As a general rule our investing business focuses on buying distressed real estate properties, rehabing them and renting them to good long term tenants. Over the past year we've been able to generate on average a 20% annual return for each single family house we've purchased using this model.

From time to time we need to generate capital to finance new acquisitions. Flipping retail homes is one way to raise relatively quick capital albeit it can take up to 6 months to get cashed out. Flipping is generally frowned upon by sophisticated investors and I for one generally agree. But there are times when waiting 5 to 10 years before cashing out of a rental property is just too long to wait to unlock your equity in an investment.

We found a good deal on a 4 bedroom 2.5 bath 2800 sq ft home in a strategic area of Michigan for about $57,000. We intend on investing another $35,000 into repairs and improvements. Comparable homes in the area are selling between $130,000 to $150,000 in under 6 months. This would give a net profit of between $38,000 to $58,000 before closing costs are factored in.

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Buying opportunities, for those looking for bargain deals, are still good and should extend well into 2010 and 2011. Housing starts according to the Commerce Dept. have come in lower than expected for 2009.

One would naturally think, as home builders attempt to reduce inventory, that home prices would stabilize. To a certain extent they have stabilized albeit temporary.

First time home buyers who have been sitting on fences, automobiles and motorbikes are now out in force trying to take advantage of the $8,000 tax credit set forth by the U.S. government. Ironically, the tax credit is due to expire on November 30'th. This small flood of home buyers has temporarily created a high demand in low to middle income housing which in turn has created more competition among investors seeking cheap deals on foreclosures and HUD homes.

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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.

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.

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...

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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.

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There are many risks when it comes to property investment as a business. I think sometimes people, especially investors forget the steps involved when obtaining a loan and how this process may open them up for risk. There are many concepts to understand mostly because the bottom-line is determined by capitalization (CAP) rates, return on investments (ROIs), and other net operating incomes.

It makes sense that people overlook the smallest detail when financing a property. It doesn't really matter "why" the loan is needed, if you are seeking a conventional loan from your neighborhood bank or turning to private lenders or hard money; it is still very important that you pay careful attention to the loan you are being offered. I understand you are concerned with flipping the property as quickly as possible; but in doing so you are not as attentive to the type of loan. And thus you find yourself in high-risk situation. Often times brokers may steer you into high-risk deals since they may have pegged you to be a risk-taker.

This opens you up to a different class of loan and areas of predatory lending practices which may incur high fees and other terms or conditions that are not always explained up front. Sometimes loans that allow you to flip properties are called rehab loans as they use hard money via private lenders. This not only means steeper interest rates but an area of lending that is not strictly regulated by the federal or local governments. These hard money loans only work to your benefit when they can get you out of a deal quickly. In other words, these loans only serve the lender because of the amount of leverage that increases the return.

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 This current talk of financial bailout suggests that as a result mortgage rates will fall allowing a surge in home buying especially for first time buyers.  Still one must wonder how long this will last but also what are the long-term impacts for the housing market?  Right now it feels like the lending industry is distressed but this may not be true for very long.  The banks at risk of failing just need to time to recover and it will actually be consumer confidence that drive the economy back to being fruitful again.

There just seems to be a lot flux in the market, organizations don't know if they are coming or going.  This is a period of acquisition and consolidation.  Lehman Brother's is on the auction block, AIG's failure has brought the issue of bailout into the limelight and Bank of America, of course, will remain standing, buying up new pieces for their vast umbrella like Merrill Lynch.  This week has been historic and shocking for the experts even to say, they don't know what should happen.  That's tough.  While so many people grasp this concept, many are putting their ducks in row and wonder if this is a right time to even think about buying a home or new car.  I believe people are hesitant this week but this will change once there is direction and leadership toward resolution.  This is what some experts have to say about the future of home buying:

How does the latest fallout from Wall Street influence mortgage lending rates?  Well, let's take a look.  We can only hope.  In the interim rates will more than likely go down because there is a lot shuffling going as the dust settles and investors look for safety nets in this uncertain market.  Upon many experts advise, this is a time to put our money in real estate investment or income property.  As of last week the 10-year notes went down which means that the yield also decrease but this makes for new opportunities.  Experts expect mortgage rates to follow this trend because historically they usually follow suit.  Expect rates to drop further as more news brakes.  Just within the last week Bankrate.com commented that the 30-year fixed rate was 5.78% down from 6.08% of the previous week.  Just to compare, this rate was 6.5% in August.

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 For a while now, many can spectulate the trouble started at the tail end of 2006 with the mortgage industry busy, the American economy has been struggling, facing uncertain times.  Many understand the historic significance of last week but the implications of a federal bailout has yet to hit home.  With the annoucement that the Federal Reserve will aid the ailing AIG with an $85 billion rescue package, the details seem murkey as more politicians throw in his or her two cents of how this bailout will work and impact the economy.  While the bailout does not favor AIG, the company must hand over 80 percent control of the organization's future business dealings, this new bailout and the status of future bailouts remains in the balance and hands of the federal government who stepped into save the mortgage giants Fannie Mae and Freddie Mac not too long ago with a $100 billion package.  Where this differs and many fail to see a need to save AIG is that Fannie and Freddie were already government controlled and sponsored by federal dollars.  Why should the federal government step in and save a stockholder owned company?  What I am trying to say is that this bailout of finance giants has been a popular trend, starting with a $30 billion loan to Bear Stearns in February.  It is a trend we will see more of and possibly a part of the Federal Reserve's strategy to save the American economy.  I believe many who are struggling to make ends meet, living pay check to pay check, the working class and even the upper class, when push comes to shove and with a cold winter on the way, wish that the Federal Reserve would give the American people a loan.  That $300 incentive check just did not cut it.

While AIG must pay the Federal government back or risk losing control of its interests, many are concerned with the level of government involvement and bascially, the bottom line, who really will be paying for the bailouts?  Is Washington really to blame for this mess?  What about corporate accountability and the management of these organizations?  Something is rotten in Denmark as Shakespeare wrote in Hamlet.  Really it does not add up.  It is cause to worry of how this can be avoided in the future but also how this will impact the American people over the years to come. Many will argue that this has been a long time coming that part of the issue has been a faillure to tighten lending practices and that the subprime market has lead to the downfall of the whole market.  Truly companies like Countrywide should have known better instead of living high on the hog.  We could have avoided a lot of trouble today with bad loans.

So should the federal government step in and save companies riddled by bad behavior in the market place?  This whole crisis begins and ends with the practice of predatory lending and we've known it since before the mortgage buble burst.  As said above, not only Countrywide but other banks allowed their lending practices to be too flexible allowing many under qualified borrowers to purchase items like homes and cars.  Many brokers pushed such products on people who otherwise should not have been buying in the first place.  Many did not look at the full picture and mainly the issue of repayment.  Now the market is suffering due to underperforming loans or bad loans.  Still the bank is at fault, they should have never allowed such practices to continue but they were leveraging on the risk involved as long as the portfolio was performing well, the bank was making money on subprime products.  Now the current situation prevents this demographic of people with blemished credit from establishing any credit and only the prime customers (A & B paper) will prevail.  Many will have to learn to live without or forget about keeping up with the Jones because there will just not be any loans out there for these customers.  It is unfortnate because this takes aways from sales people's commission salaries and many people of these professional will be out of work.  Truly this is why so many people have never believed in the concept of credit in the first place.  It creates a vicious cycle. 

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The so-called days of the mortgage boom are over causing a certain amount if disbelief among industry professionals.  Like a bad hangover from Saturday night wild party, those who gained from historic low interest rates and flexible lending products that spawned the real estate boom at the turn of the millennium, are now slowly waking to reality.  The once profitable sub-prime market is now close to extinction as many institutions known as great powerhouses are no longer in the business to originate loans.  While Wall Street may have had a say in rating these companies poorly, the ones who catered to a specific clientele should have seen a shift coming especially when the funding is no longer available.

So what is the big deal anyway?  All this hoopla has many asking, what is a subprime loan anyway?  How does this influence the mortgage industry? So okay, a subprime mortgage is a real estate loan given to a consumer with less than perfect credit and little or no down payment available.  One must keep in mind the majority of loans in a financial institution's portfolio does not consist of these types of loans but during the mortgage boom, many consumers took out these types of loans as a means of affording the American Dream of homeownership.  These loans broke down the barriers to home ownership because of their flexible lending parameters.  What this has now lead to be a marketplace upside down in loans not considered "A" paper but B, C, D and F translating into a high-risk venture?  As home values have risen so has the risky nature of these loans still being unpaid or falling behind.

So how did the bubble burst so badly, one is also wondering?  As subprime became a more popular loan product, so did the practice of selling it to the consumer become more flexible.  More and more lenders approved borrowers with not only less than perfect credit (small blemishes) but also those with poor track records including larger debit issues like previous foreclosure and automobile repossessions.  What further compounded the issue is the lenders sales device of enticing the poor credit customer by offering homeownership programs with minimum documentation needed known as "stated-income" or "no doc" loans.

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While Congress has been talking recently about finally responding to the foreclosure crisis that is plaguing our economy, attorneys general have been busy helping troubled homeowners at the state level.  Attorneys General are filing lawsuits, lobbying legislatures for tougher mortgage lender laws, and partnering with mortgage servicers and community development groups to help rescue homeowners from foreclosures. As the highest law enforcement officers start demanding action, mortgage servicers are going to have to start paying attention.

 For instance, Illinois Attorney General Lisa Madigan is going after mortgage brokers and lenders who she claims used abusive lending practices. She filed suit in November against the Chicago-based mortgage broker One Source Mortgage, alleging the outfit drew in hundreds of clients by advertising low rates on option adjustable rate mortgages (ARMs) but failed to inform borrowers that those rates would adjust upward, often very quickly.

A loan officer told one borrower his interest rate of 0.95% would last the entire first year of the loan, but it jumped to 7.5% after the first month. In order to help the people who have been misled by their brokers, Madigan helped initiate a bill, now before the state legislature, requiring foreclosure notices to include an explanation of options that borrowers have to help them retain their houses. She has also used her influence with lenders and servicers to step up their foreclosure relief efforts and work closer with community groups offering counseling to at-risk borrowers.

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