First Time Buyers Compete with Investors
I came across this article the other day. On the surface, it’s a fair representation of the market for first time home buyers. The article focuses heavily on the disadvantages felt by first time home buyers competing with investors. But, the issue is not the presence of competition, rather it is the first time home buyer’s readiness to purchase and ability to secure funding.
Funding a First Time Home Purchase
An investor comes to the table prepared to purchase a property with either cash or some form of borrowed money. Most investors have secured lines of credit, liquidity or strong lender relationships that enable the investor to move quickly and aggressively with an offer to purchase. It needs to be stated, that a Seller has but one concern, a valid and capable buyer. Seller’s want their price met, but not as much as they want confidence that the buyer will be able to perform on securing funding. Sellers accept offers on the merits of the purchase price and whether inspection and mortgage contingencies have been defined. Ultimately, a Seller will look for the path of least resistance. And this is why, on discounted properties, a first time home buyer tends to lose to an investor.
Why Investor Purchases are Important for the Economy
Real estate investors look for properties that can be purchased at a discount. And the reason is simple. Investors pursue these properties in order to make money on the renovation and resale of the property. But, there is a perception “flipping” creates a windfall of money on the resale. Maybe so in some markets, but most markets require investors to have several projects with small profit margins and one or two that have good profit margins.
What makes the investor a strong factor for the economy is speed. Investors focus on a short cycle in order to capture as much of the margin as possible. What this means is that the investor will put money to work on the behalf of lending partners which benefits our overall financial system. Additionally, investors work on multiple properties at the same time. Thus, they are using materials and labor exponentially more than a single home buyer will use. Last, the investor is putting a renovated home into inventory which replaces stagnant inventory and creates buyer demand.
First Time Home Buyers are not Running Out of Options
The article suggests that first time home buyers are running out of options. This is not true. If a house was not bought by an investor it would be difficult for a first time home buyer to purchase it. Typically, discounted homes are in a price bracket that reflects some amount of deferred maintenance. If a house doesn’t have a solid (dry) roof, is missing stairs or lacks a functional kitchen; the house may only qualify for a conventional loan. These loans typically require a down payment of 20%. If the house is listed for $150,000, the buyer has to have both a down payment of $30,000 as well as cash for the closing costs, inspections, appraisal, and more. This is why most buyers will turn to an FHA loan that only requires 3.5% of a down payment as well as closing costs.
Rather than buy a $150,000 property using an FHA 203k Streamline loan, a first time home buyer should work with a realtor to find the right property. A house that has been reasonably updated or at least well maintained will provide for a better purchase. And, over time, as homeowners, the buyers can invest in those updates. Updates that can be made by leveraging the equity built up by paying on the mortgage. Maintaining the house and making these updates will help support a new appraised value when the homeowner decides it is time to move on to selling and purchasing a (new) second home.
One Last Point…
There is one last point raised in the article and it is an important one. The role of the investor is to not only seed the market with renovated properties that serve their business goals but equally important is the need to bring these properties back to market that fit the first time buyer category.