Marketplace

Understanding the “Saver vs. Investor”—A New Way of Thinking

The difference between savers and investors

There is an important difference between people who save their money and people who invest their money. It’s leverage-the ability to do more with less. 

Old beliefs and financial habits are deeply ingrained and hard to change. Yet educated investors know how to use leverage and other people’s money to create their wealth. Savers also invest, but they invest from a saver’s point of view-mutual funds, 401(k)s, stocks and bonds. A well-informed and disciplined investor can gain much higher returns with much less risk and less money, but doing so requires financial leverage.  Most savers don’t use financial leverage. They’re more passive about borrowing. They don’t use debt to their advantage, and they don’t use it to get richer. Investors, however, use smart borrowing techniques to make their money grow faster.

What are the benefits of OPM and OPT?

Most people have the ability to apply the strategies of wealthy people by using OPM-other people’s money. Using OPM is a solid path to creating long-term wealth. As an example, banks are eager to lend money for smart real estate investments. It’s a win-win situation: banks earn money by lending money, and you earn it by purchasing properties below market value and having your real estate appreciate. 

In contrast, most bankers will not lend money to buy mutual funds. Why? Apparently bankers think that mutual funds are too risky and that real estate is a safer investment. 

It’s also wise to use OPT-other people’s time. This is a very important factor in effectively using leverage. Engaging professional assistance can help you gain more knowledge about leverage and become more astute about how you invest your money. It also enables you to save your valuable time and enjoy it with family and friends. 

Retirement is easier for investors than it is for savers 

With so much opportunity to become financially secure, why do so many people continue to do nothing?  Simply put, it is because of fear. Fear that mortgage interest is a bad investment, fear that equity pulled from a home will be lost in risky investments, fear that a home could be lost, even fear that we lack self-control and would waste available money on unnecessary luxury items.

The irony of this is that continuing to maintain large equity positions in our homes can be extremely risky. The risk of losses from unexpected life changes, housing market drops, even natural disasters, are increased when too much of our cash is buried in a single asset-our home.

For more information on leverage and how you can use it to your advantage contact us.

Zach Anderson

Cobalt Financial Services

425-828-2651

zacha@cobaltfs.com

How Appraisals Work

Thanks for coming back the final segment of Scott Linson’s wonderful real estate investment advice at Real Estate Investment Firm‘s recent educational meeting for our investors about property valuation.  Let’s talk about how property appraisals work–your own version, as well as those by professional appraisers. 

When it comes to your property’s appraisal, it’s important to understand the components used by professional appraisers to arrive at their numbers.  As Scott commented, “Comps don’t lie”, which means that comparing other houses in your property’s area of similar size, market value, etc., is a useful tool to finding out what your home is worth.  There are several approaches that can be used for property appraisals.

• Cost Approach–this is what the property would cost if it were totally destroyed, which means an itemized list and cost rundown of what it would cost (with today’s construction prices) to rebuild the structure exactly as it was prior to the hypothetical catastrophic event.  This technique is used primarily for insurance purposes.  Just remember that the insurance is not basing your home’s full appraisal value on its potential or its special features–the home’s value is based on zoning.  Some real estate agents will try to sell you on a property’s potential, so just keep your eyes open.
• Income Approach–the income potential of the property in today’s rental market, multiplied by the Gross Rent Multiplier for that area (Seattle’s rent is higher than Lynnwood’s, so its Gross Rent Multipliers are not the same).  The problem is that it’s difficult to find rental info, because currently, there’s no database of house rents available.
• Sales Comparison Approach–mostly used by real estate agents, this evaluation has the most weight in determining the property’s value when the bank is reviewing your loan.  This is also referred to as the “Sales-Paired Comparison” (or “comp”), where they compare three homes that sold with a certain feature and three homes that sold without that feature.

When your property is being appraised, keep in mind that the appraiser’s scope of work (or job) is to validate the sale price for whoever hired him or her.  If the appraiser is working for the bank, he or she will make it a priority to submit an appraisal that validates the price that the bank wants to see.  However, if the appraiser is working for you and you’re trying to sell a property, your appraiser’s scope of work is to prepare an appraisal that gives you the highest sale price.  Scope of work is influenced by several factors.

• Refinancing–Full Market Value
• Purchases–Purchase Price
• Building Specifications (for future value)
• Fair Market Value (FMV vs. ARV–Full Market Value vs. After-Repair Value)
• Unique Properties (water frontage, land, workshops, barns, etc.)

When doing the comps (again, remember that just means “comparable properties”), a minimum of three different ones are needed, but ideally, you should have 5-7 comparables, in case of possible bank disputes.  Any home worth over $400,000 gets sent to the bank’s own review appraiser, and his/her job is to state that the initial appraisal was incorrect.  However, a good appraiser can appeal the bank’s review appraiser’s decision, which is why those 5-7 comps come in handy.  Criteria for the comps are as follows:

• Radius (distance from subject–another term for your property; radius will depend on the home density in the area)
  • The search can be expanded outside your area to nearby areas as long as properties of lower value are used as comps
• Land Use (must be the same)
• Transfer Date (the date a property was last sold–should be six months to a year)
• Square Footage (needs to be within 20% of the subject property’s square footage)
• Style of Construction (must be comparable)
  • One Story with Basement, Split Entry, and Tri-Level (Tri-Level is worth the most of these 3 because it has more square feet above ground)
  • Ramblers
  • 1.5 to 2 Stories
• Year Built
  • Must be within 10 years and its effective age is half the physical age or the last remodel date, because it’s assumed that you took care of the property during the time you owned it
• Sales-Paired Comparisons (view properties, unique attributes)
• Exceptions (some of the appraisal rules go out the window on these)
  • Homes worth $500,000 or more
  • Sparsely populated areas (the further out you go in location from the subject property, the closer of a match the comp properties should be to the subject property, for other details like Year Built, etc.)

Part of determining the value of your property is based on its additional features and upgrades, as well as extenuating circumstances.  Additionally, another aspect used for evaluating your property involves two types of assessment–potential assessment vs. risk assessment.  Potential assessment refers to the property’s potential to make you money.  Risk assessment means what would happen if you couldn’t sell the property for the amount you were hoping for, or if your repairs ended up costing you too much money.  This is important to keep in mind, because while repairs and remodel are a good thing and can increase your property’s value, just remember that you’ll never get your property counted as if it were a new construction, although you can really impress your appraiser, since appraisals do have a subjective element.  Also, when you have repair and remodel expenses, remember that you can get better deals on your service costs based on the volume of business that you offer the service provider–for example, if you need 10 roofs done, you can get a better deal than if you just needed one done. 

In order for your property to be counted as remodeled, your appraiser needs to see updated tubs, sinks, cabinets, knobs, hinges, and even floors, unless the floors are wood and have been refinished.  You don’t need to change out all the plumbing and electrical, because it’s a subjective call–it’s about visuals for when the appraiser takes pictures.  Most of the focus of your remodel should go to the kitchen and bathroom.  You can even tell your appraiser, “I’m trying to remodel it back to its original glory”, which doesn’t always work, but if you don’t like your appraisal, you can always hire a different appraiser.  It might cost you $400 more, but it can be worth it, and in case you’re wondering, the appraiser doesn’t get paid until the home loan closes.  The final document you receive from the appraiser is about 10-12 pages long, and it will tell you what their numbers were based on.

It can sometimes help to show your own comps or your own before-and-after pictures of improvements you’ve made to your property to the appraiser, but keep in mind that banks will keep an eye out if you’ve made 10% or more on your sale, beyond what you bought the property for, because they call this “equity skimming”.  You can also give your loan officer your own comps and your own pictures, and he/she can use that with the bank to try and get you the appraisal you want.

When you do your comps, you need to factor in adjustments, as well.  If you have a 3 bedroom/1 bathroom home, for example, you can compare it with 2 bedroom/1 bathroom homes, but you can’t compare it with a home with more bedrooms or more bathrooms.  Each bedroom affects the home’s value by $1,000, each bathroom by $2,000, and the square footage price can vary based on neighborhood (also, different professional appraisers will use different prices per square foot).  Square footage prices can be from $20-40 per finished square foot, $10 per finished basement square foot, and $7 per unfinished basement square foot.  Year built/effective age is $1,000 per year, acreage is $20,000 per acre, garage is $2,500 per car, and carport is $1,500 per car.  All of your comps must be adjusted equally.

All CMAs (Competitive Market Analyses) and appraisals are based on the past.  CMAs can be a bit more current than appraisals, because they can compare sales from 3-6 months in the past, but again, that’s still looking at past sales activity. 

There are a few things to keep in mind.  There are two types of CMAs, and both have their drawbacks.  Real estate agent-generated CMAs have some caveats, and so do automated CMAs.  Be careful who you work with, because some realtors are using comps for their CMAs that aren’t actually valid–they use different styles of construction, for example, which is not correct.  The only time that this would be acceptable is if there weren’t enough comparable properties of a similar construction style, but even then, they would need to add on lower value properties instead of higher value properties to the list of comps.  Real estate agents are not typically trained to do CMAs properly, and they will also sometimes mix size (square footage).  Real estate agent-generated CMAs generally use comps up to 5 miles away from the subject property. 

Also, area takes precedence before other property details, but be careful, because automated CMAs like Zillow.com have a few drawbacks–they don’t know which areas are considered more desirable than others, they only base property values on above-ground square footage, and they don’t assess proximity to bodies of water (which matters here in the Pacific Northwest).  Automated tools do work well for places like Arizona, but this is not to say that they don’t have their uses here in the Northwest–just don’t base your property’s market value only on information from Zillow.  As a result, remember that both types of CMA are not the best source of a true evaluation of what your property’s worth, but they are helpful. 

Your goal as a real estate investor is to buy the worst property in the neighborhood, make it the best property, and then sell it.  Remember that when you buy a property, you can do a deferred deposit of interest, where you make sure that the check doesn’t get cashed until after the inspection, and here at Real Estate Investment Firm, we can negotiate with the seller if the property has any problems.  You can get out of the offer at any time–you might lose $400 for the appraisal, but it’s worth it if you would have ended up losing thousands, but REIF works with you to make sure that this won’t happen most of the time.  Don’t be afraid to write offers, because contracts are based on contingencies, so you can get out after making your offer.  The two contingencies on offers are inspection contingencies and financing contingencies. 

A final note on investing–there’s fast, and there’s good, but not both, so you either take your time, or you just run and hope for the best.  We don’t want to do just one deal with you and then you’re gone–we want to do 10 deals a year with you.  We get paid when we provide for you, and while we do charge 3%, we charge less when we provide other services for you. 

We’ll be happy to sit down with you and analyze what you can and can’t afford, and we’ll also tell you what kinds of property you can buy–basically, what’s best for you in your situation, whether it’s foreclosed properties at auction, pre-foreclosure foreclosures, or even MLS properties.  You can always check out or website first, by going to http://realestateinvestmentfirm.com; just sign up and you can look at auction properties available in King, Snohomish, Pierce, and Kitsap counties here in Washington state. 

When you show up for the auctions, if you have cash, bring it, but if not, we have loans you can get, and we always encourage you to research the properties before you buy them (and we’re happy to help with that, too).

Be sure to come back next time, when we’ll talk in detail about how to invest in real estate using your IRA.

Tips on Evaluating Investment Properties

This is the continuation of sage real estate investment advice from Scott Linson at Real Estate Investment Firm’s latest educational meeting for our investors.  This time, let’s talk about how to evaluate investment properties.  It’s important to find the right value of the property you’re interested in.  Several factors should be included in this.

• Determine Your Project Budget–remember, do not overbuild the area, because if you have a property that you want to improve in order to increase its market value, you must be careful not to spend too much on upgrades, or else you’ll end up losing money. 
• Know the Immediate Market (what prices does the property’s immediate market support?)
• Foreclosure Auctions

When you start getting emotional, you have a higher chance of losing money.  After all, as an investor, your job is not to make the house perfect, but to just bring it up to a higher level of quality, and get out. 

As far as your project budget, be mindful of two things.

1. What increases your property’s market value.
2. What increases your property’s market appeal.

Obviously, you’d like to increase the home’s value if you’re interested in flipping it.  Once the repairs are complete, the home’s worth is now called “ARV”, which is “After-Repair Value”.  The whole point of flipping is to buy at the fair market value (FMV), and sell at the ARV, because it’s the difference between the two that makes you money.  However, you still must have a balance between your property’s market value (what it’s worth) and its market appeal (how much it appeals to people)–although it’s true that improving the home’s “wow” factor won’t increase its market value, it can actually make the property sell faster.  Just keep in mind the old maxim, “Buy low and sell high”, which still applies today. 

The market will eventually pay you whatever the home is worth.  Up to the first two weeks that the home is listed, you’ll have the most attention from agents and potential home buyers.  Of course, you want to make money, but if your list price is too high, nobody will come–if your list price is lower and you wait a bit longer, you might eventually end up with a bidding war later on.  Keep in mind that you don’t have to sell your property just because it’s listed–it’s only a marketing agreement.  Don’t chase the market, because when you lower the list price of your home, people will wonder what’s wrong with the property.  As far as buying a property, remind yourself that $20K in the bank is still worth more than $30K that you might be able to get from the property you’re buying. 

It’s important for investors to understand the factors that tell us the home’s value.  They are as follows…

• Tax Assessments (from the government)
• Appraisals (from professional appraisers)
• Competitive Market Analyses (“CMA’s”, from real estate agents)

Tax assessments are created by the government.  They are usually about 20% below market value for the suburbs, and 40% for cities like Seattle.  To arrive at the tax assessment, the assessors evaluate the home based on mass appraisal technique (2 years’ of sales data for that area), areas (over 65 areas in King County alone), frequency, weaknesses, and disputes.  There’s actually a 50% “win” rate on property owners’ disputes, but it’s a 6-12 month process.  However, when you buy below the tax-assessed value, you just need to show proof of this to the government, and they will immediately change the tax-assessed value to what you actually paid.  Of course, if you’re able to buy a home for the tax-assessed value or even below (which would be lower than the market value), that’s going to make you some money–the only caveat is that as a result of the market’s “softening” (translation–the market’s still going down), the difference between the asking price and the tax-assessed value is getting closer, which means you might end up making less.  Allegedly, the market will improve in 2010, so there may be some properties in your portfolio, or that you’re considering buying, that you may want to hold until then, just so that they can appreciate in value.  However, don’t bank only on potential appreciation of a property–that’s speculation, and it’s not actually investing. 

In general, Scott recommends October/November/December as the best time to buy property, because you can fix it up and then sell it in March.  Keep your eye out for snowflakes–buy those auction properties when it’s snowing, because that’s when nobody else is bidding on them.  Also, you can call the bank that owns the foreclosed property on December 1st, make them an offer, and you have a very good chance of successfully buying form them.  Scott doesn’t recommend buying property in the summer if you want a quick flip, because you may end up holding it for a longer period of time, from 9-10 months.   

Remember that now is an incredible opportunity to buy, if you know what you’re doing.  You have to know what you want to do, and how you’re going to do it, so you need to educate yourself.  With that in mind, go sign up on our website at http://www.reif-wa.com, where you can view foreclosure properties to be sold at auction, short sale properties, MLS properties, etc.  Using our website, you can view the tax value vs. the list price, and you can also set filters so that you’ll only see details of properties that match your interests.  More importantly, you can analyze the deal for yourself, without any other investors seeing your details.  If you feel like you need some assistance, click “Contact Rep”, and just let us know what type of analysis you’d like for the property you’re interested in.

Here at REIF, we love what we do, and that’s helping you invest in real estate!  Stay tuned for our next blog entry, where we’ll discuss how appraisals work.

How to Find Investment Properties

It was standing room only with many first-time visitors at Real Estate Investment Firm’s most recent educational meeting. Scott Linson, President and CEO of American Home Team, Inc., gave us an informative presentation about how to evaluate a property in today’s market by determing ARV. 

His useful and timely advice stems from 10 years experience in marketing/online advertising, 6 years as a licensed agent(currently with Keller Williams in Lynnwood, WA), 5 years in appraising and evaluating properties, and 5 years working with real estate investors.  In addition, his previous work in the IT field (having worked with IBM and Hewlett-Packard) makes his knowledge invaluable to us, which is why we’re pleased to work with him.  In his career, Scott has seen lots of investors’ mistakes, so remember, it’s crucial to become educated about real estate.  Scott has developed his business around investors, which is what we do at Real Estate Investment Firm–working with our clients to help them succeed by providing them with the tools and education to invest in real estate.

When evaluating a property to decide if you want to buy it, you need to recognize a good deal when you see it; basically, as Scott explained, you need to know when to “pull the trigger”, because a good deal today in real estate is gone tomorrow.  Finding those good deals can be a challenge, but Scott reminded us that the MLS is one of the most under-rated tools for investors.  In fact, according to Gary Keller’s “Millionaire Real Estate Investor” book, although 42% of deals made by millionaire investors were made by networking, actually 32% of their deals were through MLS or real estate agents.  Only 10% of deals were from newspaper ads/marketing/etc.

Scott was able to make an investor $300K from a 2004-built home located in Mercer Island, which they found on the MLS–list price as $699K and tax-assessed at $840K, and Scott’s investor was able to purchase it for $675K.  When they ran the numbers and evaluated the property, they found its market value was $975K.  The MLS has a wide range of properties–bank-owned, probates, estate sales, landlords, Seattle Housing Authority, as well.  In fact, the Seattle Housing Authority has some amazing deals on their properties listed on the MLS.

Another excellent source of properties available is found over at REIF’s website, and the link is http://www.reif-wa.com.  Just sign up and we’ll create a user account for you so that you can have access to details on 874 distressed properties at the time of this writing, across 7 different counties in Washington state.  From the comfort of your own home, you can log in, analyze properties, and even place offers. 

We’re going to continue to post some of Scott’s real estate investment advice, so stay tuned!  Be sure to add our blog, http://www.distressedrealestate.org, to your list of favorites so you can keep coming back for more!

Latest Foreclosure Auction Properties for King County & Snohomish County

At tonight’s Real Estate Investment Firm’s investors’ meeting, we recapped several foreclosed properties that sold at auction recently, to give our investors and first-time visitors a feel for the amazing deals that can take place.  Here’s a prime example…Property ID # 2710, a beautiful 3,360 square foot home on an 8,125 square foot lot, is worth $1,015,500, and it sold at auction for $503,600–that’s fifty cents on the dollar! 

The investors learned that higher-priced properties (above $420,000) have less competition for them at auction.  If you have cash, then you’re in an even better position to buy, because most hard money lenders will only finance up to $425,000.  However, keep in mind that here at REIF, our hard money lenders will finance more than that.  And if you want even less competition, check out the higher-end properties in Snohomish County–there aren’t that many people bidding on them at auction.  Let’s take a look at a prime example of an excellent opportunity up there.

In Mukilteo’s Kamiak Pointe subdivision (near Boeing), at tomorrow’s auction, the actual opening bid on a 3 bed/3 bath home is just $334,800!  That’s a $60K drop bid on a property (ID # 11720) worth $489,500!  As Kristian Aasgaarden, one of our senior partners, commented, it’s a “screaming deal” on a nice property, with a pretty decent equity spread of $150K! 

Another example of Snohomish County deals is of the best kind–a deal in disguise.  Keep your eye out for a drop bid on property ID 7697, located in Lynnwood, which is potentially sub-dividable into 3 separate lots!  This lakefront property is a 27,442 square foot lot which currently has a 6 bed/2 bath, 2,411 square foot home on it.   Right now, there’s still not an actual opening bid on the property, but the estimated opening bid is $712,110.24, and the estimated market value is $577K.  Because the estimated opening bid is so much higher than the estimated market value, you can be sure that there will be a drop bid coming up soon on this one.  The last time it was up for auction, it had an opening bid of $585K, but the auction was postponed.  Watch this property closely–don’t miss this great opportunity.

Just remember that no matter what you’ve read or heard, now really is the best time to buy property–you always want to buy when nobody else says it’s a good idea.  Even in King County, where the usual cost of properties is high, at auction tomorrow, there are some great deals to be had. 

Have you ever wanted to own a house in Kirkland, but thought it was beyond your price range?  Take a look at property ID 1304525, in between Rose Hill and Totem Lake.  The actual opening bid on this 2 bed/2 bath, 1,060 square foot home on a 11,556 square foot lot, is just $266,857, and the estimated market value is $425,000!  It’s an excellent bargain with over $150K in equity!  Because the first mortgage is in foreclosure, the 2nd mortgage will fall away when you buy this home at auction tomorrow!

We’ll see you at the auction tomorrow! 

How to Tap into Your Retirement Account to Invest in Real Estate without Penalty

At Real Estate Investment Firm, we don’t just sell houses, we educate you, as well. On Tuesday, 05/06/08, at our educational meeting for our investors, we discussed another funding method for investing in real estate–retirement accounts. 

Self-directed IRAs (Individual Retirement Accounts) can be utilized to invest in real estate.  There are multiple strategies for doing this, including forming an LLC (Licensed Limited Corporation) and having checkbook control of these funds. 

To learn how you can invest in real estate using your IRA/401(k)/Roth IRA/SEP, without early-withdrawal penalty, contact our office at 425-968-5462 now!

What can you expect from Real Estate Investment Firm

We offer Seminars that gives our Members specific real world market knowledge not taught in other seminars.

1. Access to a professional financing network, giving our Members options to participate in different strategies of Real Estate Investing.
2. Streamlining features and processes that give our Members a jump start on the competition, increasing their odds for success.
3. Aggressive representation in negotiating the offers that give our clients the best terms available.
4. Protecting our Members with expertise in Real Estate contracts to protect their interests and give them possible exit points.
5. Full Listing Services. Liquidating our Member’s properties with the lowest costs possible to maximize their Return on Investment.

We take special care in collecting as much information that we can so we can surpass our Members expectations. We enter this information into the Online Investing System which allows us to match your Investment Strategy & Goals with properties coming into the system.

Don’t wait… Sign up today!

Foreclosure Investing 101 – Foreclosure Auction – Part 3 of 8

Why Foreclosures Sell for Less Than Market Value:

In real estate, you hear the term "market value" quite a bit when discussing properties.  Everyone seems to know what market value means,  Most would say "it is the price that a given asset or property would fetch in the marketplace." and they would be correct. 

But you cannot stop there.. 

Market Value is the price that a given asset or property would fetch in the marketplace, subject tot the following conditions:

1. Prospective buyers and sellers are reasonably knowledgeable about the asset; they are behaving in their own best interests and are free of undue pressure to trade.
2. A reasonable time period is given for the transaction to be completed.

Given these conditions, an asset’s fair market value should represent an accurate valuation or assessment of its worth.

The foreclosure process and resulting auction do not come close to meeting the above criteria of a market value transaction. In fact, they are structured in a way as to virtually guarantee the lowest possible sale price. The following table will help illustrate my point:

Many investors would look at that and say "no thanks". "Too risky, and where would I come up with all that cash anyway." It is that attitude which explains why there are so many deals to be had at the auction. 

But what about the risks?

Granted, there are risks associated with purchasing property at the auction. But you can overcome the risks of bidding!  At Real Estate Investment Firm we have worked tirelessly to help open up the foreclosure market to the average investor. By providing our clients with detailed property status tracking, property research, title analysis and insurance, value assessment, auction bid calculator, access to foreclosure financing and much more we have helped our clients minimize the risks while maximizing their profit.

Foreclosures,market value,auction,foreclosure auction

Foreclosure Investing 101 – Pre-Foreclosure & Short Sale Investing – Part 2 of 8

One of the most popular ways you can buy a foreclosure property is in the Pre-foreclosure stage.  Buying properties in pre-foreclosure can be a very profitable segment of a real estate entrepreneur’s business!

The foreclosure process allows the lender to foreclose on any liens or encumbrances in order to take the property and become the legal owner of record, thus allowing the lender to resell the property and recover the original loan amount plus expenses associated with the foreclosure. The foreclosure process can be lengthy, but up until the public auction, the homeowner owns the property and has several options available.

It’s important to realize when talking about pre-foreclosures, we are talking about acquiring the property any time before the public auction sale.

Many people have the misconception that people buying homes in foreclosure are taking advantage of another person’s misfortune. This is simply not true. The lender made a loan in good faith and the borrower agreed to repay the loan. If the borrower does not make the required payments they have broken the agreement and the lender must protect their financial interests and may foreclose on the property as agreed to by all parties when the loan was originally made. Anytime there is a foreclosure, the borrower has broken the terms of the agreement and your involvement solves a problem the homeowner created.

When facing foreclosure, many homeowners bury their heads in the sand hoping it will just go away. No action by the owner ensures a foreclosure, losing the house, a severely damaged credit profile, and a loss of all equity in the home. When dealing with an owner in pre-foreclosure it is important to explain the benefits of avoiding foreclosure if possible:

1.   Protecting Their Credit Profile. Many times a person in foreclosure is overwhelmed with life-changing events happening and has multiple financial challenges. By working with an investor, it may be possible to stop the foreclosure and start rebuilding their credit profile or prevent their credit profile from getting worse. The foreclosure will come to pass, but in today’s credit-conscious society, a credit rating affects everything from buying a car to getting property insurance.

2.   Protect Equity. When a home is foreclosed all of the equity is lost. By working with an investor it may be possible to recover some of the equity and prevent the foreclosure.

3.   Rebuilding Their Life. The pressure and strain of a foreclosure affects all areas of a person’s life. Under such pressure it is not uncommon for people to become depressed, be unkind to loved ones, or make poor personal and business decisions. Stopping the foreclosure allows a person to remove an albatross from their neck and move on with life.

For the real estate investor there are many ways to financially profit and it can be a great feeling to help people move on with their lives. If not for investors, lenders would foreclose on most properties and the homeowners would lose all equity and have a foreclosure on their records. Investors provide the vital role of helping homeowners salvage some equity, can often help the homeowner’s credit, and help people start rebuilding their lives.

In order for an investor to be involved, there must be a profit, or there is no reason to be involved in the first place. When working with sellers, we let them know up front we expect to make a profit, and for us to make a profit we need to be able to stop the foreclosure.  By being direct, the seller understands our incentive and motivation and this helps establish trust and rapport. When dealing with pre-foreclosures there are three main ways to profit:

1.   Purchase Property From a Seller At A Discount. Many times, a seller is willing to sell the property well below market value because they recognize it is better to cut their losses and move on instead of hanging on and going down with the ship. If the seller has enough equity, we can structure a purchase where they receive cash at closing, the balance of their equity in payments, or a balloon payment due at a later date.

This can be a good option for sellers with enough equity. Unfortunately, in today’s society the majority of sellers owe close to the value of the property and when an we take into account acquisition costs, sales costs, holding costs, and repairs there is not enough equity in the property for an investor to make a profit.

2. Take Over The Loan And Make Up Back Payments. When a seller is in foreclosure it is possible to buy the house from the seller, take over the loan, and make up the back payments. The advantages for the seller are the foreclosure is stopped and the property is sold to an investor that will make the payments. A drawback for the seller is the loan remains in their name until paid off by the investor or a third party at a later date.

The process of buying a home and taking over a loan in another person’s name is commonly referred to as buying a property “subject to.” In such a transaction, the title of the property transfers to the new owner, but the loan remains in the seller’s name. Lending institutions frown on buying properties “subject to” and include a due on sale clause stating the lender can call the loan due upon a transfer of title. In practice, lenders rarely enforce a due on sale clause and are more interested in receiving timely payments then enforcing calling the loan due. Selling “subject to” is not without risks to the seller since the loan remains in their name and if payments are not made their credit can be affected at a later date. The benefits for the investor are acquiring a property with little money out-of-pocket, no loan costs or appraisal fees, and their credit is not affected or put at risk by the loan they are taking “subject to.” This is a powerful investing strategy unknown to most investors and one that should be used by ethical individuals. Like many powerful tools, it has the ability to be used for good or bad depending on the individual. When purchasing “subject to” there are documents that must be signed for the protection and understanding of all involved.

In today’s marketplace, where many borrowers with less than perfect credit bought there homes using sub-prime financing, there is less of an opportunity for the investor to buy properties “subject-to”.  Many homeowners have high loan-to-value ARM loans with high interest rates that make it unattractive for an investor to consider taking over the payments.

3. Discount The Loan(s) From The Lenders. Commonly referred to as a “Short Sale” this is nothing more than negotiating with the lenders to accept an amount less than they are currently owed. A fair question is why would lenders discount their loans? There are a couple of reasons. 1) Lenders do not want to own properties. If a borrower does not pay the loan, a lender’s recourse is to foreclose on the property and if the property is not bought at public auction they become the new owner of the property. Lenders are in the business of loaning money and when a loan is not being paid, it is considered a non-performing asset and affects their lending ratios. Also, as owner of the property, the bank is responsible for property taxes, insurance, association fees, Realtor commissions, and closing costs. 2) Cash now is better than cash later. Many times a bank would prefer the certainty of accepting a discount instead of the unknown holding costs, liability, and unknown sales price at a future date. The bank understands that a discounted offer today could net them more than a higher offer at a later date when considering the closing costs, Realtor fees, and lost opportunities of lending money based on their ratios.

While banks and lenders do have motivation to consider a short sale, successfully negotiating a short sale, often with multiple lenders on the same property, can be a complex and very time consuming endeavor. Experience is key to negotiating a successful short sale.

Weekly Foreclosure Auction Re-Cap

Last Friday’s (11-09-2007) auction featured several fantastic deals. I had selected 11 properties last Thursday for my weekly “hot sheet”. Here is a re-cap of what happened to those 11 properties. 

7 properties were postponed. Five were postponed to a date in December and two were postponed to dates later this month.

1 property reverted to the lender. 

3 properties were sold to a third party.  Below are pictures of those houses and how much they sold for.

If you are interested in purchasing properties at the foreclosure auction then visit Real Estate Investment Firm and click the link for investor register.

Foreclosure auction