The State Of The Union: Cash Is King In Us Real Estate - By Craig Studnicky
	Across all sectors of the economy, consumer confidence is as low as I have seen in my 31-year career. The Dow Jones is plummeting, the auto industry is in dire straits, and unemployment is approaching 9%. That is close to the total number of unemployed people in 1929, the time of the Great Depression. President Obama is indeed trying to get people back to work, but until the administration is able to make a dent, people will not regain confidence. This creates fewer buyers in the real estate market, and in the market overall.
A glass is half empty, only if you look at it that way. The US economy is obviously in a severe recession and the world's financial markets are struggling as well, however some opportunities do exist. New federal guidelines will stall the housing recovery in the US, which actually bodes well for European buyers. Education and scrutiny are key to pinpointing these opportunities, and since you have time on your side, an investment in US real estate can be a truly rewarding one. Effective March 1, new Fannie Mae guidelines mandate that local banks will not approve a condominium or community for a Fannie Mae loan unless the building(s) is 70% closed. The reason? Fannie Mae is the clearing house for all US banks and they do not want to add any more bad loans to their existing portfolio of sub prime loans. As a quasi governmental agency due to the recent bailout, they are tightening their belts, thus putting tremendous stress on sellers by making it harder to find buyers if mortgages are not available. Story continues below ↓ Advertisement Remember, a signed contract on a home does not count. In order for a developer to increase his closing rate to achieve the requisite 70%, he has to get the buyer to come to the closing table where they are assigned ownership via a financial and legal transaction. It is the chicken-egg model. If a developer cannot approve buyers for loans, they cannot purchase, which means they will not close on their units, shutting the door on Fannie Mae loan approvals.... In addition to the Fannie Mae amendments, appraisals are creating new challenges in the real estate industry. Banks will not issue a loan unless they are satisfied with the appraisal. They are enacting much more stringent guidelines. Even if a developer does get a buyer to sign a contract, if the appraisal value is lower than the selling price, they have to lower their negotiated price in order for the buyer to obtain the loan. To make it worse, there is no reputable bank that will lend at 80% LTV to foreign buyers anymore. At best, you can finance 50% of the cost. The moral of the story is that if you need to finance your property investment, shop around now but don't make a purchase. Wait, because prices are being further reduced (since developers need to cut deals more than ever to keep their units closing), rates will continue to remain low (you can now obtain 30-year fixed rate loan at 5%), and liquidity will regain vigor (as the closing rate increases). HOWEVER if you have cash, you have a great deal of leverage. Asset values have already dropped 30-50% from 2005, the high watermark, and they will go lower. You can negotiate deals on units because developers need to sell now in order to get enough units closed to apply for Fannie Mae. Smart sellers know buyers are a rare commodity in today's economy so they will want to work with you. Of course, if you are just drawn to US real estate because of the standard of living or the weather in South Florida for example, you can always opt for B paper loans, mortgages from private investors that are readily available but typically come at a higher rate. A reliable mortgage broker can introduce you to well capitalized individuals with money to lend. Craig Studnicky Presindent of Intentaional Sales Group (ISG)