Posted by: Nick Johnson in Single Families, Remodel, Rehab, Recession, Real Estate Investment, Real Estate Agents, Private Lender, Preforeclosure, Offer, Motivated Sellers, Mortgage, Market Prediction, Investment, HUD, Hard Money Lender, Getting Started, FSBO, Foreclosure, Financing, Economy, Due Dilligence, Bank Owned on
Feb 18, 2009
Over the past 12 months my partners and I have been buying single family home foreclosures. Homes are selling for deep discounts and providing high cash-flow rates once rented. Our strategy is not to buy and flip, but to buy, rehab then rent to provide cash-flow and capital appreciation. On the surface this may seem as easy as drinking coffee because of the high number of foreclosures available. But don't be fooled with high quantity and low prices. Buying foreclosure properties is not as easy as it may seem. Buying houses for cash has been our strategy which is one way to up your chances of success. Refer to my previous article "Buying Real Estate With All-Cash" In todays article I'll outline another strategy that when paired with all-cash works for us.
Relieving Some of the Burden
Buying homes at deep discounts for cash relieves vacancy pressure as there is no unerlying mortgage. You may still have a lean on the property held by a private lender but hopefully you have worked out the terms so that you have 60-90 days until your first interest payment. Racing out to find a tenant before your first payment is no longer a pressing issue. You can be more choosy when screening tenants. You can hold closer to your asking rent price and not decrease it just to get the property occupied. You can save money by performing more of the rehab yourself. These are just a few of the benefits.
The Problem With Real Estate Agents
As easy as it might seem to buy real estate at low prices, a problem has arrisen that must be addressed if we are to successfully close deals with banks. I have found, as with many of my collegues that seller real estate agents have all the control when it comes to you submitting your offer, deciphering which offers to submit, how much information they tell you ahead of time, and lets face it some blatently do nothing. As a buyer in the past I have typically used a buying real estate agent to help me track down candidate properties, perform showings and leg work. As a result I did not close many deals dispite offering near or above asking price. The reason...
Posted by: Nick Johnson in Rehab Money, Rehab, Recession, Offer, Motivated Sellers, Mortgage, Market Prediction, Investment, Getting Started, Foreclosure, Financing, Economy, Due Dilligence, Bank Owned on
Feb 03, 2009
In an up and down market there are those investors that will dig up opportunities regardless of the state of the economy. In the current climate banks are holding on to their cash with a wait and see attitude. Savvy investors are finding that buying with "All-cash" works as a viable strategy for acquiring residential and commercial bank owned properties. Investors with a wait and see attitude for institutional lending and financing are missing a great opportunity to buy while everything is on sale. Rock bottom prices in the residential and commercial markets in part have been driven down by the scarce availability of credit.
A Hostile Lending Environment
Currently, savings and loan banks, an alternative to commercial lending institutions and private lenders, will typically finance up to 65-70% percent of property values. Buyers in some cases are required to bring 30-35% to the closing table to even be considered. The Commercial Mortgage-Backed Securities (CMBS) market which has traditionally produced many lenders eager to compete for loans has been stalled since the 4'th quarter of 2007. For example: In the first 3 quarters of 2008 only $12 to $13 billion worth of commercial loans were securitized. Already, 2009 is on its way to having the lowest production of securitized commercial loans in 10 years as stated by Commercial Real Estate Direct. Some banks, in order to finace a new project, are requiring developers to pre-lease roughly 70 percent of office/retail units and housing. Shorter amortization periods and higher interest rates added to the mix creates the perfect storm for an even more hostile lending environment.
A landlord or property manager has certain responsibilities toward the tenants of each rental. They are expected to provide an inhabitable and peaceful space for each tenant to reside. These invaluable rights of tenants have prompted many states to create renter's rights and these laws protect and govern the proper care of rental properties. These laws ensure the landlord follows through. Still generally speaking the proper care of rental property by the landlord or property manager falls into two categories of maintenance and repair. It is important to distinguish the differences between the two.
Many people think along the lines that repair to the rental property includes every small detail when truly there are different levels of importance. Generally speaking repair would fall under if anything on the property breaks, malfunctions or fails to provide a service. Then the landlord or property manager is responsible for repair as soon as possible. Renter's rights include that the tenant should not be inconvenienced by such problems. With this in mind, there are such repairs that fall under the necessities of daily life, well being and hygiene.
These include clean running hot and cold water, air-conditioning and good aeration. In this respect, the landlord should maintain these items on a consistent basis so that in the long run, repairs are not costly to the property owner. Faulty plumbing and electrical can cause not only a tenant to leave and break a lease; end of rental income but also can be a violation of housing authority codes and result in legal and civil actions. Still there is a fine line for the landlord and proactive care.
It should come as no surprise that investors of all sorts are rushing to the real estate sector to cash in, especially since this sector is outperforming many other instruments.
In short order, profit can be realized by the reselling of a property or by long term leasing of a property. This is a great way to generate revenue as your equity on the property builds.
Despite the options, investment properties can still prove to be hard to find, but that does not mean it is impossible. Employing the right strategy for your market can still yield sizable revenue streams, even in depresses markets.
Generally, a 20 to 30 percent spread between your costs and resale price will yield a handsome profit. This would mitigate any sort of inflated values due to an industry bubble and added costs like closing fees and repairs.
The most favorable buying situation for a buyer involves a vested seller with little time on his or her hands to spend in the actual selling of a property. Because they have equity built in the house, and they are motivated to divest themselves of it, they are more likely to sell far below market value.
Renters may think that because you pay your rent in full and on time every week, there's no way you could ever be evicted. But with the current housing crisis in the U.S., this isn't a safe bet.
The upsurge in foreclosures isn't just affecting homes owned by the people who live in them but is also causing trouble for renters when their landlords lose the home due to trouble paying the mortgage. According to the Mortgage Bankers Association, nearly 20 percent of recent foreclosures have been against borrowers who are renting their home to another individual or family.
Lawyers who specializing in helping renters with problems have said that these types of eviction cases are on the rise. For instance, in recent months, one in four calls about housing matters to the Legal Services of Greater Miami's renter advocacy phone line has been about foreclosures and possible evictions. The group says the rate of these types of complaints is up sharply from last year.
Investors who want to make a lot of money fast with no money down are often interested in knowing more about real estate foreclosures. They want to know how to buy these properties and how to make a profit from them. Foreclosures can be a good place to invest for quick growth with little or no money down, but you need to know all the trade offs to manage your risk as well.
A variety of approaches can be used to invest in foreclosure properties. Purchasing one of these properties, fixing it up and renting it out is one of the most popular approaches. The investor becomes a landlord and hopes to create a positive monthly cash flow. The investor also assumes all the responsibility that comes along with being a landlord, however.
Another approach is to find a fixer-upper home that's gone into foreclosure. The investor spends money to improve the property and then sells it, hopefully at a profit.
A third approach is purchasing a foreclosed property at a low price and immediately selling it at a higher price. This can be done by "taking back" a mortgage. For example, at foreclosure, a house worth $100,000 may be sold to an investor for $50,000. Say the investor puts down 10 percent and assumes or creates a new mortgage for $45,000. The investor then markets the home at a discount, perhaps $80,000, offering 100-percent seller financing.
Because the house being advertised for $80,000 is comparable to other homes in the area that are priced at $100,000, the investor will be pulling in bargain-hunting potential buyers. Once a new buyer is found, the investor will take a promissory note from the new purchaser for $80,000. The investor has now created a $35,000 note for himself. This is the difference between the $80,000 sale price and the investor's original $45,000 mortgage). The new buyer makes payments to the investor for an $80,000 loan, and the investor makes payments on the original $45,000 loan.
James and I started out in real estate business with, knocking on doors together for listings. We were unsophisticated and dirt poor. Over the years, James acquired a few properties and opened a brokerage office and managed his own properties. After a few successful and fun years, he went on his separate ways. We both continued in the real estate industry and continued to purchase properties to build our own portfolios. However, we were different in our strategies and went about our own business. One of the reasons this story is worth sharing is that when James died at age 75, he left many friends and family a financially secure family after leading a full life of doing whatever he wanted for the past twenty five years. How did he do it?
In the early days, James was a volume dealer. He purchased as many properties as he could by taking titles subject to existing loans. He made a decent living, but James was much more methodical in his approach, only acquiring houses for specific reasons. James rarely took big chances. His goal was to try to buy ten houses every year and he had a system that took care of all his financial needs and wants. The sale of five houses would be enough to support his family. James also he kept five houses as rentals for long term equity growth. He always used seller financing and refused to buy a house that didn't produce positive cash flow after all the costs of ownership.
Over the years, James' position continually upgraded by selling off older, smaller houses that had less value while keeping the larger, higher value houses. This steady and cautious approach always produced enough net income to support his family comfortably. With that as a base, James used as much of his remaining money as he could to pay down personal and mortgage debts.
Section 8, also called the Housing Choice Voucher Program, is a Federal housing program which provides housing assistance to low-income renters and homeowners. This assistance comes in the form of the city pays the rent, and the federal government reimburses the city for that rent money.
If you are considering renting to Section 8 tenants, you first need to understand how the program works. There may be more in the process and more paperwork, but once you understand the process, there are usually few problems.
Most Section 8 renters are single mothers with children or grandmothers with grandchildren. These renters receive vouchers for housing costs, usually until the children are grown. However, the tenant's income will affect how much of the rent is paid by the government. Having a low-income tenant can actually be a bonus, since the government will pay most of the rent, and the government always pays on time.
Wholesaling or "flipping" a property involves finding a fixer-upper, snapping it up, and immediately reselling it to another investor who will rehab the property and make a profit from the improvements. There below are tips for those who want to get started with wholesaling.
The first step in wholesaling is finding a bargain or "distressed" property. These are often FSBOs (For Sale By Owner's) or properties listed on the MLS (Multiple Listing Service). The most important step, though, is making the offer. You can't make a profit if you don't make an offer.
You must keep the customer- the ultimate buyer who will be doing the renovations- in mind when you make your offer. Some wholesalers use a speculative strategy and make large amounts of money off one deal, but a more conservative strategy often nets as much income when it's applied steadily over many deals.
Let's play make-believe, shall we? It's a fairy tale with a happy ending, no wicked step-mothers, and no poisoned apples. Picture if you will...
A confident and eager real estate mogul-in-training- one that looks a lot like you!- with a $5000 check burning a hole in a briefcase. Also in that briefcase is a signed contract that will generate $250 monthly Positive Cash Flow. It gets even better! Now imagine that the contract is on a property you don't even own, and you don't have any back-breaking work or maintenance to worry about in the near-future. After hearing the good news, your partner is ecstatic and can't wait to share in celebrating this triumph. You're on your way to vast riches, and it all started with this first Lease Purchase deal, and you plan on doing it again soon
How did you get to this point in your real estate career? Through hard work, studying the market, and setting your crosshairs on a beautiful property with everything that a tenant would want. You keenly employed the art of negotiation you've been honing in so many other deals, and you came out on top. Your deal is good for two years, during which you have the rights to the property and the revenue generated by tenants, and all it will cost you is one month's rent. The Sandwich Lease, the one that binds the occupant, is placing a $5000 non-refundable Option-to-Buy in your hand. This type of lease can work really well with a well-written contract, giving you control of the property. You can also include a Specialized Assignment clause that allows you to rent it out, and you keep the money! Once you consider the $5000 Option-To-Buy check and the rental lease, you're practically making money hand over fist. All while not having to encounter any deed transfers or costs associated with titles. If this sounds too good to be true, you may be on to something...
