The Expert Podcast

So there's a big controversy about real estate investors buying property and taking property away from homeowners and primary residents of houses. The FHA (Federal Housing Administration) has come out with a rule about foreclosed properties. When a property gets foreclosed, anybody can buy it, and a lot of times, it's investors. The reason why investors buy a lot of foreclosed properties is because when a property is foreclosed, it's sold at an auction. It's not sold through MLS (Multiple Listing Service) or through a realtor where you can do a contract; it's usually auctioned off by a law firm or by the government. They say, "Put bids on the house," and you have to pay cash. So, a lot of times, the buyer is an investor because they have the cash to pay full price for a house, unlike a homebuyer or primary resident.

The government is trying to get more homes into the hands of primary residents, people who will live in them, so they have passed some regulations that prioritize foreclosed properties to be purchased by people who are not investors. They say that non-profits and owner-occupied buyers have first dibs on foreclosed properties that get auctioned off. Well, that's great—they have first dibs—but is that going to change the capability of an owner-occupied buyer to have the cash to buy an auctioned-off property? That's not going to change. The biggest reason that owner-occupied buyers are not purchasing foreclosures is because it's an auction, and they have to pay cash. It's not because there's any rule around it.

For the first 30 days, a foreclosed property can only be bid on by an owner-occupant. Okay, that seems like a good thing. Well, in the past, owner-occupants could bid on it for 30 days. It's not like they were prohibited before; it's just now it's exclusive to owner-occupants. Is that going to make any more owner-occupants show up at the auction? Maybe some, but probably not a lot. But look at the next line. In addition to that, for the first 30 days, approved nonprofits and government entities can bid on it before investors.

Government entities and approved nonprofits—what does that mean? Well, if a property is auctioned off, instead of an investor getting it, it's going to go to the government because really, an owner-occupied buyer is not going to be buying these houses. They're not going to have the cash for it. Some approved non-profits might buy these houses occasionally, but most of them are going to go to the government. So really, this rule and regulation is so that the government can own houses. Is that going to help individuals own houses? Probably not. It's going to probably lead to more government-owned rentals.

Instead of an investment company owning the house and renting it to somebody, or a lot of these foreclosed properties being purchased by an investor to flip them, they fix them up and flip them, making a profit and selling it for more than they paid for it—that's why they're an investor. They also do some repairs because if a property is foreclosed, that means the person did not pay their mortgage payment. If they did not pay their mortgage payment, they certainly were not paying a lot of money on maintenance, repairs, upkeep, or making the house pretty. So, the house is probably an ugly, beat-up house that needs work.

So that's what the investor did. The investor bought it for cash, put some money into it, fixed it up, and resold it at a profit, making it desirable for the retail market. Is that good or bad? That's not really the point, but that's what they did. Now it's going to go to a government entity. So, what is the government entity going to do? Are they going to fix it up? Maybe they will. Are they going to sell it? Are they going to rent it? That's the unknown. If they're going to rent it, all you're doing is taking property that would have gone into the resale market as a sold home and now it's a government rental—it's like a HUD home. Or, they have other plans.

The person interviewed from the FHA says this policy change is critical as the nation continues to address the challenges of a real estate market in which home prices are high, and availability of affordable housing is low, making it difficult for individuals and families to achieve the dream of homeownership. Okay, so it seems like they're trying to support and encourage homeownership. Let's see if they're trying to ensure that at least 50 percent of these properties will be purchased by government entities, nonprofits, and owner-occupied buyers. Well, it doesn't say how that breaks down—how much of this 50 percent is mostly owner-occupied, or is it evenly distributed between the three? That makes a difference.

Here's where they're talking about the condition of the properties. Buyers are not privy to information about the condition of these properties prior to purchase. The administration said that property is sold as-is and may include defects, health or safety hazards, debris, or be located in a flood area. So, this is why investors buy them—they're taking the risk. They buy them cheap. Some of them become disasters. You've seen those home-flipping shows where they start working on it, and they find out the house needs $100,000 worth of work, and they're going to lose money on it, but they make money on the next one.

Now they're talking about mortgages. The FHA told mortgage services they can now offer a 40-year loan term. Well, this doesn't say if it's connected to these properties. After they talk about these properties being as-is hazard properties, it doesn't say what's going to happen to them. It says this program is designed to expedite the disposition of foreclosed properties, reduce the amount of time it's vacant. The program is beneficial to lenders and the department because it reduces costs. It doesn't say what's going to happen to these properties.

We should all keep an eye on this. Even though they want to try to encourage owner-occupied buyers with priority, that's great, but how many more of them are going to be able to buy these houses? And is it just going to take prioritizing these groups over investors? Meaning, these groups are government or nonprofit. Who’s going to really buy it as a nonprofit? Is the inclusion of nonprofit and owner-occupied buyers really just kind of a dilution or laundering of the fact that they're trying to prioritize government buying these houses over investors? Which, if that's the case, that's fine—government entities can buy these houses, but what are they going to do with them? Are they going to sell them or rent them?

Because if they're going to rent them, then why not just let investors buy them and resell them so there's a homeowner who has homeownership security? Because if they're going to rent them, then now you're just creating more tenants, which presumably is not what the FHA wants. The FHA said that they want owner-occupied buyers—they said right here, "families to achieve the dream of homeownership." So, it's unclear whether this is designed to try to get more people to achieve the dream of ownership in the long run, and if that's the case, then the method of getting these houses from the government to the homeowners is unclear.

Because it's probably unrealistic to expect that just because investors are kept out of the loop for 30 days, owner-occupants are going to be jumping in at a higher rate. Why? Because they need cash, and most of them don't have cash. Not only do they need cash, but they also need to be able to withstand the possibility that the house is as-is and includes defects. An investment company that has $10 million in the bank, which buys the house for $180,000, can afford to fix a $60,000 problem. A first-time homeowner who's buying the house for $180,000 and finds out it has a $60,000 crack might not be able to fix it, so that's going to be a problem.

So not only do they need the money, but they also need the financial capital to be able to withstand defects in a property. And it's unknown whether or not this program takes that into account and is going to assist people if and when that happens or if it's still as-is. Take the defects, take it or leave it. Let us know what you think in the comments.