Many people are divided on the idea of whether the government should support private business. However as many investors know, the recent crisis in real estate has frozen all liquidity and created a slew of foreclosures that only a select few investors are seeking.
The Houston Chronicle today had an analysis by the AP about why the Obama team could help calm the markets, but it also discussed how the confidence has collapsed in the past few weeks (AP article). The article highlighted how the nature of the bailout changed from its initial scope of buying out the failed assets of banks to investing in banks that provide loans to credit for student, credit cards, and auto loans. By changing the scope of the assets, the Federal government is trying to encourage spending and consumerism. The unfortunate thing is that those policies do not encourage middle class and lower income individuals to learn how to save and promote fiscal responsibility. The belief that easy credit was available has created an economy where people lived beyond their means.
As a property manager, I have often talked to prospective tenants who are looking for homes. The thing is that most people have a distorted view of home ownership. I have seen people who are afraid of background checks for rental due to their credit issues, but they some how believe that they plan to fix their credit within a year or two and buy a home. Most of these people do not understand how difficult that the process of homeownership will be as we emerge from these difficult economic times.
I have had prospective tenants who call for homes request “owner financing or lease to own” deals, but those types of deals are no longer an easy thing to get. Due to some changes in regulation, the rules of providing these kinds of deals are much more convoluted. In fact, standard realtor leases have built in clauses that state that you should not write lease options in your standard lease. You have to go out and get a legal document (hopefully reviewed by a lawyer), if you want to pursue those types of deals. People have to provide statements showing how much money is being applied to equity versus interest. Additionally, you cannot provide contract for deed deals (where the purchaser gets no equity till all payments are made) here in Texas due to abuse by others in the past. These reforms have definitely made those kinds of arrangements much more difficult to come by.
Moreover, with the scope of the bailout changing from saving failed assets to provide more liquidity, these assets will remain on the books of these banks. Banks do not provide upkeep or repair these properties. In certain areas with high concentrations, this could create a downward slide towards creating slums. I have a few investors who own condos in communities with high foreclosures, and this has created a very slum like atmosphere which has made it difficult to attract good tenants. The foreclosed units are often in very bad conditions with broken windows or often vandalized. In fact, the units are often havens for squatters, and this only creates a spiral downward for the other units. As tenants flee and owners sell, the prices for the properties start a downward spiral.
Now other threat looms, the city of Houston is working to close down complexes with high crime and other issues. The city puts the responsibility on the owners of these complexes to improve conditions, but many cannot afford to put in the high levels of security that are required to remove these elements, which then leads the city to foreclose those properties. In Houston, we have heard and witnessed several complexes that the city has held meeting with owners or threatened to close the complex.
What are the solutions? It is not an easy answer. The truth is that these large complexes will need to be bought by consolidated investor groups and then with consolidation of units create the appropriate tenant mix. This is done by screening tenants (criminal, proof of income, rental history), enforcing eviction policy, and being willing to slowly fill up property to get that appropriate mix of tenants. It is not an easy solution or quick fix.
However while these assets remain in the hands of banks and liquidity is difficult to achieve, there will be for the foreseeable future difficulties for condo complexes. Sometimes the best medicine is time, but not many people are willing to take the medicine because it is bitter.
Posted by ashokalion 
