These days, I encounter so many real estate investors who are sitting on their capital even though they know they are missing out on what many believe will be one of the biggest opportunities in their market during their lifetime. They tell me they desperately want to invest in both fix-and-flip deals and buy-and-hold rentals, but they are worried about “the F-word”.
Now, before you stop reading because you think I’m about to start swearing and cursing, go ahead and finish this sentence and the next. The F-word is not what you think it is; the F-word is forbearance. Specifically, federal mortgage forbearance, but most investors do not realize that most of the information out there on this topic is limited to mortgage forbearance. Instead, they think that federal forbearance (yep, two F’s) means housing forbearance in general, or universal forbearance on paying rent or their mortgage.
This, as you can probably see, is going to create a problem for a lot of people – both as residents/homeowners and real estate investors. After all, if people think they have the power of the federal government on their side when they decide not to pay rent or a mortgage, then they are not likely to back down. And, given that mortgage forbearance is not universal and does not necessarily apply to rent, both populations are going to have some serious trouble working out how to handle this issue.
Real estate investors can see how they might be tempted to just sit out the current housing situation – including the ability to get great deals, build up and protect communities, and provide affordable housing – because of fear you will not get your rents or your loan payments from tenants and borrowers. However, before you assume that forbearance means that as a real estate investor, you are subject to another “f word” I would never say, take a look at these three important facts about forbearance:
Formal forbearance applies to households holding federally backed mortgages
This means that if a homeowner has a home mortgage on a property and the mortgage is backed by Fannie Mae, Freddie Mac, or the FHA, then that homeowner may qualify for forbearance. It does not mean that no one ever has to pay their mortgage again. In fact, the reason only Fannie, Freddie, and FHA loans are included in federal forbearance is that in general, borrowers who have gotten loans through these programs have been more heavily vetted and tend to be better qualified borrowers than others. So, if you are not making private loans right now because you think your borrowers will “cash in” by calling forbearance on the loan, you can breathe easier on that count. Your private loans are not part of the federal forbearance program.
Rent strikes are not part of sanctioned forbearance
There are many rent moratoriums in place at this time because health officials fear that tenants who are evicted from their homes because of their inability to pay rent could end up in group-living situations that put more people at risk of infection. Also, about 36 million people are out of work, so a lot of states and cities decided that would be too many evictions and formally declared moratoria on them. These local and state regulations have led many tenants to believe they have a “right” not to pay rent and even to organize “rent strikes” to encourage others in their communities not to pay rent either – regardless of whether they have the funds to pay.
While this is troubling and does represent a problematic behavior, it is not tenants’ “right” to forgo paying rent and, furthermore, there are a number of exceptions designed to protect landlords from tenants simply opting out of paying rent and abusing the system. So, while you might have to make tough decisions about evictions at this time, the concept that the federal government is endorsing nonpayment of rents is dead wrong.
Forbearance (rental and mortgage) is not a “free ride” for anyone
Most real estate investors, homeowners, and tenants have no idea that forbearance can actually create serious credit problems for them for more than a year after they exercise their ability to freeze payments on mortgages or rents. The CARES Act that Congress passed at the end of March says that missed payments that are identified as being a result of the COVID-19 pandemic are not to be reported as late. As a result, theoretically someone missing rent payments or mortgage payments might believe they cannot be penalized for doing so now or in the future. However, many lenders and landlords have found that they can note in the “comments section” on a loan that a payment or multiple payments were late during this time period. This means that if a renter opts not to pay and abuses the system, you do have some recourse even if you are legally prohibited from reporting them to a credit agency.
Of course, our industry is changing right now just like everything else. Forbearance is not the only thing to consider when deciding whether to get involved in rentals or flipping projects. If you want to learn more about how to get extra protection for your capital while working with a group with more than 20 years in the real estate space, visit PIPGroup.com for more information.