Experts Say There Could Be Blood In The Water

With all that has been in the news lately about increasing interest rates, lowering of property values, extended days on market of homes for sale, and massive layoffs from big named employers, it is no wonder that there is a sense of fear, and uncertainty in the average person, and especially the average real estate investor.

So, I took advantage of the opportunity to hang out where real estate investors spend their time. As you might suspect, I am a fan of networking and that is exactly what I did. I devoted time to virtual networking events where some of the major players might be in attendance so I could hear their point of view.

I will not divulge names, as let’s face it, no one can actually accurately predict the future, and these parties may be embarrassed if their thought patterns proved to be incorrect (and for everyone’s sake, I hope that they are wrong), but I will share some of what I heard.

I had hoped to hear that the news of lowering property values and slowing down of the market, with the rise in rates was a myth. But that wasn’t the case. What I heard was much different, in fact scary different.

I am not sharing this to pass along doom & gloom feelings, but rather that it was what was spoken of plain and simple, with little punches pulled and quite honestly a slap of reality across the face. I survived investing in the market mess of 2007-2012 (whatever years it worked out to be) but have to tell you that when that was taking place, I would question people in the industry (realtors, other investors, mortgage lenders, appraisers, etc.) as to how bad it really was, and almost all of them told me it was nothing to worry about, that the market was strong. Essentially, they were ALL LYING to me! They either didn’t want to sound like a Negative Nelly, or they were trying to stay positive and NOT accepting the reality of what was taking place. In reality many lost much!

So, lesson learned – don’t believe all of what you hear, do some of your own homework. This time, I figured I would go closer to the source. To the real estate investors that have invested millions of their monies and others in real estate assets and have plenty to lose if the market turns the wrong direction – for too long of a period. Some of these investors, which are well seasoned, also lost plenty, if not all of their assets in the last market mess up.

What I heard, and received goose bumps from it, was that in the opinion of most of these seasoned operators was that it is going to be MESSY! One even said, “There will be blood in the water.” You see, what they laid out sounded to be nothing like the issues of the last market mess, but rather what seemed to be like taking punches from multiple directions simultaneously.

There exist the possibility of the following taking place, all of which can individually have a negative affect on the real estate market, but when combined together can be devastating.

Massive layoffs – this could cause those laid off to fall behind on bills (mortgage, rent, etc.). Negatively impacting landlords cash flow projections.

Slower rise in rental rates – this could affect the landlords projected income to keep pace with the increase in expenses.

Slowdown in new construction – this could cut jobs, create even more shortage of housing and slow down lending to the industry.

Continued rise of interest rates – this could slow down borrowing, increase the payments of those in variable rate mortgages and make it difficult for investors to gain long-term financing that works with the cash flow proforma projections established in order to have positive cash flow (some investors currently in short-term higher rate mortgages may not be able to exit them). This item alone has multiple forms of negative impact in the market.

Increase in DSCR (debt-service-coverage-ratio) underwriting requirements for long-term debt mortgage financing – this will reduce the number of assets and borrowers that can qualify for financing further reducing the number of refinancing loans taking place.

Property value decreases – this will slow down property sales as well as real estate investor property purchases. The current owners will be reluctant to sell and may choose to wait to sell later. Additionally, this will make refinancing properties more difficult.

When you see it laid out the way it was spoken of, you begin to understand why these seasoned operators had fear in their voices. What I recall from the last market mess was that it seemed to affect single family homes much more than multifamily assets. However, this mess seems like it could affect multiple types of housing and asset classes, so there may be no particular type isolated from the results.

I must add that while the conversations were negative, but realistic, there was also the talk of opportunity ahead. It seems that in almost every negative happening, resides the opportunity for a positive spin. Those with access to capital may have the opportunity to capitalize on the loss of others. Foreclosures will likely happen (in many asset classes), investments will likely be lost (or greatly reduced) and some businesses will likely close up (lenders, realtors, those businesses impacted by market slow downs and assets being recovered for non-payment, etc.).

While other business may even be forged, or experience growth. There will likely be deals to be found if you can locate the capital to snatch them up. The question is, will you position yourself to be among those who will be found able to take advantage of opportunities discovered, or will you be one of those found to be negatively impacted?

As with anything, the wise investor listens, researches and tries to stay well informed. Please do not take this post as gospel, as it is the opinion of some seasoned real estate investor operators that felt honest enough to voice their concerns as they have plenty to lose if things continue to move in the wrong direction, while still might have the opportunity to gain at the same time.

Choose your moves wisely and follow your gut (it spared me in the past).

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