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Investments

3 dire warnings for emerging real estate investors

Nothing like a little dose of fear

May 14, 2014
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Attendance is strong at the IMN single-family rental forum in Boca Raton, and most of the attendees appear to be made up of the investor class.

Tuesday's blog post focused on some of the more innovative approaches to new financing. And interestingly enough, I've come to learn that a closed-door panel on crowdfunding real estate investments convened yesterday; proof that this is not something to brush off.

Wednesday the mood was less electric and topics seemed to serve more as a cautionary tale for these would-be investors.

Yes, as one panelist stated, a 12% to 22% return in single-family rentals is not unusual -- but it does require plenty of work. And the warning is that these new investors need to be fully aware of what they're walking into.

"Some of these guys are going to be totally wiped out by next year," one attendee told me in the hallway of the Boca Raton Resort & Club.

Investing in real estate, especially in the single-family REO-to-rental space, is fraught with its own set of unique perils.

But panelists seemed to think everything would be fine, as long as emerging investors heed these three warnings.

1. Fear the CFPB

The Consumer Financial Protection Bureau is becoming a a popular topic at conferences. One speaker mentioned to investors that the CFPB will come down hard on anyone who is not compliant.

And it can be bad.

The CFPB, for example, institutes a clear set of rules for servicing the mortgage and investors need to get to know those rules intimately or pay a heavy price.

2. Continue any loss-mit as is

Of particular concern is that investors may not be aware that they cannot shift loss-mitigation strategies if they take over a non-performing loan.

In some cases, investors may think they're investing in just a property, but there is a likelihood the investor could end up with mortgage issues as well.

Peter Slagowitz, CEO of Spurs Capital, stressed that there is no dual-tracking, for example, ever. Doing so lands the investor/servicer in a lot of hot water. For further questions, see warning #1.

3. HAMP defaults are the next shoe to drop

OK, Urban Institute analysts Laurie Goodman and Jun Zhu disagree that HAMP resets, coming around the fourth quarter of 2014, are going to lead to another wave of mortgage defaults. This is because, as part of the program, after a few years the modified rate of 2% goes up by 1% a year until reaching market rate. Goodman and Zhu estimate a 10% increase in the default rate, with 40-50% of affected borrowers receiving an additional modification, suggesting a 5-6% increase in defaults at the resets.

But Ron McMahan, CEO of American Mortgage Investment Partners, is telling investors at the conference that he thinks 75% of all HAMP mods will eventually fail. This will create supply in the nonperforming loan sector and opportunities for investors who get ready.

Another panelist at one point said anyone who invests in any large nonbank, especially any that keep modifying mortgages over and over again to get HAMP incentives, is going to run out of steam. Those investors need to "wake up," he said, and plan an exit strategy.

A possible solution to all of this, and a popular one here, is to try to massage the homeowner into a rental deal, so they can stay put. The use of third-party vendors to maintain the property for the homeowner-turned-renter is also being highly suggested as a must-do for emerging investors.

"It's better to use someone local," as one attendee put it. Another panelist said modifications are not always the answer, though another said to be sure to try all loss-mitigation options out there to satisfy the CFPB.

As the former mentioned, one homeowner owes $400,000 on a $100,000 property. Even with good jobs and wage growth, there is no chance that loan will be paid, he felt. It is only a matter of time before the loan fails, the manager said, and converting the property to a rental may be the best solution — for the homeowner and investor alike. Just don't cross the CFPB when doing so.

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