Government Shutdown Effects on Real Estate Investors

 

government_shutdown_effects_on_real_estate_investorsWhat effects are real estate investors experiencing from the the government shutdown? Those real estate investors who are selling properties to retail buyers, which is typically the case for those investors that buy, fix up and resell, or flip, properties, are the most affected by the shutdown. The government’s closed doors is playing havoc with the loan origination process. And when buyers can’t get loans, real estate transactions don’t close and then real estate investors who are counting on those closings to pay back loans, reimburse renovation costs as well as turn a profit, can run into a financial pinch. The “payday” for many real estate investors is the day of closing and when closings get postponed (or canceled), investors don’t get paid. And when investors are overextended financially, closings need to happen on time to keep their businesses running smoothly.

 

The Loan Verification Holdup

 

The government shutdown is preventing mortgage underwriters from completing two major loan verifications; verification of tax transcripts and social security number verifications. Smart mortgage originators planned ahead and got those verifications done in preparation for a potential shutdown. However, for those who didn’t plan ahead and for all new loans going into underwriting, prospective borrowers are at a standstill until the IRS and Social Security Administrations open back up their doors. And in some cases, such as with USDA loans, even if the tax transcript and social security number verifications were completed before the shutdown, since the local USDA office is closed, the file cannot get a final approval so those deals are literally sitting at the closing company on hold.

 

Should Investors Exclude FHA/VA Buyers?

 

If you are an investor with a property on the market right now and an offer is submitted by a buyer who is getting an FHA or VA loan (federal government backed loan), should you decline the offer unless they can get an conventional loan? It actually doesn’t matter because whether conventional or government backed (FHA or VA), the tax transcripts and social security number verifications are required, so investors don’t gain any advantage by excluding FHA/VA buyers.

 

Does the Shutdown Present Unique Opportunities?

 

As the Rothchilds were credited with stating, “When the streets of Paris bleed, we buy,” when the general public is in panic mode, investing opportunities typically abound. And it’s usually in these times that cash is king. For cash-rich real estate investors, there may be situations where a wholesaler (or normal seller) may need a deal to close really badly because they desperately need that money from the sale and the current buyer hasn’t closed because the loan hasn’t gone through. The cash-is-king investor may be able to step in and buy the deal since the current buyer can’t perform. This happened on a deal yesterday whereby the buyer was supposed to close on Friday, he couldn’t perform and by Tuesday, he had lost the deal to another investor who was more than happy to buy the property.

When you are actively in the game of real estate, when crazy things happen (like the federal government closing their doors), you are in the best position to jump on the opportunities created by those crazy events. It’s difficult to move fast enough otherwise. Another example of this is when hedge funds began buying up everything they could get their hands on several months ago. If you already had deals in your pipeline to sell, you were already in the right place at the right time. But just as fast as the hedge funds came in and bought everything in sight, they disappeared.

 

Long Term Effect?

 

What are the long term effects of the government shutdown to real estate investors? Come October 17th, the US Treasury will supposedly be completely out of cash, which is certainly not good. However, Wall Street analysts contend that the shutdown is small potatoes compared to the repercussions of the federal government defaulting on their debt payments. August 2011 provides a small window into what can happen. This time though, it is predicted that if the US government defaulted on any of its debt obligations, it could throw the country back into a deep recession, stock markets tanking and perhaps even worse economic problems never before experienced. Which is why it is extremely unlikely that Congress would allow that to happen. However, if it did, those real estate investors that didn’t get in on all the great deals of 2011-2012 would have another shot on picking up some great deals while the US entered a double dip economic disaster. But such a financial meltdown would also be quite stressful for many, many people in this country so let’s just hope the government shutdown ends soon.

 

These are just a few example of the effects of the government shutdown to real estate investors. How else? Do you have any other examples? Please comment below:

Comments

  1. Mark Roane says

    Hello Phil I am currently living in a Detroit Suburb and am interested in an upcoming foreclosure auction in Metro Detroit. Its no secret that Detroit is in serious trouble so most of these distressed properties are selling for pennies on the dollar. I am wondering how the shutdown will affect my potential resale of these homes beyond the obvious lack of government funding for potential buyers.

    Mark R.

    • Phil Pustejovsky says

      Depending on how bad the part of town the property is in, you may not be able to get an FHA buyer anyways. I’ve done deals with students in Detroit and in some places, the prices of houses is shockingly low. There is rarely any upside in fixing up and reselling. About the only thing you can do is renovate and then rent Section 8. Plus, my understanding is the city of Detroit is bulldozing certain areas completely. So you have more challenges besides the government shutdown to contend with. In general, my typical rule of thumb is not to own real estate in areas you don’t feel comfortable driving to at night.

  2. Just curious Phil how does this effect the real estate auctions? Does this relate in the same manner and would this be the area investors will capitalize during the shutdown? Just a thought.

    • Sherman Peters says

      Thank you,

    • Phil Pustejovsky says

      My understanding is that auctions will not be affected at all, including those conducted on behalf of federal government agencies. However, depending on how long this drags on, if you buy a property from an auction, fix it up and have the intent to sell to a retail buyer, buyers getting loans are going to be on hold until the government doors open again.

  3. Yes, cash is king. When trying to retail sell a property, *always* offer financing solutions. Be prepared with alternative financing, like carrying back temporary seller financing for a few payments and then sell the note to a note buyer. For example, structure the sale as 2 wrap notes and sell the senior note to pay off the underlying debt and keep the junior note for cash flow. Many note buyers can handle 30-day seasoning and credit score as low as 580.

    Also consider larger properties, like 5-units or more (commercial). Commercial real estate financing of income properties is actually easier and much less regulated than small residential debt financing.

    2 cents worth. Your mileage may vary.

    • Phil Pustejovsky says

      Thanks for sharing. In our experiences, note buyers usually pay pennies on the dollar for 30 day seasoning, low credit score, low down payment loans. Once you have one year of seasoning or more on an owner financed note, then you have something marketable to a note buyer.
      Commercial usually requires much bigger down payments than small residential loans. Plus, we have found commercial to be much less liquid than single family homes.
      Hopefully they get the Govt back up and running soon.

  4. Given the current shutdown, it seems to me that Lease Option assignments are going to be a good option right now…Your thoughts? Will there be any govt. interference with lease assignment deals?

    • Phil Pustejovsky says

      Great investing niche during these times. Thanks for sharing. Selling properties on a Rent to Own to Tenant Buyers is a great way to circumvent the current shutdown.

  5. Phil, what if your a brand new investor just getting started? I was really looking forward to doing some Fix and Flips because I think I would really enjoy that. Now I am scared! So should I just concentrate on wholesales? And is that even safe?

    • Phil Pustejovsky says

      Real estate moves fairly slowly and the Gov’t will get this worked out. I wouldn’t change your plans over this momentary blip.

  6. I say the way to go , is if you have property, then do a lease with option and if it needs work find a buyer with little down but is handy..like a roofer or plumber, etc. They can come in and at no cost to you do that work, BEFORE you sign a lease with option. Just have a regular contact and tell them when they do this and that, show the receipts and this goes for the lease option for 2-5 years. That way you buy time for the house to come up in value with a up each year in what they will pay. But IF they don;t get a loan in that time, continue to rent and let them do other things to continue lease option and the home stays up to date. be sure to verify everything.

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