The Crisis of Credit Visualized continued.....

Video - Courtesy crisisofcredit.com

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I came across this video which illustrates the cause of the banking crisis and stock market collapse. I found it very informative and easy to understand with excellent graphics and commentary. Video - Courtesy crisisofcredit.com

As an investor I hope I can always learn from my mistakes and help others. I hope together we can all grow stronger moving forward.

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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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When the words "flipping" and "fraud" are mentioned, my mind drifts off to visions of scandalous actions. However in reference to real estate some view the terms as being synonymous with one and other, I would like to point out what they actually are. "Flipping" is basically the idea behind buying something cheap, fixing it up so that it is nicer then it was when you originally bought it, and selling it to someone else for more then you originally paid for it, thus generating a profit. In more complex terms what this is, is the free market exchange of goods and services for valuable consideration or capitalism at work.

An example of flipping would be purchasing a house in need of work for $150,000 in May, renovate the kitchen and bathrooms, and landscape the yard at a cost of $30,000. After renovations, in July (assuming it took 2 months to complete renovations) the house is sold for a price that reflects market value. Keep in mind that you've spent $150,000 buying the house and $30,000 fixing it up, thus leaving you $180,000 behind. Selling the house for $180,000 would allow you to break even, meaning that you just busted your tail fixing up a place for no financial gain (which of course would be foolish). Since you are in this to turn a profit and to get paid for the hard work you put in, look for a price that reflects market value, but also is generous enough to give your checking account a feeling of satisfaction.

Another example of flipping would be if I owned a Best Buy or Circuit City retail electronics store, I would be "flipping" everything from satellite radios, computers, Mp3 players, to televisions and movies to my customers. Businesses flip goods and services to us that we (consumers), in turn, pay for; the profit received is ethical... Even though it feels that the prices we pay for goods and services makes us feel like we are getting robbed ($4.15 national gas price average) we still fork over the money.

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