Real Estate Investor Opportunity to
Buy Low, Sell High

Historically, 63% of households in the United States own their own homes. Recently, that percentage has risen to 69%, a 6% increase. More families were able to enter the real estate market to purchase a home in the last few years because of the sub-prime mortgage market and Adjustable rate Mortgages (ARMs) that used "tickle" rates. Tickle rates were typically in the 2-3% range for the first 2-3 years at which point they "reset" to the market rate.

A large percentage of these loans were used to buy homes under $250,000 in value. Not only were they price specific, but town and neighborhood specific as well.

The Colorado Division of Housing just released a report that the vacancy rate for real estate such as single-family homes, condominiums, and duplexes dropped to 3.9% and average rents rose by 2% from 2nd quarter to 3rd quarter.

This reset process is going to peak in the first quarter of 2008

It will take a few months for the impact of the resets to be felt. As these families lost their homes, they will be moving to rental properties. Their behavior so far indicates they will prefer to remain in their neighborhoods and, if they live in a single family home today, they will want to continue to live in one after the foreclosure.

If there are 1,000,000 single family homes in the Denver Metropolitan area and 6% of them were purchased with sub-prime loans (60,000) we can expect some percentage of them to lose their homes. There are 300,000 rental units in the market today. If the vacancy rate mentioned by the Colorado Division of Housing is correct (3.9%), then there are around 12,000 units available to absorb the new renters.

The chart below shows that the percentage of resets that went into foreclosure in 2007 is up 50% over 2006. If the market values are soft in this segment, then selling homes with little or no equity will not be easy. We therefore predict more foreclosures and the percentage worsening even further.

As sad as it is for those families, it is still a great opportunity for investors. In many of the hardest hit neighborhoods bank-owned homes are selling for 50% of the value 3 years ago. If you have cash, good credit, want to manage rental properties now is the time to do so.

In north Aurora, there are hundreds of 3 bedroom, 2 bath, 1000 square foot homes available for under $100,000. Homes close to the Fitzsimons project are renting for $1100-1200 per month. An 80% LTV loan for 30 years at 7.5% will have a monthly payment of $450. Allocate some cash for maintenance and management of the property and you have strong cash flow. Wait 4-5 years for the prices to go back to historical levels (in effect doubling in value) and you have a sweet deal.

Buy now. Make the repairs necessary to make it attractive to renters. Rent it out. Wait for price appreciation. Sell.