"$hort $ale"
The new buzz word in the real estate investing world. Where everyone is going to cash in on the foreclosure market. Realtors are afraid of short sales and investors think it's the new thing. Short Sales are not new and they are only one facet of investing in pre-foreclosures. A Short Sale is when a lender agrees to accept less than the balance due on a loan.
When a property owner finds themselves unable to make their mortgage payment and their loan becomes more than 30 days late, the lender has a non-performing loan. When the non-performing loan is more than 90 days late the lender will generally initiate foreclosure proceedings which will result in a forced liquidation of the property. Traditionally, a foreclosure sale at the local county court house. Generally the lender will be the high bidder at the foreclosure auction and the property becomes "Bank Owned" or an REO (Real Estate Owned).
Lenders are in the business of lending money not the business of owning real estate and all the costs associated with owning a vacant house. Accepting a lesser amount than the balance due may be preferable to foreclosing and owning a vacant property.
A lender will not just accept any offer to avoid having an REO Property. They are looking at the numbers and if a short offer nets the lender more money than the foreclosure, they will usually do the deal. It takes a great deal of time and research to do a short sale. Knowledge of the Loan Product is paramount. The loan product determines how the lender the disposal of the property. There are properties that the banks will not short and there are properties that the banks will not foreclose on. Loan Product is FHA, VA, Fannie Mae, Freddie Mac, Conventional, PMI, and the list goes on. If you don't know the loan product, don't waste your time working a short sale.
I've got a FHA pre-foreclosure listed in the local MLS and another realtor called me to say that his client wanted to make an offer. I informed him that this was an FHA loan and that there is a minimum amount that the lender can accept. His offer was $18k below that and his comment was that sometimes the banks just want to unload these properties. The problem here was that he did not research what I gave him about a FHA pre-foreclosure and this property was not even foreclosed on yet and the bank can't "unload" it. This offer from an arrogant realtor was a gross waste of my time. You have got to understand Loan Product.
Before deciding to jump into the world of short sales and start making offers, take the time to learn your states foreclosure laws, procedures and time lines. You need to know if you live in a short time-frame state or a long time-frame state. Are you in a Deed of Trust State or a Mortgage State, Judicial or Non-Judicial. Doing your homework ahead of time can keep you from making serious mistakes that can cost thousands in lost profits.
Sunday, August 31, 2008
Friday, August 29, 2008
Thursday, August 28, 2008
Good Debt vs. Bad Debt
Just what is Good Debt?
Good Debt is debt that allows you to create a positive cash flow.
Bad Debt is... everything else.
Credit cards are the worst form of bad debt. Now I am speaking of the spending habits of the general American public that has been brought up in and trained in the Industrial Age way of thinking. From the teenage years we have been taught that we need credit. "Get a car loan to build your credit," or " Get a credit card so that you can start building your credit," and this is a good one "Buy a house so that you can have a tax deduction." Yes, we need good credit. These are ways to obtain a credit history and thus a credit rating but these are only half truths. If we don't teach that teenager that a credit card is for needed purchases when cash is not available or for emergencies, then we are teaching instant gratification with out realizing just how fast the balance can and does grow.
We are living at a time that I think someone that can fog up a mirror can get a new car loan. Again, instant gratification on a monthly installment plan.
Interest. Simple or Compound. I would bet that I would be hard pressed to find many college students that could tell me the difference. Interest is a fee, paid on borrowed capital.
A credit card allows us to purchase goods and services and pay a "minimum" monthly payment. The payment is very affordable. The problem is that the interest is compounded daily. That means when we make the minimum payment due we have a balance left that is accruing interest daily on the unpaid balance and the balance continues to get bigger not smaller.
A home mortgage is a simple interest loan on an appreciating asset that we can get a tax deduction on the interest paid in the tax year. Assuming that the property will appreciate to a value that exceeds the amount of interest paid over the life of the loan. The idea of a tax deduction is a great selling feature but again the interest paid over the life of the loan is much more that the tax deduction and the appreciation of value combined. NOTE: The house that you live in is not an asset. It's a necessity. It's better than renting but it can not cash flow. If we were to buy a modest house, pay it off and then invest the amount of monthly payment in an interest bearing account, we can make more than the tax deduction would save. It's how the rich get richer.
I believe we have become a society that buys on emotion and the ability to make the monthly payment with out caring what the overall price paid actually is. If we were to save for the car and the house and "live with-in our means" we would be far better off.
I read an article this week that said that 54% of Americans carry a credit card balance of more that $15,000. Another story was on the current mortgage situation where a lady was losing her house. She couldn't make the monthly mortgage payment. When we got further down into her story she had $40,000 in credit card debt, $60,000 in school loans and a car payment. The $900 +/- mortgage payment was not the problem here. It was the out of control spending.
The mortgage crisis is not really a crisis. Yes it is a problem that has grow to exponential proportions, but it is because of home buyers were able to buy homes way out of their price range. The payments were affordable at the time of purchase. Low interest rates, Adjustable Rate Mortgages (ARM's) and interest only loans are just a few of the products offered to home buyers to entice them to purchase more home that they could afford. Then, life happened. Companies downsized, the kids got sick, the tickler period on the ARM loan came to an end before the homeowner could refinance the loan to a fixed rate. Yes, the mortgage companies are to blame so is Wall Street, unethical mortgage brokers and the general American public buying the biggest and most expensive home with a monthly payment they could afford at the time of the emotional purchase.
That is all Bad Debt.
There is such a thing as Good Debt. Good debt allows a business owner enough working capital to make monthly overhead payments while building a business that will eventually produce a positive cash flow. An interest only loan allows a real estate investor the funds to purchase and rehab a property to sell at a higher price and thus make a profit greater than the interest paid on the loan. An investor can also have a mortgage on a property that is rented out to tenants for more money than the mortgage payment. This is called a positive cash flow. A lease payment, be it for a building, vehicle or equipment can be either bad debt or good debt. Consult a competent CPA before leasing anything.
Operating a business or buying property requires capital (money). Borrowing this capital, even with a high interest rate gives the business owner/investor leverage. This is referred to as using money to make money or using Other People's Money (OPM).
The biggest thing that gets under my skin is that we are not teaching our children about finances. How could we? We have become comfortable with living paycheck to paycheck. We should be teaching our teenagers how to balance a checkbook, what a balance statement is and how to read one instead of allowing them to be bombarded with multiple credit cards with ungodly limits. By the time kids get out of college they have acquired so much debt that they spend the rest of their lives just trying to get their head above the water. We need to teach them to pay with cash. Save for that new or used car. Here's an idea you don't hear too often - if at all. Get a loan (good debt) to purchase an asset that produces enough free cash flow to pay for that new car, house, boat or what ever it is we desire.
Remember if you want to live like the rich, you have to live like the rich. They don't accumulate bad debt.
Zig Ziglar said that You don't "pay the price" for success - you enjoy the benefits of success.
There are two excellent learning games that teach financial literacy. One is the Millionaire Maker by Loral Langemeier and the other is CashFlow 101, 102 and CashFlow for kids by Robert Kiyosaki.
Good Debt is debt that allows you to create a positive cash flow.
Bad Debt is... everything else.
Credit cards are the worst form of bad debt. Now I am speaking of the spending habits of the general American public that has been brought up in and trained in the Industrial Age way of thinking. From the teenage years we have been taught that we need credit. "Get a car loan to build your credit," or " Get a credit card so that you can start building your credit," and this is a good one "Buy a house so that you can have a tax deduction." Yes, we need good credit. These are ways to obtain a credit history and thus a credit rating but these are only half truths. If we don't teach that teenager that a credit card is for needed purchases when cash is not available or for emergencies, then we are teaching instant gratification with out realizing just how fast the balance can and does grow.
We are living at a time that I think someone that can fog up a mirror can get a new car loan. Again, instant gratification on a monthly installment plan.
Interest. Simple or Compound. I would bet that I would be hard pressed to find many college students that could tell me the difference. Interest is a fee, paid on borrowed capital.
Simple Interest is calculated only on the principal, or on that portion of the principal which remains unpaid.
Compound interest is very similar to simple interest, however, as time goes on the difference becomes considerably larger. The conceptual difference is that unpaid interest is added to the balance due.
A new car is a depreciating asset. What this means is that at the moment the car is purchased it becomes a "used vehicle" and thus is not as valuable as a "new vehicle." On top of that the car was purchased with borrowed money. Money that is owed plus interest.Compound interest is very similar to simple interest, however, as time goes on the difference becomes considerably larger. The conceptual difference is that unpaid interest is added to the balance due.
A credit card allows us to purchase goods and services and pay a "minimum" monthly payment. The payment is very affordable. The problem is that the interest is compounded daily. That means when we make the minimum payment due we have a balance left that is accruing interest daily on the unpaid balance and the balance continues to get bigger not smaller.
A home mortgage is a simple interest loan on an appreciating asset that we can get a tax deduction on the interest paid in the tax year. Assuming that the property will appreciate to a value that exceeds the amount of interest paid over the life of the loan. The idea of a tax deduction is a great selling feature but again the interest paid over the life of the loan is much more that the tax deduction and the appreciation of value combined. NOTE: The house that you live in is not an asset. It's a necessity. It's better than renting but it can not cash flow. If we were to buy a modest house, pay it off and then invest the amount of monthly payment in an interest bearing account, we can make more than the tax deduction would save. It's how the rich get richer.
I believe we have become a society that buys on emotion and the ability to make the monthly payment with out caring what the overall price paid actually is. If we were to save for the car and the house and "live with-in our means" we would be far better off.
I read an article this week that said that 54% of Americans carry a credit card balance of more that $15,000. Another story was on the current mortgage situation where a lady was losing her house. She couldn't make the monthly mortgage payment. When we got further down into her story she had $40,000 in credit card debt, $60,000 in school loans and a car payment. The $900 +/- mortgage payment was not the problem here. It was the out of control spending.
The mortgage crisis is not really a crisis. Yes it is a problem that has grow to exponential proportions, but it is because of home buyers were able to buy homes way out of their price range. The payments were affordable at the time of purchase. Low interest rates, Adjustable Rate Mortgages (ARM's) and interest only loans are just a few of the products offered to home buyers to entice them to purchase more home that they could afford. Then, life happened. Companies downsized, the kids got sick, the tickler period on the ARM loan came to an end before the homeowner could refinance the loan to a fixed rate. Yes, the mortgage companies are to blame so is Wall Street, unethical mortgage brokers and the general American public buying the biggest and most expensive home with a monthly payment they could afford at the time of the emotional purchase.
That is all Bad Debt.
There is such a thing as Good Debt. Good debt allows a business owner enough working capital to make monthly overhead payments while building a business that will eventually produce a positive cash flow. An interest only loan allows a real estate investor the funds to purchase and rehab a property to sell at a higher price and thus make a profit greater than the interest paid on the loan. An investor can also have a mortgage on a property that is rented out to tenants for more money than the mortgage payment. This is called a positive cash flow. A lease payment, be it for a building, vehicle or equipment can be either bad debt or good debt. Consult a competent CPA before leasing anything.
Operating a business or buying property requires capital (money). Borrowing this capital, even with a high interest rate gives the business owner/investor leverage. This is referred to as using money to make money or using Other People's Money (OPM).
The biggest thing that gets under my skin is that we are not teaching our children about finances. How could we? We have become comfortable with living paycheck to paycheck. We should be teaching our teenagers how to balance a checkbook, what a balance statement is and how to read one instead of allowing them to be bombarded with multiple credit cards with ungodly limits. By the time kids get out of college they have acquired so much debt that they spend the rest of their lives just trying to get their head above the water. We need to teach them to pay with cash. Save for that new or used car. Here's an idea you don't hear too often - if at all. Get a loan (good debt) to purchase an asset that produces enough free cash flow to pay for that new car, house, boat or what ever it is we desire.
Remember if you want to live like the rich, you have to live like the rich. They don't accumulate bad debt.
Zig Ziglar said that You don't "pay the price" for success - you enjoy the benefits of success.
There are two excellent learning games that teach financial literacy. One is the Millionaire Maker by Loral Langemeier and the other is CashFlow 101, 102 and CashFlow for kids by Robert Kiyosaki.
Thursday, August 21, 2008
Exit Stategy
Your Exit Strategy should be a priority thought before buying a property. If you don't have an Exit Strategy, you have just made a major mistake. There are enough properties with many more to come in the near future so don't bet on a purchase a loser.
Exit strategies come in many forms. Most people who want to be RE investors think that flipping is sexy. "Flipping" or buying and selling a property before the first payment is due is the quickest way to make some fast cash to fund other deals, but there are large tax consequences. BUY & HOLD is a great way to save on those capital gains taxes. If you sell a property in less than 12 months + 1 day, the IRS considers you a trader and the tax rate is about 40% on any profits realized from the proceeds of the sale. In contrast, if you were to hold that same property for 12 months + 1 day and then sold, the tax on said gains drops to approximately 15%. That can make a big difference on wither a deal is profitable or not. Always consult a competent real estate CPA before purchasing property as an investment.
The person with a foreclosure on their record today is not the dead-beat of yesterday. We have become a generation that buys big ticket items based on the amount of monthly payment we can afford today and our emotions drive what decisions we make. Along with emotions, the creative 100%+ financing that the lenders and Wall Street brokers have designed, we as Americans have become comfortable with having the nicest and biggest homes that we can afford... at least we can afford the monthly payment at the time of purchase.
EXAMPLE: A family that bought a $200k house with an Adjustable Rate Mortgage (ARM) that has a 2 to 5 year "teaser" interest rate is OK until the loan adjusts to a higher rate and the monthly payment goes up 40 to 60%. Now they can't afford the monthly payment and the housing market has slowed down or in some areas has slumped and the house goes into foreclosure.
RENT-TO-OWN: Now the Investor that has a $150K house can Rent-to Own, Lease-Purchase, Lease-Option or Owner Finance that house to our family that could not afford the larger house with the ARM. All that is needed is a contract stating the intentions of both the seller and buyer. There are many types of contracts used in Rent-to-Own transactions. Investors should always consult a real estate attorney before drafting any contract. More on these contracts will be covered in a later post. A home warranty is a good idea and also a nice selling feature.
BUY and HOLD for the long term is another type of wealth building. Building equity while renting the property and having someone else make the mortgage payments. If you are investing for equity through holding property long term, buying the property at a discount is still a smart move. You need to make sure you have enough cash available for repairs and to cover the mortgage during times of vacancy. A good home warranty is a good idea to help reduce maintenance costs and also for a speedy repair at times that may not be convenient to you the Investor.
WHOLESALING is a strategy where the Investor buys a property at a deep discount and sells the property to another Investor at a discount. The most desirable way to wholesale is to have a buyer for the property before you actually purchase the property. This is where we get into the various types of closings, ie Back to Back, Simultaneous or ABC closings. Getting to know your closing agent or attorney and how they like to do these types of closings is paramount. *Note: You have to have a relationship with your closing agent BEFORE you close the deal. Also, more on this in a future blog.
RETAIL SALE: This is where the Investor buys a property, rehabs it and then sells to a retail buyer, usually listing with a Realtor using the local MLS. Something to remember is that a retail buyer has many financing options that may require the seller to have owned the subject property for a "seasoning" period of time. This varies between 90 days to 365 days. See the Tuesday, August 19 blog "The Housing and Economic Recovery Act of 2008."
Selling ebay: This is an exit strategy that less than 10 investors are using to sell their homes. Ebay is one of the top 3 sites on the web with the most hits in one day and you can sell property there. Drew Perry IS the leading expert for selling property on ebay. Check out his site at www.DrewLive.com.
There is more. Check back often and please leave me some feedback or answer the poll question.
Thanks for reading, now GO MAKE SOME OFFERS!
Exit strategies come in many forms. Most people who want to be RE investors think that flipping is sexy. "Flipping" or buying and selling a property before the first payment is due is the quickest way to make some fast cash to fund other deals, but there are large tax consequences. BUY & HOLD is a great way to save on those capital gains taxes. If you sell a property in less than 12 months + 1 day, the IRS considers you a trader and the tax rate is about 40% on any profits realized from the proceeds of the sale. In contrast, if you were to hold that same property for 12 months + 1 day and then sold, the tax on said gains drops to approximately 15%. That can make a big difference on wither a deal is profitable or not. Always consult a competent real estate CPA before purchasing property as an investment.
The person with a foreclosure on their record today is not the dead-beat of yesterday. We have become a generation that buys big ticket items based on the amount of monthly payment we can afford today and our emotions drive what decisions we make. Along with emotions, the creative 100%+ financing that the lenders and Wall Street brokers have designed, we as Americans have become comfortable with having the nicest and biggest homes that we can afford... at least we can afford the monthly payment at the time of purchase.
EXAMPLE: A family that bought a $200k house with an Adjustable Rate Mortgage (ARM) that has a 2 to 5 year "teaser" interest rate is OK until the loan adjusts to a higher rate and the monthly payment goes up 40 to 60%. Now they can't afford the monthly payment and the housing market has slowed down or in some areas has slumped and the house goes into foreclosure.
RENT-TO-OWN: Now the Investor that has a $150K house can Rent-to Own, Lease-Purchase, Lease-Option or Owner Finance that house to our family that could not afford the larger house with the ARM. All that is needed is a contract stating the intentions of both the seller and buyer. There are many types of contracts used in Rent-to-Own transactions. Investors should always consult a real estate attorney before drafting any contract. More on these contracts will be covered in a later post. A home warranty is a good idea and also a nice selling feature.
BUY and HOLD for the long term is another type of wealth building. Building equity while renting the property and having someone else make the mortgage payments. If you are investing for equity through holding property long term, buying the property at a discount is still a smart move. You need to make sure you have enough cash available for repairs and to cover the mortgage during times of vacancy. A good home warranty is a good idea to help reduce maintenance costs and also for a speedy repair at times that may not be convenient to you the Investor.
WHOLESALING is a strategy where the Investor buys a property at a deep discount and sells the property to another Investor at a discount. The most desirable way to wholesale is to have a buyer for the property before you actually purchase the property. This is where we get into the various types of closings, ie Back to Back, Simultaneous or ABC closings. Getting to know your closing agent or attorney and how they like to do these types of closings is paramount. *Note: You have to have a relationship with your closing agent BEFORE you close the deal. Also, more on this in a future blog.
RETAIL SALE: This is where the Investor buys a property, rehabs it and then sells to a retail buyer, usually listing with a Realtor using the local MLS. Something to remember is that a retail buyer has many financing options that may require the seller to have owned the subject property for a "seasoning" period of time. This varies between 90 days to 365 days. See the Tuesday, August 19 blog "The Housing and Economic Recovery Act of 2008."
Selling ebay: This is an exit strategy that less than 10 investors are using to sell their homes. Ebay is one of the top 3 sites on the web with the most hits in one day and you can sell property there. Drew Perry IS the leading expert for selling property on ebay. Check out his site at www.DrewLive.com.
There is more. Check back often and please leave me some feedback or answer the poll question.
Thanks for reading, now GO MAKE SOME OFFERS!
A 1-Day Real Estate Rehab Workshop!
True Wealth University
Presents
A 1-Day Real Estate Rehab Workshop with
Paul Esajian, star of A&E's hit TV show "Flip This House"
Have you registered yet for an intensive one day seminar this Saturday August 23rd with Paul Esajian, star of A&E's hit TV show "Flip This House being held in Athens, TN?!" If you have ~ awesome, get ready for an event that will change he course of your real estate investing business!
If you haven't yet registered ~ what are you waiting for?! Seating is severely limited and we are almost at capacity. Register today before the event is full! The price to register before the event is only $29 (a great value from the $49 door price)!
www.twullc.com
Here are the details of the event:
DATE:
Saturday, August 23rd
TIME:
9:00am to 4:00pm (registration begins at 8:30am)
LOCATION:
Sign up online:
www.twullc.com
Or Call: (800) 319-4080
At Saturday's full-day intensive rehabbing seminar, Paul will detail the real life, no-nonsense, money-making techniques he has used to build a multi-million dollar investing business! Many of his students around the country are making FORTUNES in TODAY'S MARKET by replicating these systems designed for buying, fixing and selling homes. NOW IT'S YOUR TURN!
Mention this blog and receive a FREE special BONUS - Paul's "
To see a clip of Paul and the crew from "flip this HOU$E" click the link below
Tuesday, August 19, 2008
Housing and Economic Recovery Act of 2008
Good news for the first time home buyer.
H.R. 3221, The Housing and Economic Recovery Act of 2008 (July 30, 2008) authorizes a $7,500 tax credit for qualified first-time home buyers purchasing homes on or after April 9, 2008 and before July 1, 2009. A first time home buyer is defined as, "a buyer who has not owned a principal residence during the three-year period prior to the home purchase."
In order to receive the tax credit, the first time home buyer must close on the home between April 9, 2008 and July 1, 2009, and you must also meet income requirements of $95,000 (single) or $170,000 (married).
Of course there are things about a tax credit that buyers need to be aware of and consult a tax professional. This is a tax credit, meaning that you must repay the government either over the next 15 years (no interest charged), or when you sell the home, if there were sufficient capital gains from the sale.
Example: Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The home owner does not have to begin making repayments on the credit until two years after the credit is claimed. So if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed. If the home owner sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven. National Association of Home Builders (NAHB).
For more information about the tax credit, please visit the Web site of the National Association of Home Builders, www.federalhousingtaxcredit.com.
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