Impact of Subprime Market on African Americans

Dear Everyone,

I am a great fan of Mellody Hobson. She is the president of Ariel Capital Management, a Chicago-based mutual fund that manages nearly $20 billion for both individual and institutional investors. I admire the fact that she has found success in a "boys' club" industry. I also admire that under her leadership, Ariel has increased its visibility by boldly venturing into new areas, such as providing financial backing for Oprah's Broadway production of The Color Purple. Bravo, Ms. Hobson.

In the April issue of Black Enterprise magazine, Mellody Hobson writes that African American communities will be hard hit in the coming year due to the high numbers of interest-only mortgages granted to African Americans and the oncoming adjustment this year of $1.5 trillion in ARMs (adjustable rate mortgages). She also mentions the annual Ariel/Schwab Black Investor Surveys. These studies consistently show that most African Americans prefer investing in real estate over investing in the stock market.

While Ms. Hobson was writing to encourage African American to invest in the stock market, her two points present opportunities to the observant. Real estate investors are in a position to lessen her predicted financial blow in African American communities by including these communities in their marketing plans. Whether your strategy is obtaining pre-foreclosures or rehabs or rentals, Ms. Hobson's observations suggest that there will be many opportunities to purchase in African American communities.

Offering seller financing to your potential buyers is another opportunity. If it is becoming more difficult for the credit challenged to obtain financing, then you have the option of filling that need. There are a host of seller financing strategies, from holding part of the note (a seller carryback) to allowing your buyer to lease the property before obtaining a mortgage (lease option) to carrying the entire note (contract for deed or land contract, depending on your state). My caveat, particularly aimed at newbie investors, is that this is not a strategy for the faint of heart nor the short of cash. This is not a strategy for you if a missed lease payment would lead to your financial ruin. This is also not a strategy for you if, even with the financial resources to offer seller financing, you would spend sleepless nights wondering if your monthly payments will arrive.

Finally, it is my humble opinion that African Americans are an overlooked source of investing capital. You're leaving money on the table if your investing strategy includes recruiting sources of private money yet you're not doing anything to connect with African Americans. In the 2006 Black Investor survey conducted by Ms. Hobson's firm, 52% of blacks stated they preferred real estate to stocks.

A word to the wise...

Elaine