I talk a lot about looking in my rear view mirror, and maybe it makes me sound like an old fogey. I often explain how we used creative financing to solve money flow problems back in the 80s and 90s. Well, those old school techniques are coming in mighty handy now that our market has turned south.
There’s a 3-way triangle that makes the real estate industry work. That triangle is made up of the buyer, the seller, and the mortgage company. When one of those three sides gets out of whack, then the other sides of the triangle can’t connect. When the balance of that triangle is disrupted, it creates an opportunity where entrepreneurs can come in with a solution.
For example, 2008 was the most recent serious down turn in the real estate market. The lack of financing produced a huge inventory of houses, so values dropped. With financing unavailable, buyers couldn’t buy and sellers couldn’t sell. It created a huge opportunity for entrepreneurs because we solve problems other people can’t.
Entrepreneurs make the most money when we use creativity to solve problems that traditional thinking can’t fix.
There are some regions and segments of the market that are busy right now. They’re the ones who are financing perfect properties for people with perfect credit. There’s a pent-up inventory for that top layer of the market. But looking at the market overall, we’ve seen a reduction of about 35% in who can get a mortgage. That’s a huge chunk that’s been taken out of the market and it has disrupted things in a big way.
Plus, there are other factors that have changed the real estate game. Around 2012, Hedge fund managers used their huge pot of money to buy houses like crazy. Wholesalers who used to have to rehab their properties before selling could now just flip the contract to the hedge funds without doing the rehab. They made the same profit with a third of the work. It changed the whole business model of wholesaling.
When the hedge fund buyers trailed off around 2015, the HGTV buyer came along to take up the slack. They were enthusiastic about jumping into real estate because it looked fun on TV. But they were not very knowledgeable, so wholesalers were able to dictate the price and continued to make good money.
But with financing tight today, the HGTV guy can’t buy new properties. And he can’t sell the ones he has because his buyers are struggling to get financing through traditional mortgage companies. He’s in a real squeeze.
Fortunately, entrepreneurs who understand creative financing can come to the rescue once again. We’ve put a new spin on these old school techniques so that properties can keep changing hands.
Imagine if you were playing in the outfield in the final inning of the final game of the World Series. Before the pitch is thrown, you run to the far corner of the outfield and stand in exactly the right spot. To everyone’s amazement, when the ball is hit, it flies across the field and lands right in your glove. That’s what it’s like when you understand market conditions and know exactly where things are headed. You don’t have the be the fastest runner if you have the best vision.