In our previous post, we discussed the unique opportunities that present themselves to home buyers during a recession—opportunities that benefit both traditional buyers and investors. Economic down-turns don’t come without a good deal of challenges, however, and home buyers aren’t exempt from facing difficulties. In part two of our series, we’ll explore these challenges and offer some ways home buyers can mitigate the potential pitfalls of buying during a recession.
Challenges for Traditional Buyers
Purchasers who intend to reside in the home must exercise patience. A number of factors will guide their decision. First, they must have their lending situation in tip top shape. During a recession, lenders will only consider borrowers who are credit worthy and who have sufficient cash reserves to pay for three months of payments in the event that is necessary.
Even if a borrower is credit worthy, has cash reserves and fit all of the lending guidelines, lenders will still scrutinize deals more tightly. The last thing a lender wants is to file for foreclosure and take the property back. The reason for this is that lenders know that finding another buyer for the property during a recession will be next to impossible. Furthermore, managing and maintaining property costs money, and lenders seek to minimize costs at every turn.
Instead, home buyers who intend to reside in the home will need to exercise patience and conduct due diligence. Aligning yourself with an experienced realtor and real estate attorney is essential if you are seeking to purchase property during a recession. A good realtor will find properties where the sellers are motivated and have not encumbered the property with any substantial liens other than the open mortgages. A motivated seller will negotiate more favorably with the potential buyer, reducing the price for inspection issues or other matters which may arise during the contract process.
This also benefits investors who can offer a speedy closing with cash on hand. Investors will be able to undercut buyers who are seeking financing since they have the ability to close quickly. Moreover, many investors are likely raising the capital to buy the property from some of their own investors, so their risk is minimal.
Overall, buyers who intend to reside on the property must measure every move since this is an investment they will make once and possibly never again. The challenges we’ve discussed above are only a few of the complex dynamics that are at work when the real estate market goes into a recession.
Challenges for Investors
For investors, there isn’t really much of a down-side to buying a home during a recession. The low prices present a golden opportunity that essentially expands the market for them. With homeowners becoming more motivated to sell their properties, investors have the ability to pick and choose opportunities that suit their criteria. Because the market opens up so much for them, it is a virtual feeding frenzy among investors.
This can, however, actually work against investors since there are so many of them looking to pay rock-bottom prices. This often drives sellers toward traditional buyers because traditional buyers are less likely to disrupt the home buying process and will simply stay the course. After all, traditional buyers wish to move into the home sooner rather than later.
No matter which side of the ledger you are on, purchasing during a recession can yield favorable results as long as you do your homework and are aware that there is more risk than normal based upon the circumstances that are part and parcel of a recession.
