Where have all the”Investors”gone?

By:Dennis Norman

A couple of days ago I was having lunch with a friend of mine,a real estate investor from out of town,and we were discussing the challenges facing his business today.  He buys homes on a wholesale basis then resells them to investors in one of two ways:as is or after a complete rehab and tenant in place (turn-key rental).  He said his biggest challenge has been his investors ability to get financing even very qualified investors that have not had a problem in the past.  Obviously this comes as no surprise to any of us as everyone in the industry is facing this challenge…banks that have historically lent for the purchase of rental property or properties for resale have simply stopped lending. 

For those investors that have in the past used the services of a had money lender many are finding their lenders are no longer lending.  Many hard money lenders have been put out of business by the same sagging real estate market that has clobbered the banks and for the ones that survived but operate based upon lines of credit from banks many are finding the welcome mat at the bank is gone.

My friend said he’s finding the banks that are still willing to lend to his buyers are now want 20%-30% down which will not work for many of his investors.  This is when it finally hit me….the meaning of “investor”has changed dramatically during my 30 years in the real estate business.  For at least the first half of my career an investor was someone that had money to invest and was looking for some place to put it.  In fact after entering the real estate business at the age of 18 my very first client was an investor.  This investor worked for a developer of apartment buildings and had some money saved that he wanted to invest in rental property.  We worked together for years and he built a substantial portfolio.  He did look to leverage his money but he did put money into the deals however.

Sometime after that things changed…maybe a result of late-night infomercials by Dave Del Dotto and Carleton Sheets or others teaching ordinary people how to buy property with no money down or through creative financing methods.  Suddenly “investors”were popping up everywhere…It seems everyone was an “investor”.  In fact you no longer needed to have any money to invest to be an investor.  In fact,as my friend was telling me at lunch,his buyers thought it was unreasonable to put 20% down to buy a rental property. 

Just to make sure I wasn’t out of line here before writing this I thought I better do a little research on the meaning of “investor”.  I went to WikiPedia.Org and found “investor”defined as “any party that makes an INVESTMENT”.  Merriam-Webster defines “investor” as “to commit (money) in order to earn a financial return”.  Clearly I’m on the right path.

Today there are plenty of great opportunities out there in real estate and I think when it comes to residential rental property and the like there is financing available for buyers,albeit much more restrictive and harder to get then in the recent past however a few old basic fundamentals are going to most likely apply:  Investors are going to have to BE investors and have cash to put down on deals as well as adequate credit,income and assets to support the borrowing they are doing.  

So,for the investors out there I would suggest if your business model involves selling property to investors then be very careful and make sure that you have an adequate number of QUALIFIED,REAL Investors that you can sell your property to and don’t count on past peformance as the only proof an investor is real.  I am hearing about hundreds of examples where people have been selling to a pool of investors for the past few years without a hitch but now,more and more,are findig their investors are finding their bank financing has dried up. 

If you are an investor looking to buy property then my suggestion would be to be prepared to put money into each deal.  In addition to making it easier to obtain financing it should also give you more “breathing room”on the deal by limiting debt.  If putting cash into the deal is not a possibility or will put a strain on your finances then I would suggest you sit this one out for a while.

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