okay, I'm a mortgage banker that works primarily with real estate investors.  Why is it in a market where you fight to overpay for property that real estate investors crawl out of the woodwork to start buying (like 2004 and 2005 where investors were content with sometimes less than 7% ROA) compared to the now very soft market when seemingly every investor I know or meet sits on their hands avoiding the best buyers market in years??

What's the deal there?  Isn't that a little (or a lot) like buying buying stock high and selling low?  Isn't their something you learn as a kid to buy cheap??  By the way the credit contraction is keeping more and more people from actually owning homes and driving vacancy rates down.  Properties are now easier to rent and a proper ROA is easy for even a novice real estate investor.

I've been in the mortgage business a pretty long time (more than a dozen years) and I'm just curious if anyone else is puzzled by this.
 :violin:

Account Closed · Answer

I suggest the people you thought were investors are just what I call "BSO's" These are people that chase the next big thing. BSO stands for Bright Shiny Objects.

They chase the next shiny object they see.

If you want to get your business going, you have to seek out the REAL investors, the ones that have been around and know this is the time to buy!

Just like in Wall Street when they mentioned he was short selling NASA stock minutes after the shuttle exploded. You have to sieze opportunity, and now is opportunity. Just flipping isn't as rampant and being a landlord doesn't make for sexy TV shows, so people bailed out.

Account Closed · Answer

Dumb money follows trends.

REI has been around for a long time. There are peaks and falls in the interest levels.

I am glad the dumb money has largely pulled back.

Toby Munk · Answer

I have a 10 year trading background in financial derivatives, mostly options arbitrage and structured commodity deals.

As a trader it is clear that it is much better to buy a stock (real estate) in a rising market than in a falling market. The real estate market is like like a cargo ship. It takes a lot to stop it. So while it was going up chances were that it would keep going up. Just as now chances are that it will keep going down.

Nevertheless I agree that if for REI the cash flow is right one should still do deals. If the projects carry themselves it does not matter if prices go lower in the short term. You have the staying power to see better days and unload the property then.

Michael Rossi · Answer

All4Investors,

I believe the reason is that real estate investing is a fad - like day-trading stocks, MLM, trading tulips, etc.  The serious investors are still buying (I bought 12 in May and will be buying several more in October).  The newbies are waiting for the "bottom" to be declared, which of course means they will miss it.  In addition, millions of newbies and wannabes have already been washed out of the market with the demise of the "flipping" fad (and lost a bunch of money in the process).

If you're trying to improve your mortgage business and have money to lend, then I would suggest joining your local REIA and talking to the SUCCESSFUL investors.

Mike

Jon Holdman · Answer

I would guess its a manifestation of the old investing saw "the trend is your friend."  When prices are going up, it seems like they will always go up, so you're willing to buy at any price.  When they're going down, its seems like they will always go down.  You never want to buy because it will always be cheaper later.

With stocks, dollar cost averaging is a way to deal with these swings.  But, pretty tough to do that with real estate.

Personally, I do think we're just seeing the start of a downturn.  We have lots of ARMs will waiting in the wings to reset.  Lots of properties in foreclosure. I saw a recent statistic that some 60% of houses in this area that enter pre-foreclosure do end up going to the sale.  Harder to get loans, so fewer buyers.

Jon