A big part of our mission here at HMB is to be a valuable source of info on the world of real estate investing.
Our clients are our lifeblood and if they aren’t doing deals, neither are we.
So here is a tip for this week, that I recently learned from a mortgage loan officer friend of mine:
An investment property MUST be off the market for 6 months or more before a refinance is possible. Even a rate/term refinance.
This is a guideline for most every bank/ lender out there.
Let me rephrase that in a way that might sound more familiar:
You buy a property to rehab, using either cash or a hard money loan. Your plan is to sell it, as long as you get the price you want. If it doesn’t sell, you’ll just refi and hold it for awhile.
Right? Sure, this is a very common scenario.
But now that refi won’t be approved for 6 months because it was listed on the market for sale! Ouch!
So a word to the wise: look into doing the refinance BEFORE you put the property on MLS!
Doing it that way could save you some real time and trouble.
We hope that helps! Stay tuned for more.
Jason, Jeff, Chris and Ben HMB Cribs Bloggers Hard Money Bankers, LLC http://hardmoneybankers.com/
Please enjoy what we hope will be an entertaining, informative and unfiltered look at the ups and downs of living the real estate investor lifestyle. We’re going to show you how investors are making (and sometimes losing) money in real estate. We’re also going to give you the tools you need to make money and stay on the winning side of your deals. Remember to check back often, as we will continue to post valuable new content.
Real estate changes quickly. Real estate investors must be constantly watching the forecast to remain profitable in their investments. Many investors are turning to longer term investments to weather the volatile real estate market storm.
Rentals are becoming increasingly popular. Investors have seen that a quick sale may not always be the most profitable course of action and rental income can be substantial while an investor waits for property prices to increase.
Unlike flipping properties, renting them out requires more long term attention. Many real estate investors don’t have the time to be constantly managing their portfolio of rentals. Property management companies have become a savior for the time-strapped investor.
Property management companies can provide valuable services such as finding tenants, performing maintenance, collecting rent, and if need be, conducting legal evictions. In order to provide our readers with as much real estate investing information as possible, Jason Balin pulled Ian Walsh away from his busy schedule to pick his brain about what services exactly property management companies can provide and the benefits of using one.
Please enjoy what we hope will be an entertaining, informative and unfiltered look at the ups and downs of living the real estate investor lifestyle. We’re going to show you how investors are making (and sometimes losing) money in real estate. We’re also going to give you the tools you need to make money and stay on the winning side of your deals. Remember to check back often, as we will continue to post valuable new content.
HARD MONEY BANKERS is a dedicated group of professional attorneys and finance experts who provide fast and flexible hard money / private lending solutions for investment real estate transactions. Based out of the Maryland, Virginia and Washington D.C. area, we offer loans nationwide. If you are a borrower with a property flip, rehab, construction project, commercial deal, cash-out refinance, or bankruptcy/foreclosure bailout, contact us. We can provide you loan approval in 24 hours or less. We welcome borrowers with income or credit issues. We can fund 100% of acquisition and constructions costs, and can finance foreclosure/bank REO properties and short sales.
If you conduct a search for real estate news you’re more than likely to find a number of articles referring to shadow inventory. Many of these articles have titles such as, “Shadow Inventory Causing Delay in Recovery” and “Shadow Inventory Hints that Real Estate Bottom is Near”.
Many of my readers have been asking me about shadow inventory, what it means for real estate investors, and how it’s affecting the recovery. As hard money lenders who primarily lend to real estate investors we have been watching this situation closely.
What exactly is shadow inventory?
Shadow inventory in real estate refers to properties that are in default, foreclosed on, or already bank owned. Basically, any property that is or was distressed that will be on the market in the future, but not yet, is shadow inventory. The reason it’s called shadow inventory is because the properties lurk in the darkness of banks’ balance sheets waiting to be put on the market and sold. Banks either can’t or don’t want to sell them yet (I’ll explain why below).
Who is looking to buy the shadow inventory?
Once the banks do decide to sell the properties, they are most likely going to sell for just below market value and they will most likely need repair or rehab. (Many properties have been vacant for months or years.) Real estate investors have been chomping at the bit, waiting for banks to begin releasing the properties so they can get their hands on some and turn a profit. Once the banks are ready to begin letting them go in large scale, there should be an influx of properties on the market ready for investors to make them livable again.
Homeowners too would like to get their hands on cheap properties but financing and other restrictions exist that prevent many from buying directly from banks.
But real estate investors aren’t the only ones watching the shadow inventory closely. Economists are also keeping an eye of shadow inventory for a few reasons. They know that when the banks begin to release the properties in large numbers, the banks are signaling their prediction that the housing market has already hit the bottom and is on its way up. Also, because housing is such an important factor of the economy as a whole, shrinking shadow inventory means an expanding economy.
How can shadow inventory help recovery?
While it’s no secret that a growing housing market plays a huge role in the economy, the converse is also true; stagnant housing causes high unemployment and slow expansion of GDP. Each property sold can add tens of thousands of dollars to the economy just in the form of furniture, fixtures and labor.Loans also help the economy. It’s called fractional-reserve banking. (This is not a Macroeconomics course so I won’t bore you with the details but feel free to do some research on your own.)
So why don’t the banks sell the properties now?
The shadow inventory is so large now for 2 main reasons. One reason is out of the banks’ control and the other is a business decision made by the banks.Many states have laws slowing foreclosures. Mediation and modification attempts are required before the bank or loan servicer can reclaim the property. In many areas this can take a year or more. In addition to local regulations, the banks know that holding the properties will allow home prices to rise and therefore they can get a higher return when they do sell. Most people understand the principle that banks are not in the business of holding properties for any longer than they have to. Common logic would say that selling the properties and getting them off the books would benefit the banks. For the most part, this is correct. What needs to be compared is the price of a house if it sold today versus the price it will sell for in the future minus carrying costs. I haven’t independently verified the figures but if the banks are intentionally holding properties, the expected future price (minus carrying costs) must be higher than today’s price.
We don’t know when the banks will release their inventory but it should help the economy.
Bill Posey (R-Fla.) has introduced H.R. 1526 in the U.S. House of Representatives. Under the proposed law, early distribution penalties would be waived on qualified retirement plans IF the funds are used to buy a house that has been in foreclosure for one year or more AND the purchaser holds the property for 2 or more years.
Posey’s concept seems to be that this would promote homeownership and stabilize neighborhoods, rather than having an investor swoop in, buy the property, and quickly “flip” the home for a profit.
I certainly love the out-of-the box thinking, but I don’t think he’s thought this all the way through.
Has Posey actually been around homeowners? How ’bout conventional lenders?
In the world of consumer retail real estate, I have found 2 things to be true:
1. Retail homeowners are ridiculously picky in this market. How many quality properties does he think remain listed for more than a year? Perhaps he’s in a State where that’s true, but that’s certainly not the case in my home State. Usually, properties that are in good, move-in condition sell within months as long as they’re priced correctly. Only the investor grade or bottom-end properties sit for more than a year. Why? Nobody wants them because they’re junk, over-priced, or mired in endless short sale red-tape.
2. Conventional lenders hate junk properties. Think about it - it’s tough enough to get financing on a good property. How is a retail homeowner going to get a loan on a property lying around for a year because it needs moderate to extensive rehabbing (which are the ones that sit around for a long time). We all know that conventional lenders won’t lend on properties that need anything more than paint and carpet – so who’s going to lend on these properties? Hard money lenders? Oh, that’s right – our same government has over-regulated us out of the consumer real estate marketplace.
One other point of contention with Posey – so what if investors are “swooping in” and making a quick profit? They’re taking the risk – they deserve the profit. It’s called c-a-p-i-t-a-l-i-s-m. Posey, like so many morons in Congress, fail to understand or appreciate that we investors, not them, are the engine to the housing recovery. We put properties back to productive use and increase job creation and tax income. We are vital to the system but, instead, are always portrayed as the villains.
Did Posy bother to read that over 35% of real estate transactions last year were cash or investor transactions? There’s a reason for that. Homeowners aren’t interested in grunt work. They’re letting the investors do the hard work (short sale negotiation or rehab), then buying them when they’re in good shape and priced correctly.
I have a better solution: Simply let anyone buy a property from his or her retirement account, regardless of the nature of the property. Investors already do this from self-directed retirement accounts. They buy properties from within their IRA’s and make profit tax-free or tax-deferred. If investors can do this, why not open it up to homeowners? Consumers would be super-excited to be able to buy their home and enjoy the appreciation tax free. And better yet, the home would be immune from creditors because it sits in an IRA. Now that’s a bill worth passing!
Several weeks ago, the HMB gang made a group trip to Denver.
My partners had been there before and told me how beautiful it was, and I’d have to agree. But they also failed (purposefully, I’m sure) to fill me in on some very important travel tips. Here are some things I learned, and what you’ll need to know, if you ever travel to Denver:
-You have to drink 4 gallons of water a day to stay hydrated -Running in Denver makes you’ll feel like you’re having a heart attack -Alcohol has a much greater effect in high altitudes (let’s not get into how I know this)
While we were in Denver, we caught up with Mike Warren, a friend of ours and a note buyer himself, and asked if he would do a quick video with us on defaulted paper.
He agreed.
Because of everyone’s tight schedules, we didn’t get a chance to get too detailed, but I did get him to introduce our readers to note buying and explain the process a little bit and what he does with the paper once he gets it. It’s interesting stuff.
-How to buy notes at 20-40 cents on the dollar -How to flip notes for big finder fees -How to do it with no money out-of-pocket and no credit
If this topic interests you, make sure to sign up for this free, information-packed webinar. The links are below:
P.S. In the interests of full disclosure, Mike has an advanced fee based note-buying training system he will introduce during the webinar. You are not required to buy anything to attend the webinar! However, if you’re thinking about getting into note buying and you like what you hear, you may want to pony up some cash to get expert training. I wouldn’t recommend “experimenting” with this strategy until you get properly trained.
Industry analysts tell us that 36% of all sales are now REO or short sale, and not likely to change. Additionally, approximately 3 million REO’s have been sold thus far, with about 5- 6 million more properties to go. So, as Bon Jovi would say,
Whooah, we’re half way there
Livin on a prayer
Take my hand and we’ll make it – I swear
Livin on a prayer
(Okay – for you math majors – we’re not quite half way, but you get the idea.)
I’ve previously commented that residential investing is getting very crowded. Lots of offers. Lots of people getting into the game again. So is there another way to buy a property without tripping over 50 other investors?
Yes.
Instead of buying the property, you can buy the defaulted note from the bank. With 5-6 million properties left to go, that means there’s still plenty of opportunity for you to make money this way.
I’ve had many inquiries from people asking about whether this technique works, what it is, and how to get involved with it, so I decided to spend a few posts examining the world of defaulted paper. Let’s start with a little Q&A.
What is “defaulted paper?”
“Paper” is the term used in residential and commercial banking to describe promissory notes, along with the security instruments that secure the debt associated with those notes, including deeds of trust, mortgages, security deeds, etc.. “Default” simply means failure to perform a contractual obligation. So when an investor uses the term, “defaulted paper,” he or she is simply referring to when a borrower has failed to pay a note or mortgage back when due. Right now, as a result of the real estate collapse, there’s lots of defaulted paper.
Why would a bank sell defaulted paper?
The reasons a bank would sell a note rather than the property are a bit complex, and can vary from deal to deal, but generally banks recognize there is a huge cost, as well as some risk, to go all the way through a foreclosure process. These risks include delay and lawsuits, property management issues, title and insurance issues, etc.. Because of this, banks are more willing than ever to sell the bad paper, take a tax write-off, and move on.
When do banks sell defaulted paper?
Banks actually sell both performing notes and defaulted notes all the time. Many Wall Street-type institutions and large banks buy them. However, these institutions, like the banks, are not set up to manage properties. They only want “good,” or performing paper that is producing regular, consistent cash flow. This leaves a lot of opportunity for Average Joe to pick up the non-performing notes at a steep discount.
Why would you want to buy defaulted paper?
There are many reasons. I’ve already mentioned one – there are too many people on the property buy-side. Too much competition. Here are some other reasons:
- you can buy at a better discount than if you were to buy the property outright. Instead of buying at 50, 60 or 70 cents on the dollar, how about 10, 20, or 30 cents?
- banks are willing to sell notes even if the short sales can’t be approved.
- you can buy through your self-directed retirement account and all earnings can be tax free.
- there is virtually an endless supply of paper that you can purchase, so the business model will be viable for a long time to come.
Does this work with residential and commercial properties?
Yes. Many good commercial investors today are actually buying notes rather than buying the properties. It saves a lot of expenses normally associated with purchasing property.
What can you do with defaulted paper after you buy it?
There are many strategies you can implement once you own the note. Here are just a few:
- do a forbearance agreement with property owner to give him or her time to sell the property.
- offer a deed-in-lieu, maybe even with some “cash for keys.” The owner may be willing just to sign the deed to the house over to you. You can then sell the property on the open market at full retail or sell to a local investor.
- resell the note at a higher amount – a quick flip.
Is this an easy investment strategy?
Although the “process” of note-buying is easy, there’s also a lot of danger if you don’t know what you’re doing. I don’t recommend implementing this strategy without first having a full grasp on the risks associated with it, along with a good real estate attorney or mentor to help you through the process.
The Bon Jovi Defaulted Paper Tour continues next week, when we speak with real estate mentor Mike Warren, a note buyer, to understand how to tell a good note from a bad note, how to actually buy them, and how to get involved with note buying.
Several weeks ago, the HMB gang made a group trip to Denver.
My partners had been there before and told me how beautiful it was, and I’d have to agree. But they also failed (purposefully, I’m sure) to fill me in on some very important travel tips. Here are some things I learned, and what you’ll need to know, if you ever travel to Denver:
-You have to drink 4 gallons of water a day to stay hydrated -Running in Denver makes you’ll feel like you’re having a heart attack -Alcohol has a much greater effect in high altitudes (let’s not get into how I know this)
While we were in Denver, we caught up with Mike Warren, a friend of ours and a note buyer himself, and asked if he would do a quick video with us on defaulted paper.
He agreed.
Because of everyone’s tight schedules, we didn’t get a chance to get too detailed, but I did get him to introduce our readers to note buying and explain the process a little bit and what he does with the paper once he gets it. It’s interesting stuff.
Here’s the video:
Mike has developed some really good note buying systems, so at the end of our time together, we asked him to help us put on a webinar about note buying. He agreed to conduct a more in-depth training webinar called “Cashing In Defaulted Paper,” where he will show you:
-How to buy notes at 20-40 cents on the dollar -How to flip notes for big finder fees -How to do it with no money out-of-pocket and no credit
If this topic interests you, make sure to sign up for this free, information-packed webinar. The links are below:
P.S. In the interests of full disclosure, Mike has an advanced fee based note-buying training system he will introduce during the webinar. You are not required to buy anything to attend the webinar! However, if you’re thinking about getting into note buying and you like what you hear, you may want to pony up some cash to get expert training. I wouldn’t recommend “experimenting” with this strategy until you get properly trained.
Many thanks to our guest blogger, Cornelius Henderson from Cooperative Solutions LLC, based in Washington, DC. Cornelius has a wealth of experience in wholesaling real estate and has provided a few very valuable tips in his post below.
Don’t forget to sign up for our FREE webinar this Thursday 3/31 with Vena Jones-Cox
“Earn a Six Figure Income Wholesaling Real Estate in 2011”
Some people call it “flipping houses” while others call it “wholesaling.” New investors execute this investing strategy because they know it allows “newbies” to get involved in real estate without a lot of their own money or risk. Experienced investors execute this strategy so that we can maintain positive monthly cash flow to satisfy our bankers and pay the monthly bills. Regardless of your investing experience, the ability to execute a successful wholesale deal is an essential tool for any real estate investor. There are three fundamental steps to a successful wholesale deal: the motivated seller, the qualified buyer and the ability to provide a turn-key experience. I will illustrate each of these through a deal we completed in Washington, DC.
The first and most important step to a successful wholesale deal is to get a property under contract from a motivated seller. My personal favorite motivated sellers are personal representatives of estates, frustrated landlords and out of town landlords. This particular deal was with a guy in Florida who was the personal representative of an estate with a property in DC. The property was in fair condition and we determined that with about $50,000 in repairs, it would be worth about $330,000. Based on this information, we knew the investors on our Prime Buyer’s List would buy this property for about $165,000. Although the seller asked for $175,000, we successfully agreed to a purchase price of $150,000 which would provide us with a $15,000 wholesale fee. Once we had the contract, the most important part was complete but we still had two more steps to get our check.
The second step to obtaining our wholesale fee was to obtain a qualified buyer to assign our right to purchase the property to. We pulled a buyer from our list that said he was active in the area and we gave him the first shot at the deal. We had not worked with the buyer before so we requested a substantial deposit and verification of the hard money relationship that he was using. These are important steps in today’s current marketplace. The days of posting a deal on Craigslist and getting a buyer who can actually close on a deal are over. You MUST qualify your buyer! Do not skip this step or you may not get your check!
The final step to our deal is our ability to provide a turn-key experience. This buyer was interested in our deal because the numbers worked and we provided everything for him. We provided the comparable properties sold in the last 3 months, pictures, virtual tour, approved hard money lender, estimates from a licensed and insured contractor, closing attorney and title company PLUS a list of buyer’s agents in the area who have potential buyers. Essentially, all he had to do was bring the cash needed to close the deal, tell everybody “GO” and then cash his check at the end. In this market, providing turn-key customer service is critical to getting your wholesale check whether the investor uses the services provided or not.
In summary, a successful wholesale starts with a motivated seller. Once you have the deal, you simply have to locate a qualified buyer and provide a turn-key experience. Naturally, if you are looking for a quality wholesale deals, join our Prime Buyer’s List atwww.DCMetroRealEstateDeals.com. Additionally, we provide a wealth of FREE information on our Facebook page at www.facebook.com/cooperativesolutions.
About the author… Cornelius Henderson is the managing partner of Cooperative Solutions, LLC, a residential and commercial real estate development firmed based in Washington, DC.
PS-
Don’t forget to sign up for our FREE webinar this Thursday 3/31 with Vena Jones-Cox
“Earn a Six Figure Income Wholesaling Real Estate in 2011”
I should probably begin by saying that I’m a self proclaimed and unapologetic Internet and technology junky. The latest technological marvel rarely escapes my grasp. The combination of screens, keyboards, mice, and other communication devices in my office draws comparison to mission control at NASA.
My tablet with 3G access is the newest addition to my accessibility arsenal (I had to brag a little).
And of course I never leave home without my smartphone (you’ll see where this is going soon).
But that’s enough about my devices for now. Let’s talk about my newest infatuation: QR codes.
You know what QR codes are, right? If you don’t yet, you will. And after reading this, you’ll begin to notice them everywhere.
QR codes, or quick response codes, are basically square images with black and white dots that link to a specific web page, image, song, document or anything else on the Internet; kind of like a 21st century bar code. Users scan the image using the camera and a reader on their smartphone (free apps are available on all platforms) and are taken to the target destination. It’s quick, simple and highly effective.
Here is an example of one I made recently. It references one of my favorite inspirational posters. If you already have a code reader, go ahead and scan this code:
Recording labels often put them in magazines so that readers can download a free MP3 instantly. Hard Money Bankers recently had a booth at a real estate expo. I printed out a large QR code that referenced our website and displayed it on the table. As patrons stopped by, they could scan the code and be taken directly to our home page where they can get more information, fill out an application, or simply make note of the webpage to view later.
And the best part, QR codes are unlicensed and FREE to use. Finding free QR code generators on the Internet merely requires a search using your favorite search engine. Enter the URL into the QR code generator and you’ll be given an image that you can save or print and place anywhere. I’ve seen and scanned QR codes on business cards, fliers, bandit signs, listings distributed to potential buyers, for sale/rent signs, food labels, beer bottles, sides of buildings, t-shirts, tattoos… OK maybe not tattoos yet, but I wouldn’t be surprised.
Imagine the head start you could have if a potential buyer scans your QR code printed on a listing sheet and can pull up endless information, pictures, and data that you simply can’t fit on a single piece of paper. Without a QR code, your potential buyer would have to go home, sit down at their computer, remember your URL, and then get the additional information. This could be hours later and they may have seen many properties since.
You can also place QR codes on for sale signs in the front yards of your listings. Anyone driving or walking by can stop and scan the image and go directly to a video walk through of the property. It’s like having an open house 24/7. Brilliant.
Before I get too excited and blab on and on about my love for QR codes I should probably wrap this up.
Advertisers in Asia have been using QR codes for years and it looks like the technology is going to become extremely popular here too. Getting involved now would put you ahead of the curve (and your competitors).
Now go open a new tab, find a QR generator, put your website’s URL in the box, get a code and start using it. Maybe one day I’ll scan your code too.
They dangle the “low cost” carrot in front of you.
They say, “Come here, Mr. Rehabber. Step into my van. I charge less than anyone else. Hire me!”
You’re on a tight budget. The electrician charged you too much and the market sagged another 2%. So to cut corners, you give in to temptation.
S-T-O-P!
STEP AWAY FROM THE CREEPY STAGER IN THE VAN!!
Cost is certainly a factor, but don’t hire any stager until you ask 7 critical questions.
In my previous post on staging (read here), I commented on how important it was in this market for rehabbers to hire a top-notch stager to properly stage their properties for resale. Staging your property correctly can result in your property being sold 80% faster and for a 7% higher price. That means a big difference to the bottom line, so it’s worth the expense if you have the right stager. But how do you find such a stager?
I asked a staging expert, Karen Lawlor, to put together a list of questions for our readers to make sure they’re not wasting money on an unqualified stager:
1. What’s your average days on market?
This speaks for itself. If he doesn’t know the answer, be worried. It means he doesn’t properly track the results of his work.
2. Do you have before and after pics of your work?
Staging is a very subjective art form. How do you know this stager has tastes similar to you or, more importantly, your buyers, unless you see and analyze the results of his or her work?
3. How many properties have you staged?
It’s tough to knock someone just because she lacks extensive experience, but how do you know she’s good without experience? Your rule of thumb should be the less experience she has, the more she should have to prove results to you, and for less money. The person with experience and proven results should ask for and get higher compensation. Like it or not, expertise costs money.
Working with homeowners is one thing – investors another. Your stager should understand the differences. Ask the stager what services he or she has provided to other investors.
5. Can you describe your experience with building material selections?
Related to Question #4, a good stager will be able to consult with you even prior to beginning your rehab to help you select building materials, kitchen cabinets, flooring, fixtures, etc., that properly map to your budget and buying demographic.
6. What is your fee and specifically what does it cover?
Many people do not ask this question, thinking all stagers charge for the same exact service. But stagers can provide many different services for you, and you will want to know what services are being offered. For instance, does the “flat fee” cover shopping for accessories, or meeting with the kitchen people to help lay out the look and feel of the kitchen? Make certain you tell the stager exactly what you need and that the fee covers what you expect it to.
7. Where do you get your inventory?
Some stagers are able to charge less because they have storage rooms full of furniture that they use in every house. This may save money on furniture rental, but there is a down side. How much furniture could one person have? Is the good stuff already being used elsewhere? Moreover, each house you have will likely appeal to a different type of buyer. Will this “stock” furniture appeal to every type of buyer? If budget allows, you may want to have the furniture hand-picked from a rental furniture store to make certain the decorations flow properly with the neighborhood, as well as the colors and style of house.
One other very important point on hiring a stager: Make sure you get at least 3 referrals from any prospective stager and call them all. At least one referral should be a property investor. Ask the referrals about their experiences with the stager and what services they felt were most important to have.
Thanks to Karen for these great questions!
Next week Karen will appear in a low budget yet exciting video on proper staging for investors, and will share lots of free information. Don’t miss it!
For more real estate investing articles, please visit http://www.HMBCribs.com
