Wholesaling

Wholesaling can be a way to make good money in the real estate investment business, but it is not for everyone. Is it for you? Here is a good resource into what wholesaling is and is not.

If you want to know MORE, you can go to the wholesaling post on my blog as well.

How do I find a foreclosure?

Finding a foreclosure property requires a combination of diligence and patience. Each MLS system has its own set of criteria to be filled out by the listing agent. My best advice is to call one of the larger real estate companies and ask which agent in the office works mostly with REO’s, foreclosures, and investors. You can then contact that agent and ask to be put on an email list of their foreclosures as they come in.

That works really well for getting the addresses, but many of the agents who list a lot of foreclosures don’t have time to work with buyers. Handling foreclosure properties for a bank requires a lot of paperwork and caretaking. They may have a few steady investors that they work with, but for the most part you’ll need to find a buyers agent.

Finding a buyers agent is a little harder. Many REALTORS say they work with investors, but don’t really understand the foreclosure market. Bank owned properties are a different breed, and buying a bank owned property is not for the faint hearted!

A good investor agent will not have time to show you the 25 properties you need to see to find the “diamond in the rough”. It will be up to you to drive by the addresses and decide if you want to go inside. Then call your REALTOR to meet you. Ask them if you buy lunch if they will discuss your goals and how best to meet them, and how you can most efficiently find the properties you are searching for. Ask them for advice on locations and strategies, as well. If they don’t “get” what you are trying to do, try again until you find the right agent to help you meet your goals. Then, treat them like the team member they are!

If you drag your REALTOR out to see 15 houses and never make an accepted offer, you will find that they no longer answer your calls. They have 10 other investors who do screen the houses and respect their time. A good investor agent is money in the bank for you, never take them for granted!

Banks do not follow the normal rules and practices of the local MLS board. They almost alway have an “addendum” which is essentially a re-written contract that puts them in control of the sale. They are sold “as is”, there are no disclosures, and there is no recourse after the sale. They set the good faith deposit, and after a certain number of days it becomes non refundable for any reason. They also set the closing date and place, and any delays will cost a “per diem” or daily surcharge. You must provide a proof of funds or financing letter with any offer to be considered. VA foreclosures here in Louisville, Kentucky actually add on a “service fee” (the last one I sold added $800 in costs to the buyer), and when we tried to contest the fee because it was not disclosed until after the withdrawal deadline, the seller was told he would forfeit the deposit if he didn’t close. The deposit was $1500. He closed the deal, but hasn’t bought another VA foreclosure.

It is up to the buyer to perform “due diligence”, and it is often best to do most of this prior to making an offer. Unfortunately, the seasoned investor will walk through a “hot” property and determine the condition quickly. They may even take their contractor through to give a rough estimate. This enables them to write an “as is” offer with a quick closing, and may shut the novice investor out of the best deals. This is why having a good investor agent is so helpful, they can steer you clear of some bad deals, check on sewer connections and flood plains, and help with neighborhood price ranges so you can make a quicker and more informed decision.

In this market their are plenty of deals to go around. You just need to have your financing ready, and be willing to move quickly. Getting caught up in the “Paralysis of Analysis” has lost many a deal!

Is it time to buy an investment property?

Here in Louisville, Kentucky real estate sales have slowed significantly. With all the loan program changes for the first time homebuyer, it is getting harder for them to get loan approval. FHA has decreased the downpayment amount to 1.5%, but many first time homebuyers have trouble even saving up that amount. This means that many of the first time homebuyer homes aren’t selling.

Anytime a significant part of the market isn’t selling, prices have to come down. When prices come down the investors step in. My partner and I recently bought a 3 bedroom 1 1/2 bath 2 story home for $29,000, it needed about $8,000 in cosmetics and waterlines (no heat =broken pipes, vacant=copper pipes gone) and is worth about $70,000 in a normal market. This is not a normal market, so we have it for sale for $55,000. It will rent for about $700/month. If it doesn’t sell in 60 days, we’ll put a tenant in and wait a couple of years for the market to normalize and let the tenant pay off our mortgage.

This sounds easy, doesn’t it? It can be, but we already have a relationship with a local bank that will lend us 100% of the sales price for up to 3 years. We just have to come up with the repair money and get the work done. It’s also important to know your areas, it’s only a good deal if you can sell it, or put a tenant in. There are areas that are so rough that it’s almost impossible to get a tenant to live there. It’s not a deal if you can’t make any money! Be sure you do your homework, then jump in! It’s time to buy!

Downside of REOs Part 2

I am currently working with clients buying an REO home to live in.  They are not real estate investors, so I have had to be very sure they understand the process.  The particular asset management group for this transaction used the addendums to change the inspection period from 12 days to 10, required use of the seller’s title company and closing of the seller’s choice, reduced the number of days to closing by half, put a high per diem charge for every day after their close by date, and required $2000 in certified funds as a deposit.  The buyers had already given a good faith check made out to the listing realty company as per the original contract. 

This addendum put me in the precarious position of trying to best protect my clients, without causing them to not be able to buy the home they wanted.   We did this by writing up an addendum agreeing to their addendum after the inspection period, and agreeing to exchange the original good faith check for certified funds once the inspection contingency was released.   The asset management company never signed our addendum, but they did wait for the inspections to be done before demanding the certified funds.

Because this particular home had some pretty obvious defects, we negotiated a lower price up front to cover the expected repairs.  Where we got into a bind, was that we discovered the house had a very high radon level and no sump pump.  Radon abatement was going to be costly, so we asked the asset manager for a credit at closing.  About 50% of the time they will agree to this if it is reasonable.  This particular company would not agree, so my buyer clients had to make a decision to continue with the purchase or release.  Fortunately, they felt like it was still a good buy for them and they moved on to closing.

The Downside to Buying REOs

REO stands for real estate owned, with the implication that it is owned by a bank or finance company.  With the big up swing in foreclosures, there are more and more bank owned properties listed with the various MLS providers.

What we are seeing here, in

Louisville, Kentucky, are the asset management companies becoming more and more difficult to work with.  Because a property is listed, and I am a REALTOR, I use a standard Board of REALTORS offer to purchase agreement signed by my buyer client.  The REO company, or asset management group then “verbally” counters or agrees to the contract via the listing agent. 

Unfortunately, just because you have an “acceptance”, doesn’t mean you have a real contract, because all of the REO companies stipulate that acceptance is contingent upon the signing of additional addendums.  These addendums vary greatly by company and oftentimes negate major portions of the original offer. 

It is really important for buyers to understand that with a bank owned property, the original offer to purchase agreement is only the starting point, and the owner or management company is essentially calling the shots on the transaction.  For REALTORS working with clients, it is imperative to understand and convey to the client, that almost all the banks have certain guidelines and procedures that may not be in the best interest of the buyer.   Sometimes the listing agent will be able to provide the addendums prior to writing the offer.  In other cases, the listing agent doesn’t know to which company the contract will be assigned so they will not get the addendums until after the contract is written. 

Most companies require the good faith deposit to be non refundable after the inspection period, and I even had one company send notice of required fees for the buyer well after the inspection period.  The buyer was justifiably angry, since he was told he could pay the $650 fee to the asset management company or release the contract and lose his $1000 good faith deposit.

 REOs are usually listed “as is” and it is unheard of for a management company to agree to repairs, so offers need to really reflect the condition of the property.  That being said, I have sometimes seen them agree to a credit for the repairs at closing.  This gets really tricky if the lender requires repairs prior to closing, and the bank owner will not allow any repairs until after closing.  Asset management groups never agree to escrow for items after the closing.

Buying REOs is complicated, and not for everyone.  I’m really trying to educate first time and low down payment home buyers about these properties.  Unless they are in stellar shape, the loans usually won’t go through based on repairs.  I hate to have a buyer client spend money on inspections then have to release the contract over the repair request.   

Running Numbers

It is not hard for even seasoned investors to make a mistake in their property analysis that can be the difference between a positive or negative cash flow.  We all seem to be pretty good at the big items, it’s the details that can kill us. It is important to “run the numbers” each and evry time you evaluate a property.  Use some type of a checklist to make sure you don’t leave out any expenses.

 

Sometimes savvy sellers will give buyers a net sheet showing income and expenses for a property.  It is imperative to go over it item by item.  If they have owned the property for a long time, they may have a low mortgage balance, or a lower rate than you will have.  Mortgage interest is usually your biggest cost, so make sure you know your loan options before you commit to a property.  Also, be aware that any building more that 4 units automatically becomes a commercial loan.  Commercial loans generally have much higher closing costs and rarely have long term fixed rates.  They often have pre payment penalties as well, so do your research early in your due diligence period.

 

Taxes are another item to take into account, most tax assessors will make the new sales price the new assessment, so be sure to calculate your tax expense based on the sales price, not the previous assessment.  This also applies to insurance, the previous owner may not have felt compelled to fully insure the property, so get that quote early on as well.

 

Maintenance costs need to be evaluated carefully.  Make every effort to actually look at the appropriate page of the current owner’s tax return to see true expenses.  Once you see the expenses, you still need to evaluate based on age of the property.  Has there been adequate maintenance done, or has it been “deferred” waiting for a new buyer.  If all the furnaces are 20 years old, you better be budgeting to replace furnaces fairly soon.  And be sure to get CO detectors in if they are gas!  Same thing with the roof, if it’s 15 years old then budget for a new roof in the next 3- 5 years.  Look at everything involved with the property, from the driveway and exterior, to the interior paint and appliances, all the way up to the roof.  Set up a 5 year plan for maintenance, then budget accordingly.

 

Utility costs are important even when the units have separate meters.  Here, many of the apartments have separate electric meters for personal electric, but the owner pays for water and gas heat, plus trash and common electric for the hall and porch lights.  Also, when a unit is vacant, the owner may have those costs as well.  Call all of the utilities and arrange for transfer prior to closing, make sure that there are no costs to transfer.  Our electric company now requires a certificate from a licensed electrician if the power has been off for a certain length of time.  These certificates can run from $125- 400 so, again, make sure you are aware of all the associated costs.

 

If you decide to hire a property manager, make sure you have a detailed agreement spelling out the fees.  These can vary widely from one company to the next.  Pay attention to all the fees, some companies seem very competitive on the percentage of rent, then add on other charges such as, putting out a sign, surcharges for arranging maintenance, tenant screening.  Others may seem higher for percentage of rent, but don’t charge for every other little item.

 

Finally, do some serious research on the rents.  Properties can be seriously over or under rented.  It is important to know waht the current market rents are, if you are too high your tenants will move. In fact,  they may not even wait for the renewal period, or give you notice!  If you are too low, then look at small increments for raising the rents of current tenants- don’t “shock” them into moving.  Bring new tenants in a fair market rent, but let your long term tenants think they are valued.  A vacant unit almost always costs more than delaying a rent increase. 

Common Mistakes by Novice Investors

As our real estate market shifts to a buyer’s market, and first time homebuyer loans become less readily available, rental properties become more appealing.  Like any other endeavor in life, it must be done correctly.  This article is designed to help investors avoid the most costly mistakes.

First mistake- not having a plan.  I’ve seen many gung ho investors decide to jump into buying investment properties with no plan for what to do with it once you own it.  It may be a really great deal, but if you don’t have a plan for it, it is not the right deal for you.  Don’t work backwards, first devise your strategy, then find the deals that fit your plan. 

Second mistake-lack of knowlege.  Once you have a plan, you must either learn your market, or hire a professional to help.  The best investors know their market area so well that they can jump on the best deals on a moment’s notice.  A true investor knows all their money is made up front, buying at the right price is the key.  If you buy a property at tremendous discount, it will fit into any plan.

Third mistake-not having your finances lined up.  Unless you are fortunate enough to have a wealth of cash, you need to have some resources available to fall back on.  These can be a line of credit or a private lender.  But it must be cash that is available immediately.  You never want to lose a really profitable deal because you couldn’t get the cash today. 

Buying REO’s 2

I’ve had several calls lately from people wanting to buy “foreclosures”.  Many of them have seen or heard commercials that tell them they can “buy foreclosures for pennies on the dollar, with no money down”.  I’ve been in this business a long time, and I wish it was so easy!  Yes, the lenders do have a lot of bank owned properties (REO’s), but they are generally not going to give them away.  The banks have a fiduciary obligation to market and sell these properties, making a good faith effort to maximize their return.  As an investor, I sure wish they would just give them away.  For the average homebuyer, a bank owned property is not realistic.  Most of the homes are not in good repair, with many of them needing major renovation.  No lender will consider a house that has had the plumbing lines and A/C condensor unit stripped of copper as habitable.  The owner banks will not make repairs.  I have seen banks offer a credit at closing for repairs.  Unfortunately, a low downpayment buyer will not be able to have a credit at closing.  This effectively shuts the average first time homebuyer out of the REO market.  With less potential buyers, the value of these properties diminishes.  This leaves this section of the market only to investors who know their neighborhoods, can accurately estimate repair costs, and have cash or credit lines to buy these homes.  And for many investors- the homes aren’t priced low enough for the risk in a down market.  It’s hard to pay top dollar for a home that you may have to carry for months, or even a year or more, waiting for a buyer after rehab.  Remember, investors are looking for a return on investment, and need to be very conservative.  You only need one costly mistake to ruin your year.

Buying REOs

OK, now that you’ve learned how to find the bank owned properties, and your best method may be a patient REALTOR who knows how to work the system, it’s time to write the offer.  Rule number 1- inspect the property before hand.  Take a handyperson type friend with you to look.  Look for major issues.  Remember, the lender-owner is selling it “as is”.  Rule number 2-decide what your strategy is for the property and figure out the cost of repairs.  You must decide your strategy up front because a home to be resold to an owner occupant needs more detail than a home you are going to hold for rentals.  Once you’ve estimated the cost of repairs and know after repair market value, decide how much you are willing to pay.  Rule number 3-make sure your offer is complete.  It will not be submitted without a loan approval or verification of funds letter and the minimum required good faith check.  Rule number 4-the lender owner runs the show!  This means you must use their forms, agree to their addendums, and usually close with their title company.

REO 101

Like many investors, I used to attend the Commisioner’s Sale and buy homes at the foreclosure auction.  That was a great buying strategy until about 2 years ago when I began to see a definate shift in the types of homes being sold at the auction.  Fewer and fewer homes had sufficient equity to get an investor to make an offer, so the lenders were being forced to take the homes back. 

What I am now seeing, is a glut of bank owned (REO’s) properties listed for sale.  I am now buying from the banks and only going to the auction if I see something that really looks promising.  There are some secrets to buying an REO (this stands for Real Estate Owned- by a lender is implied).  The first item is to locate these properties.  Some are easy to find on HUD websites, but most are just listed on the local MLS system.  There are REALTOR “code” words that indicate a property is bank owned.  Some of these include “as is”, “proof of funds”, or “special deed”.  Since most lender owners will not do repairs, most REO’s are not going to qualify for FNMA or FHA type loans.  While there may be lots of deals out in the market right now, being able to capitalize on them requires some preparation.  Stay tuned for more!

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