Is there hope for first-time buyers post-COVID-19? Part two: The case for

by Clayton Jarvis02 Jun 2020

Last week, Mortgage Professional America looked at the immense challenges facing first-time homebuyers in the COVID-19 age. But it’s not all doom, gloom and hopelessness for America’s prospective buyers. Some feel that by approaching their first properties as real estate investors rather than end users, first-time buyers might not only make that initial purchase easier, but the second and third as well.

Many first-time buyers think of real estate investment as something too complex or risky for the inexperienced, a fair assumption if they are thinking of moving forward with no help from an investor-focused realtor or originator. But with the right people in their corner to help them choose a manageable, appropriate investment strategy, there’s little stopping a qualified borrower from being a successful landlord.

Real estate investing is how Ben Mizes, CEO of Clever purchased his first property, a fourplex in St. Louis, Missouri. Mizes had the same anxieties that any first-time investor has, but he was able to quiet those doubts by educating himself and diving in.

“There’s a little bit of that fear of like, ‘Can I really manage tenants? Can I handle a building like this?’ Most people have to get over that fear that it’s going to be difficult and scary to manage a rental property,” Mizes says. “If you have a plan going in, it’s a lot less scary.”

By purchasing his fourplex as a rental property and living in one of the units, Mizes was able to secure far more house than he would have otherwise. At the time of the purchase, Mizes wasn’t earning enough to buy the fourplex outright, but the rental income the other three units generated helped get him over the finish line with his lender. He put down $7,000 on the $220,000 property and let the rent cheques do the rest of the heavy lifting.

“For the lifetime of me owning that building, I didn’t put a dime into it because I made enough that the rents covered all of my expenses and the mortgage,” says Mizes. “I was effectively saving my rent every month.”

Dealing with tenants can be a deal-breaker for some buyers, but Mizes says there are plenty of ways to smooth out the landlording process. Apps like Cozy can help streamline rent payments and tenant evaluation. There are literally hundreds of books, blogs, YouTube channels and podcasts out there dedicated to making real estate investing more efficient and less stressful. Even just taking a neighborly approach toward tenants can make things easier for everyone involved.

“It can make it a lot more enjoyable if you view them as your neighbors and you’re doing your best to provide a good place for them to live,” says Mizes.

Strike while the iron’s cold

With home selling activity expected to drop by as much as 15 percent in 2020, Fairway’s Ryan Grant also thinks first-timers should be thinking more like investors, who see in an unsettled market not the potential bottoming-out of prices, but the inevitable rebound and future profits.

As Grant explains it, home prices are expected to dip, but only modestly and for what might be a window of only a year or so before they shoot up a projected seven percent by the beginning of 2022. That’s why he thinks now’s the time for first-timers to start acting like their more opportunistic, better capitalized counterparts.

“The one-percenters are going to be jumping in, trying to buy these homes at crazy low interest rates,” Grant says. “They’re going to be gobbling them up because there will be some need for people to sell. And once that period ends, they’re out.”

First-time homebuyers need to act just as quickly, taking advantage of a period of muted demand that has no chance of lasting once the economy recovers and the market returns to normal. Grant says the next six to 12 months of seller queasiness present the perfect opportunity for buyers to try to leverage seller buydowns.

“A lot of our homebuyers are able to have some negotiating power with the seller,” Grant says. By asking buyers for a price concession in line with the amount home values are expected to decrease, buyers can sometimes cover their closing costs and bring their rate down. “We’re getting clients rates at 2.875 percent, with no mortgage insurance and five percent down because we’re using the seller’s funds to buy the rate down and buy leveraging out the mortgage insurance.” Grant says seller buydowns are typically five times more impactful to a buyer’s bottom line than making a lower offer or waiting for prices to fall naturally.

Timing the market is often one of the last skills real estate investors learn. But in this case, the writing’s on the wall: This isn’t 2008. The opportunity to save money on purchases isn’t going to last.

“This quasi balanced-slash-buyer’s market just won’t be around for very long, because when the demand comes back, the inventory’s not going to come back at the same level,” Grant says. “There’ll be way more demand than supply, and then sellers aren’t going to be willing to negotiate because they’ll have multiple offers.”