Recycling Houses

Believe it or note, a housing shortage is looming. That’s not common knowledge, but it’s coming. Consider the following:

In July 2008, the U.S. Census Bureau released some incredible population projections. Take a look at these numbers:

  1. Projected increase of 135 million people (a 44% increase) in the U.S. by 2050 (to give you perspective, that’s equivalent to the entire populations of Mexico and Canada moving to the United States)
  2. The Census Bureau estimates this population boom will require 52 million new housing units
  3. This amounts to over 1.25 million new housing structures that must be built each year in America just to keep up with the increase in population.

With this looming housing demand coming, let’s look at the status of the present construction industry. New construction has slowed dramatically, and there is nowhere near 1,000,000 new homes being built each year to meet this future demand.

In the present real estate marketplace, an opportunity is looming that will allow remodeling contractors to take advantage of their skill set, and leverage their relationships with subcontractors and suppliers. In most parts of the country, there are thousands of foreclosed properties coming back to lenders, properties that need work that banks will sell at discount prices. The opportunity that is presenting itself now is the purchasing and remodeling of foreclosed and discounted real estate.

Let me share some important information concerning the potential market of foreclosed property. Up until 2003, the mortgage market for interest-only and negative amortization share of mortgage-market originations did not exceed 6%. In 2004, all of that changed:

  • In 2004, 25% of all mortgage originations were interest-only, or negative amortization
  • In 2005, 29% of all mortgage originations were interest-only, or negative amortization
  • In 2006, 23% of all mortgage originations were interest-only, or negative amortization

You know what happened after that. Real estate values continued to climb until 2008, when the market crash took place. With decreasing real estate values starting in 2008 (and continuing in some areas), it is estimated that 25% of homes in the U.S. have mortgages greater than the current appraised value. The key fact here is that most interest-only and negative amortization mortgages have a 5-year recast schedule (5 years from origination).

What’s coming? Foreclosures will continue to occur as the next wave of negative amortization and interest-only mortgages hit maturity (5 years), and homeowners are required to refinance their mortgages. When the mortgage balance is greater than the house value, what will happen? Are these homeowners bringing money to the table to refinance their mortgage?

The answer in most cases is “no”. With homes falling in value, many owners are deciding that maintaining an asset that has negative equity doesn’t make sense. They are letting the banks take these properties back. This is where the opportunity lies.

There is a “perfect storm” taking place in the real estate industry. Home mortgage interest rates are the lowest they have been in 30 years. I went to Google and did a key word search on “home mortgage interest rates”, and there were several offers starting at 3%. This is both a remodeling opportunity, and a first-time home-buyers dream.

Can you take a foreclosed property, do the work on a wholesale basis, and put that property back up for sale? Can you do this 3 or 4 times a year? If you are short on capital, are there investors (past clients) who would be interested in partnering on properties you purchase and remodel at wholesale prices? The answers are yes, yes, and yes.

This could be a win-win-win-win proposition. Let me explain:

  • Banks benefit when they sell foreclosed property
  • Remodelers financially benefit when they remodel these homes and put them back on the market
  • Investors benefit when they can get an excellent return on their investment for a 6 to 12 month loan
  • Home buyers benefit by purchasing newly remodeled homes, with low-market interest rates

Can you do this? I know someone who does this regularly. He is a former remodeling contractor, and he began his own real estate career in 2006. He has made over a million dollars since that time. To show you this is possible, e-mail me and ask for the details.