Minnesota Real Estate Investors Association, Inc.

Everyone knows that as interest rates rise, real estate prices drop.  It is only natural.  If the current interest rate is 4% on a $300,000 loan, the monthly PI (Principle & Interest) payment is $1,432.25.  If the interest rate goes up to 7% and the average buyer can only afford a monthly payment of $1,432.25, then the maximum amount they can borrow goes down to $215,277.40.

This is affectively what has happened over the past year and a half, so why have prices continued to climb?  That’s a great question and can be explained by the extremely low inventory levels.  The level of inventory has been so low for so long that the principles of supply and demand have caused prices to increase dramatically. 

In other words, if interest rates hadn’t risen so much so fast, the average loan balance may have risen to $565,000.  That is what the borrowers could afford based on the current average monthly PI payment of $2,700 and an interest rate of only 4%.

The following chart shows the affect interest rates have on a borrowers ability to pay over the past 18 months.

Yah… Your mortgages are going to cost you more to help offset the cost of people who have bad credit, isn’t that wonderful?  Yes, it’s true, beginning May 1, 2023, upfront fees for loans backed by Fannie Mae and Freddie Mac will be adjusted because of changes in the Loan Level Price Adjustments (LLPAs).

Example, beginning May 1, 2023, a buyer with a good credit score of 750 who puts down 25% on a $400,000 home would now pay 0.375% in fees on a 30-year loan, or $1,125, compared to 0.250%, or $750, under the previous fee rules, which is an increase of $375.

Meanwhile, a buyer with a credit score of 650 putting a 25% down payment on a $400,000 home would now pay 1.5% in fees on a 30-year loan, or $4,500. That compares with 2.75%, or $8,250, under the previous rules, which is a decrease of $3,750.

It is true that the increase to buyers with good credit is a small percentage of the overall loan and the borrowers with poor credit are still paying more, albeit less than before.  However, why should those of us who have worked hard and shown prudent money management and done without some things to build up good credit have to pay to lower the costs of those who have not suffered as much as those of us that have built good credit.

25% of all listing had a price reduction last month and inventory levels are rising. We are still in a sellers’ market, but we are transitioning into a buyers’ market.  When that happens, sellers buyers become picking and stubborn sellers slowly become more receptive.  The first phase of this transition is for sellers to drop their asking prices, and that is starting to happen. 

The next phase, if interest rates remain high, will shock the sellers and if they have to sell, they will drastically drop their price to get a sale and that has a snowball affect on prices.  The only thing that can help the sellers now is for inventory levels to remain low and interest rates to drop a little.

Bank financing is getting harder to qualify for, interest rates are rising, and people are getting scared.  This is exactly what most investors have been waiting for.  Opportunity is brewing, the question is, are you ready for the coming storm? 

Inflation is destroying the value of the dollar. Every time this has happened in the past, people look for other investments and commodities to beat inflation or at lease does not lose too much value from it.  Hard assets like gold and silver tend to do well in times of out-of-control federal spending and inflation.

Real estate is another hard asset that does well over time. This is why so many people are looking to put their money into real estate.  Real estate investors are struggling to find good deals right now, but as the storm approaches, deals will become more readily available, however, the easy bank financing is also drying up.  This presents a problem to investors who have not prepared for this and started to raise their own private financing. 

Having access to private money is a game changer and will separate the doers from the wantabees.  You see most people get into real estate when things are going up because they heard about all the money that can be made in real estate.  However, that money was mad by the dowers who bought when everyone else was getting out and then resold years later to the new investors getting in.  It’s a vicious cycle, the question is, when will you be the buyer?  When everyone is getting out so that you can be the seller when everyone is getting back in, or when everyone is getting back in?

 When you first think of the consequences of rising interest rates, you could naturally conclude that would drive real estate prices down.  Over the long haul, you would be right.  However, when you look at what is going on now as rates are rising, you might be shocked to see that both rates and prices are rising together.

Mortgage rates have been increasing steadily since the begging of the year 2022.  At the beginning of the year, mortgage rates were right around 3.2%.  As of the end of April 2022, mortgage rates have risen to around 5.2%. Some resources are show as high as 6.1% as of this writing.

The interesting thing is that the median sales price for real estate is also increasing. The median home values of Minnesota, my home state is currently $326k, the twin cities metro area is a little higher at $340k. 

So why are prices still increasing at the same time interest rates are also increasing.  To explain that you need to have a little understanding of economics.  In the simplest form, when supply is high and demand is low, rates tend to drop lower to encourage borrowing.  This is one of the tools that the federal reserve uses to spur growt
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I remember the first phone call I got back in March, 2020 from a REIA leader (Real Estate Investors Association) on a Saturday asking me what we were going to do now that they shut down the world and we couldn’t have live events anymore.  At that time I had no idea how to answer that question for 2 reasons.  First reason I wasn’t aware of that because I don’t watch the news and I spend as little time as possible on facebook and other social media platforms because everyone has become so negative.   And the second reason is that we were hosting a live event at that very moment so I told them that we would talk on Monday.

I just assumed that they were talking about their state and that it was not going to affect most of the country.  But by the time I turned a TV on Sunday night, almost the whole country was on lockdown.  That week Vena Jones-Cox from Cincinnati REIA was doing their first Online Main Meeting and there was over 600 people in attendance at that event including myself.  Everyone heard about the Cincinnati REIA and their topic was how to deal with tenant and real estate with all the new rules and restrictions that had been trust upon us in less than a week or 2 weeks for a lot of the country. 

At first it was fun for me and everyone working with new technologies and working through the challenges to adjust to the (don’t yell at me…) new normal.  People were working from home and we had to take all our training session that we have been
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Seller financing is a term that covers a lot of different things. But it basically is a process to purchase or control a property without needing all cash of getting a loan to pay the seller off. Seller financing can be a useful tool in a tight credit market. It allows sellers to move a home faster and get a sizable return on the investment. And buyers may benefit from less stringent qualifying and down payment requirements, more flexible rates, and better loan terms on a home that otherwise might be out of reach.

In a seller financing transaction, the seller takes on the role of the lender. Instead of giving cash to the seller, the seller extends enough credit to the buyer for the purchase price of the home, minus any down payment.

Seller financing can be done in many different ways and with multiple options in the same transaction. The most common form of seller financing is with a Contract for Deed (AKA Agreement for Deed or Land Contract), but there are many alternative options available, including lease options, Subject-To and wrap around mortgages.

A Contract for Deed is simple to understand, you make monthly mortgage payments to the seller directly rather than getting a loan from bank or private lender. Let’s say you agree to pay the seller $100,000 and they agree to a Contract for Deed at a 6% interest rate with a 5 year balloon p
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Something peeked your interest in real estate. Maybe it was the Flip this house, or Flipping Vegas or any other the other 100 reality TV shows that have nothing to do with reality but makes for entertaining TV.  Maybe it was a radio ad from some national guru looking to build their business in your market and they want you to join their team.  Maybe it was an ad on Facebook telling you that it is so simple to make $30k a month without even getting out of bed.  Maybe it was a friend that really did flip properties or a relative that owned several rental properties.

Whatever the reason is that you decided to give real estate investing a try, you soon realized that there is a lot to know and the real estate business can seem overwhelming when you are first starting out.  I know because I felt that way in the beginning and now I mentor students through the minutia all the time.

In one of my early mentoring sessions with my mentor, he said something to me that I just laughed at, at the time but later realized how profound that statement was that he repeated to me over and over until I finally got it.

He said; if you want to get to where I am, you need to KISS your way to Riches.  Keep It Simple Stupid.
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When it comes to making offers, most investors only know how to make one offer at a time.  They usually make an all cash offer, also known as the MAO (Maximum Allowable Offer) or they get a loan from a bank, hard money lender or a private investor.  This strategy has worked fine for investors and if you are only making offers on bank REOs on through the MLS, then a cash/MAO offer is really all you will be able to make.

The average number offers to get one accepted with this approach is 20-40 offers to get one accepted in today’s market for most of the country.  Some more experienced investors have been able to reduce that number down to about 5-10 offers to one acceptance by being very selective on what properties to make offers on.  In other words, they know from experience that certain properties from certain banks or listing agents simply will not accept their offers so they don’t even make the offers. 

The secret to success in the real estate business is making offers.  The problem is that most investors use the same offer process when dealing with sellers directly and they are missing some huge opportunities if they just knew how to create alternative offers that don’t require cashing out the seller.

Ask yourself these two questions:
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There is a lot of confusion out there with newbies and some seasoned investors as to what exactly Wholesaling means.  The easiest way to describe this is to look at the Minnesota State Statue: 82 REAL ESTATE SALES REGULATIONS Sub 55 Definitions. Condensed Version: You cannot sell a property for another for a fee without a real estate license.  So the question is, as a wholesaler, what are you selling?  If you have a property under contract, you can sell your rights to the contract, not the property.  This is done via an assignment agreement which allows the assignee to step into your place as the buyer.  That is the basics of wholesaling. 

Some states actively go after real estate investors for incorrectly wholesaling.  These investors get themselves into trouble because they can’t explain legally what they are doing and therefore say the wrong things, like I am trying to find a buyer for the seller.  That shows intent, and as the previous FBI Director James Comey famously explained, it comes down to intent.

The problem is that your true intentions may not reflect your stated intentions because you don’t understand the legality of what you are doing.  If you just change what you are saying, to reflect your true intentions, then you will avoid a lot of aggravation and harassment from the state.
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