Real Estate Investors are a Good Thing
Although Realtors are seen as the dirty scoundrels behind the real estate bubble, let’s admit it also was created by greedy homebuyers and investors — as well as politicians of both parties.
And although real estate investors indeed had a role in the housing crisis, they also could be the biggest part of the solution. As homeownership rates are declining, who will buy the backlog of houses if not real estate investors?
Many Americans, especially in the younger generations, are now too afraid of buying a home. Millions of former owners who already have lost a home in the bubble will be unable to purchase homes for anywhere from five to seven years from the date of foreclosure, according to new federal guidelines.
The administration ironically has done almost everything possible to thwart home purchases by investors in the past four years. It forced banks to tighten lending standards and increase down payments. While some of this was needed to reduce further risk of defaults among investors, in typical government fashion, it went too far.
In 2010, the Environmental Protection Agency created hundreds of pages of regulations about rehabbing homes built prior to 1978 that contain lead-based paint. Investors now must follow extremely difficult procedures and detail those procedures in work journals. Those who fail to adhere to these arduous regulations can be fined $32,000 per violation!
How Incentives Would Work
What we need is for our politicians to get over their fear of voter disapproval and do the right thing. If we are going to create more jobs and boost the economy, it is time to create incentives for investors who purchase foreclosures.
The incentives could include rebates such as the ones that were given to first-time homeowners in 2009, tax breaks in the form of increased depreciation rates, lower interest rates, or grant monies to repair run-down properties and encourage rehab projects.
Another possibility is to lower the long-term capital gains rate to investors who sell their rehabbed properties to their tenants after a certain length of time, say two or three years. This helps tenants who have poor credit to rebuild their loan worthiness, while living in the home that eventually will become theirs. That’s a win-win situation.
There are some safeguards that can be put into place, too. To receive and keep the incentives, the investor will have to retain ownership of the home for at least two years. This will keep flipping at a minimum. The number of homes bought with incentives also could be capped, thereby keeping the large real estate hedge funds from benefiting the most from buying large groups of homes.
But for these incentives to work, the American public is going to have to get over its myopic view of investors being these house-flipping, appraisal-boosting thieves who created the bubble. We also need politicians who have enough foresight to create such legislation, and the courage to stand up to angry voters in the interest of refueling both the housing market and the general economy.
That’s also a win-win situation for all — even the taxpayers who undoubtedly will have to pick up the cost for such legislation — because all of us ultimately benefit. The job growth and increased tax revenues created by such legislation is exactly what the economy needs right now.