During my approximately 40 years of investing, buying and selling Mortgages, Deeds of Trust, Land Contracts, etc., I have encountered many different and varied situations, problems and surprises. I have also discovered that when you get one of those surprises, it is almost never good. So, what we need to do is protect ourselves from those surprises as much as we can. I am going to list some questions and answers which, if adhered to, will eliminate some of those unpleasant surprises. To make it a little easier, we will refer to Mortgages, Trust Deeds, Land Contract, Contracts For Sale, etc., as “Mortgages”.
1. Q: What determines if a good investment in a Mortgage?
A: A good investment is when you get your invested capital back plus all the Interest or Yield due on the investment.
The following Q’s & A’s will help you to be sure you have a good investment.
2. Q: Is investing in Mortgages a “Safe” investment?
A: There is no such thing as a 100% safe investment. There is always some risk involved. That’s why we have interest. The return of Interest or Yield should be commensurate with the risk, i.e. more risk – more interest. However, if an investor does his due diligence which includes having ample Equity in the property, which secures the mortgage, it is my opinion that this would be a very “safe” investment. If the Mortgage should go into default, the property (upon sale) would return the principal, plus maybe more, to the investor.
3. Q: What are some of the risks, and what can an investor do to minimize the risks?
A: As state previously, any investment entails some risks. However, these risks can be greatly reduced if the investor does his/her due diligence. Some of the things the investor can do include:
(1) Verify the Real Market value of the property that secures the Mortgage. This can be accomplished by the investor obtaining an independent appraisal of the property. The investor or someone he/she trusts should select the appraiser. I recommend that you do not use an appraiser recommended or provided by the borrower.
(2) Be sure you use a professional Escrow Company, Title Company, or in some cases an Attorney to prepare the documents and close the transaction.
(3) Be sure you get Title Insurance. This is referred to as Mortgagee’s Title Insurance which insures the Mortgage you are buying as opposed to Owner’s Title Insurance which insures the property. BE SURE you, as the investor, get Mortgagee’s Title Insurance.
(4) If it is an improved property which secures the Mortgage, be sure you get a Fire (Casualty) Insurance policy insuring the property, naming you as additional insured. If it happens to be land, you won’t need Fire Insurance.
4. Q: How do I protect myself to ensure that I will get my investment back if the borrower doesn’t pay?
A: You have to be sure that there is enough value in the property over and above the amount of the loan (this is called Equity) so that if you have to foreclose and sell the property, you get your investment back plus costs.
There is a saying that the 3 most important things to determine the value of a property is Location, Location, Location. Well, when you are investing in a Mortgage, the 3 most important things are Equity, Equity, and Equity!
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Tuesday, August 31, 2010
Thursday, August 26, 2010
"Ultimate" Residential Rental Property
What is the “Ultimate” Residential Rental property? Many experienced investors might well say, “Apartments”. This can range from a Duplex to hundreds of units in a Complex. In my “Illustrious” Real Estate career, I have been involved in ownership of various sizes of these complexes.
However, today I still own several Residential Rental properties, of which none are apartments. I believe for the “Average” (if there is such a thing) investor, the ULTIMATE Residential property is the Single Family House. “Well, Jack”, you say, “Why do you make a statement like that?” Let me count the reasons why.
1. The Single Family House (SFH) is easier to manage. One unit – One tenant.
2. The SFH is easier to finance or refinance.
a. Institutional Lenders much more are inclined to loan on a SFH than a
Multi-Unit property.
b. Private Investors also will usually favor lending on the SFH. This is especially
beneficial for rehabbers.
3. The SFH is much easier to sell than larger properties. The demand for SFHs far
exceeds Multi-Unit. More buyers who can afford to buy.
4. The SFH is easier to maintain because there are fewer things that will require repairs.
5. Greater choice available in SFHs for investors who want to get involved in Rental Property.
6. The SFH offers a greater Tax Advantage for the Investor. If managed by the Investor,
things like interest paid, taxes paid, and depreciation can create tax deductions.
7. The SFH is easier to understand, especially for the newer or beginning Investor.
This is true because most people already know a lot about SFHs because they have been
living in one for most of their life, up to now.
Acquiring and holding single family houses as rental property is a great way to set up one’s retirement plan. If a person, say at age 30, 40, or whatever acquired just one house a year by the time they reach retirement time, they should have a good steady income from the houses.
A good thing about rental income is that in the event of inflation, the rents will go up along with everything else. One question a person might ask is, “How am I going to buy a house a year? Where am I going to get the money to do that?” The answer is you do that by acquiring financing for the purchase. If you have good job income and good credit you look to your bank or other Institutional Lenders.
If this is not the case or if you would rather just not use Institutional Lenders, there are many houses you can finance with the seller or private investors. If you doubt that just look at your newspaper in the “Houses For Sale” section and you will find houses that offer Seller-Financing, often with the statement “No Credit Check”.
Another good way to find houses to acquire is to look for those that are in need of repair. Often these houses are vacant. If you happen to be handy with fixing-up, you can often acquire a house with “Sweat Equity”. If not, you can look for a handy man who can help you get the house fixed up and ready to rent.
One final comment: If you own a house free & clear, or with a lot of equity, you can always raise cash if you need to by selling or borrowing from an Institutional or Private Lender.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
However, today I still own several Residential Rental properties, of which none are apartments. I believe for the “Average” (if there is such a thing) investor, the ULTIMATE Residential property is the Single Family House. “Well, Jack”, you say, “Why do you make a statement like that?” Let me count the reasons why.
1. The Single Family House (SFH) is easier to manage. One unit – One tenant.
2. The SFH is easier to finance or refinance.
a. Institutional Lenders much more are inclined to loan on a SFH than a
Multi-Unit property.
b. Private Investors also will usually favor lending on the SFH. This is especially
beneficial for rehabbers.
3. The SFH is much easier to sell than larger properties. The demand for SFHs far
exceeds Multi-Unit. More buyers who can afford to buy.
4. The SFH is easier to maintain because there are fewer things that will require repairs.
5. Greater choice available in SFHs for investors who want to get involved in Rental Property.
6. The SFH offers a greater Tax Advantage for the Investor. If managed by the Investor,
things like interest paid, taxes paid, and depreciation can create tax deductions.
7. The SFH is easier to understand, especially for the newer or beginning Investor.
This is true because most people already know a lot about SFHs because they have been
living in one for most of their life, up to now.
Acquiring and holding single family houses as rental property is a great way to set up one’s retirement plan. If a person, say at age 30, 40, or whatever acquired just one house a year by the time they reach retirement time, they should have a good steady income from the houses.
A good thing about rental income is that in the event of inflation, the rents will go up along with everything else. One question a person might ask is, “How am I going to buy a house a year? Where am I going to get the money to do that?” The answer is you do that by acquiring financing for the purchase. If you have good job income and good credit you look to your bank or other Institutional Lenders.
If this is not the case or if you would rather just not use Institutional Lenders, there are many houses you can finance with the seller or private investors. If you doubt that just look at your newspaper in the “Houses For Sale” section and you will find houses that offer Seller-Financing, often with the statement “No Credit Check”.
Another good way to find houses to acquire is to look for those that are in need of repair. Often these houses are vacant. If you happen to be handy with fixing-up, you can often acquire a house with “Sweat Equity”. If not, you can look for a handy man who can help you get the house fixed up and ready to rent.
One final comment: If you own a house free & clear, or with a lot of equity, you can always raise cash if you need to by selling or borrowing from an Institutional or Private Lender.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Thursday, August 19, 2010
Substitution Of Collateral
An extremely valuable and strategic tool to use when acquiring Real Estate is the “Substitution Of Collateral”. As you know, if you have been reading my articles, I am a strong proponent of acquiring (and sometimes selling) properties wherein I can obtain Seller Financing. This tool could also be effective if you, as a buyer, are obtaining Private (other than seller) financing. It probably would be difficult, but not impossible, to obtain this substitution from an Institutional Lender. OK, so what am I talking about with this “Substitution Of Collateral”? Let me give you an example or two. I believe learning sticks better if you can tie it to an example of how something works.
Charlie Barrow is a budding Real Estate entrepreneur who has a mentor. Charlie has a good paying day job; however, he is looking to acquire, hold and manage Rental houses to supplement his income when he retires. Charlie finds a single-family house For Sale wherein the seller, R. Bishop, has already stated that he would consider financing the house for a buyer.
The house needs some repair and Charlie is confident that he can handle that for about $3,000. The estimated value of the home, after repairs are made, is $125,000. The house will rent for $1,100 per month.
So after conferring with his mentor, Charlie makes Mr. Bishop an offer to buy his home. After negotiating, Charlie and Mr. Bishop agree to the following terms:
Sales Price $90,000.00
Down Payment $5,000.00
Seller Financed Loan $85,000.00
Monthly Payment (P&I) $565.51
Estimated Taxes & Insurance $167.00
Total Monthly Payment $732.51
Following his mentor’s advice, Charlie also negotiates the “Right of Substitution” of the collateral for the Loan. The seller agrees that in the future Charlie may move the Loan from the house to another property. The other property would need to have an appraised value of at least as much as the value of the house. The seller further stipulates that the appraised value of the new collateral must be at least $15,000 more than the sales price of the house he is selling.
OK, so they close the deal. Charlie makes the repairs and the house now has an appraised value of $125,000. Charlie has received approval from his bank for a future loan of 80% of the appraised value, payable over 30 years at 6% interest. His monthly payments, PITI, would be $766.55 giving him a positive cash flow of $333.45 per month.
Charlie, feeling very confident now, is looking for another house. He soon finds one somewhat similar to the one he just bought from Mr. Bishop. This house is owned by a Mr. & Mrs. Clarke who are asking $100,000 for the home. The house has been on the market for over 6 months. The Clarkes have indicated they might finance; however, they need at least $40,000 as they are moving to be near their children and need as much cash as they can get.
Sensing an opportunity here, Charlie asks Mr. & Mrs. Clarke what the price would be if he paid ALL CASH. After some negotiating, Charlie offers the Clarkes $85,000 cash for their home. They accept the offer from Charlie for that amount.
Charlie now goes to Mr. Bishop and tells him that he wants to move his loan from the house he bought from Mr. Bishop to the house he is buying from Mr. & Mrs. Clarke. They agree and hire an appraiser for the home. The appraisal comes in at $105,000.
Now Charlie goes to his bank and obtains the $100,000 loan on the house he bought from Mr. Bishop. The loan will close simultaneously with the purchase of the Clarke house and the movement of Mr. Bishop’s loan to the Clarke house.
So, after the smoke clears, let’s see what happened:
1. Charlie obtains a loan from the bank for $100,000.
2. Mr. & Mrs. Clarke receive $85,000 cash for their home.
3. Mr. Bishop’s loan is now secured by the house acquired from the Clarkes.
4. Charlie now has approximately $700 per month cash flow from both houses.
5. Charlie also has $15,000 cash left over from the bank loan. This will repay the repairs on Mr. Bishop’s house and leave more for repairs on the Clarke house.
Now Charlie can repeat this process over and over again. Isn’t this Real Estate business a fun thing?
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Tuesday, August 17, 2010
Joint Ventures To Create Wealth
What is a Joint Venture? Wherein two or more entities (people, corporations, etc.) work together to accomplish a mutual goal; that is a Joint Venture. As for our discussion here, we are talking about one party (the investor) who provides the necessary funds to acquire a property, and a second party (the entrepreneur) who will provide the management and expertise necessary to accomplish the mutual goal. Let me give you an example that I have used many times. This will be an example wherein I was the entrepreneur, although I have been the investor also in many transactions.
Charlie Harris, the entrepreneur, has located a nice house in a middle class neighborhood which is for sale by owner. the owner is really motivated to sell the house and has even indicated that he would be willing to finance the purchase with at least 10% down. Charlie has established that the house’s fair market value , if in good condition, would be $120,000. also, the house should rent for about $1,100 a month.
The house has some minor repairs that need to be made. Charlie has a bid of $3,000 from an experienced handyman to make all the repairs. Charlie has negotiated with the owner for a purchase price of $80,000 with $8,000 down. the owner will finance the balance of $72,000. The loan will be amortized over a 30 year period (with no pre-payment penalty) with payments of $479.02 per month, including interest of 70% per annum.
Charlie obtains information from the County that the annual Real Estate taxes are $1,800 per year. Fire & Casualty Insurance will be $800 per year. Both added together and amortized would be $216.67 per month. This amount added to the loan payment ($479.02) and subtracted from the Fair Market monthly rental amount ($1,100) indicates a positive cash flow of $404.31 per month.
With this information packaged, Charlie, who lacks the needed up-front cash to close the purchase, looks for an investor to Joint Venture the deal with. Through research with Realtors that he knows, newspaper ads, and referrals, Charlie finds Janice Ellis who has done Joint Venture investments before. Janice has an excellent high salary job with A.T.&T. She also pays considerable income taxes each year which is one reason she is always looking for opportunities to grow her wealth and get some tax benefits.
So, after making initial contact with Janice, Charlie proposes the following:
1. Janice will contribute $15,000 to the Joint Venture which will pay the down payment ($8,000); pay for the needed repairs ($3,000); and leave $4,000 for reserve and unforeseen contingencies, which always come up.
2. Charlie will manage the property; although he may hire a Property Management Firm to find and manage tenants. The cost is 10% of the rental income or $110 per month, per tenant.
3. My recommendation is that Charlie let’s Janice have ALL the tax benefits; interest, taxes, maintenance, insurance, etc., deductible to Janice.
4. Both parties would equally share the monthly cash flow of $294.31 per tenant.
5. When the property is sold at a later date, Janice will receive her $15,000 back FIRST, then the balance of profits are equally divided between the parties.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Monday, August 16, 2010
Lease And An Option To Buy With A Twist
In most areas the market for the resale of homes is either slow or extremely slow. This is especially true of more expensive homes. In fact, many home owners are faced with the reality that if they don’t sell soon or receive some good financial windfall, they may be forced to give up their home. The flip side of this story is that there are many potential buyers of homes who may have some cash and an adequate income to pay monthly for a nice home; however, they don’t have a large amount of cash or for whatever reason they can’t qualify for a new loan to purchase a home.
One Solution a home owner might consider is to lease their home to a potential buyer as described above with a separate option to buy agreement. First lets discuss the lease. The existing mortgage loan on the property should be reviewed to determine if there is a clause pertaining to the owners of the home leasing to a third party. Some mortgages state a maximum length of time a lease may be written for. If such a statement is in the mortgage, (and most of the have it) then the lease should be of a lesser time than the maximum stated. Most mortgages I have seen state three years.
For this same reason, I recommend that the option to buy be a separate, so as not to disturb the lenders. I recommend that the option be long enough to give the property time to appreciate in value. For example, 3 to 5 years with possible extensions. In exchange for the ample time for the option to be exercised, the owners (sellers) could share in the accrued appreciation.
A Hypothetical Transaction:
1. Owners asking Full price for home = $250,000
Existing loan on home = $150,000
Somewhat inflated equity = $100,000
2. Existing monthly loan payments, PITI (principal, interest, taxes, insurance) – $1,250
3. Lessee/Potential Buyers and owners execute a 3 year lease for $1,500 per month.
4. Potential buyers & owners execute a 5 year Option Agreement giving potential buyers the option to buy the property at any time during the 5 years for $250,000. The owners agree to give potential buyer a credit of $200.00 for each month’s rent paid during the term of the lease.
~ The option could also contain an agreement that the potential buyers could extend the
lease agreement to coincide with the term of the option.
~ In exchange for the rent credits the owners might receive 25% of the appreciation
~ In exchange for the rent credits the owners might receive 25% of the appreciation
over $250,000 when the house is sold.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Should You Pay "All Cash" For Your Home? Pros & Cons
An “All Cash” situation does happen quite often. For whatever personal reasons, some people desire to own their home free and clear. The psychology of cash, or course, gives the buyer a negotiating advantage in the acquisition process; but like all other situations, it does have its Pros and Cons. Let’s take a look at some of these.
PRO – Benefits of Owning Your Home Free and Clear:
1. It does give people a sense of security. While you can’t put a dollar figure on this benefit, it is a motivating factor.
2. It eliminates the necessity of making payments on a mortgage. This, of course, means that there is no reverse cash flow in owning the home with the exception of maintenance, insurance and taxes.
These benefits have many side effects, but they all seem to basically relate to security and cash flow. Because it’s people that really count, the above mentioned benefits may outweigh all of the economical benefits that point to a direction other than owning one’s home free and clear.
CON – Basic Leverage in Owning Real Estate That is Not Free and Clear:
In looking at this side of the picture, we are going to compare to owning a house which is free & clear of encumbrances. For purposes of our comparison let’s assume that you are going to buy a $200,000 home in which to live. And let’s assume that you have the $200,000 and can pay ALL CASH – $200,000.
Let’s also assume that we have appreciation taking place in your area which is a constant 6% per year. So, your home would be worth $212,000 at the end of one year. If instead of buying the home for “All Cash”, let’s say you purchase it with 20% down or $40,000 and you owe $160,000 on a 5% mortgage. The interest would be 8,000 for the first year. If your house increased in value $12,000 in the first year, your earnings for the first year would be $4,000. If you paid $8,000 in interest and you house appreciated $12,000, the difference is $4,000. In addition, your equity (the Loan less Loan Reduction) increase the first year would be $2,360. Your total earnings the first year would be $6,360.
Remember, of the original $200,000 in capital, you have only used $40,000. You can now take another $30,000 and buy a home valued at $150,000 for rental purposes. Now you would owe $120,000 at 7% (probably higher than 5% for income property), which is $8,400 in interest per year. If you are a reasonably good business person, you should be able to buy a house of this value that you could rent for at least $100.00 more than it takes to make the monthly payments which would be $1,200 profit per year. In addition to that, you would have the same $9,000 appreciation or 6% of the $150,000 value of the house. so, the appreciation plus the $1,200 from the rental would get you $10,200 per year. You deduct the $8,400 interest you pay on the $120,000 loan and find that you earned $1,800. that first year on the rental house. In addition, your equity increase (loan balance reduction) would be $1,219 making your total earnings for the first year $3,619.
Remember, you only used $30,000 of the $160,000 that remained of your original capital. Let’s assume that you could buy five of these rental houses with $30,000 down in addition to the home you bought for yourself. If you purchased five of these rental homes similar to the example, each of them earning you $3,619 per year, you would receive $18,095 in earnings per year from your rental houses. In addition to that, you had $6,360 earnings from your own home that you purchased which would deliver then a total of $24,455 in earnings per year on the $190,000 cash investment, or a return of 12.2% per year -vs- 2% you had on purchasing one home for ALL CASH. * And you have $10,000 cash left over for reserve.
In addition, you would have other benefits, such as tax shelter on your investments, which can be expressed in dollars. We are not attempting here to analyze this situation. Our purpose is to show the use of leverage in its simplest form. This is an EXAMPLE of the use of the money in other than a cash sale.
The above, of course, is merely a cursory exploration of the benefits of leverage versus the ALL CASH purchase. The benefits in each person’s mind would dictate their choice. This comparison merely develops both sides of the question for your perusal.
This is not to be considered to be investment advice. Any person considering investing should communicate with experienced investment advice from competent people in their own geographical area.
Some of the information for this article was excerpted from Robert W. Steele’s book “50 ways to Acquire Real Estate”.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
PRO – Benefits of Owning Your Home Free and Clear:
1. It does give people a sense of security. While you can’t put a dollar figure on this benefit, it is a motivating factor.
2. It eliminates the necessity of making payments on a mortgage. This, of course, means that there is no reverse cash flow in owning the home with the exception of maintenance, insurance and taxes.
These benefits have many side effects, but they all seem to basically relate to security and cash flow. Because it’s people that really count, the above mentioned benefits may outweigh all of the economical benefits that point to a direction other than owning one’s home free and clear.
CON – Basic Leverage in Owning Real Estate That is Not Free and Clear:
In looking at this side of the picture, we are going to compare to owning a house which is free & clear of encumbrances. For purposes of our comparison let’s assume that you are going to buy a $200,000 home in which to live. And let’s assume that you have the $200,000 and can pay ALL CASH – $200,000.
Let’s also assume that we have appreciation taking place in your area which is a constant 6% per year. So, your home would be worth $212,000 at the end of one year. If instead of buying the home for “All Cash”, let’s say you purchase it with 20% down or $40,000 and you owe $160,000 on a 5% mortgage. The interest would be 8,000 for the first year. If your house increased in value $12,000 in the first year, your earnings for the first year would be $4,000. If you paid $8,000 in interest and you house appreciated $12,000, the difference is $4,000. In addition, your equity (the Loan less Loan Reduction) increase the first year would be $2,360. Your total earnings the first year would be $6,360.
Remember, of the original $200,000 in capital, you have only used $40,000. You can now take another $30,000 and buy a home valued at $150,000 for rental purposes. Now you would owe $120,000 at 7% (probably higher than 5% for income property), which is $8,400 in interest per year. If you are a reasonably good business person, you should be able to buy a house of this value that you could rent for at least $100.00 more than it takes to make the monthly payments which would be $1,200 profit per year. In addition to that, you would have the same $9,000 appreciation or 6% of the $150,000 value of the house. so, the appreciation plus the $1,200 from the rental would get you $10,200 per year. You deduct the $8,400 interest you pay on the $120,000 loan and find that you earned $1,800. that first year on the rental house. In addition, your equity increase (loan balance reduction) would be $1,219 making your total earnings for the first year $3,619.
Remember, you only used $30,000 of the $160,000 that remained of your original capital. Let’s assume that you could buy five of these rental houses with $30,000 down in addition to the home you bought for yourself. If you purchased five of these rental homes similar to the example, each of them earning you $3,619 per year, you would receive $18,095 in earnings per year from your rental houses. In addition to that, you had $6,360 earnings from your own home that you purchased which would deliver then a total of $24,455 in earnings per year on the $190,000 cash investment, or a return of 12.2% per year -vs- 2% you had on purchasing one home for ALL CASH. * And you have $10,000 cash left over for reserve.
In addition, you would have other benefits, such as tax shelter on your investments, which can be expressed in dollars. We are not attempting here to analyze this situation. Our purpose is to show the use of leverage in its simplest form. This is an EXAMPLE of the use of the money in other than a cash sale.
The above, of course, is merely a cursory exploration of the benefits of leverage versus the ALL CASH purchase. The benefits in each person’s mind would dictate their choice. This comparison merely develops both sides of the question for your perusal.
This is not to be considered to be investment advice. Any person considering investing should communicate with experienced investment advice from competent people in their own geographical area.
Some of the information for this article was excerpted from Robert W. Steele’s book “50 ways to Acquire Real Estate”.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Friday, August 13, 2010
Bartering Back In Style
Personal property can often be used as down payment or part down payment to buy Real Estate. Hypothetical Situation: Mr. & Mrs. Weaver want to purchase a new home in ABC Corporation’s Subdivision. This builder, as many others over the last few years, is over-stocked with already constructed homes.
The builder is asking $210,000 for the home that the Weavers would like to buy. He has a construction loan on the home (with his bank) for $170,000 that he needs to pay off when he sells the home. Because of the slow market, the construction loans on these unsold homes are quickly eating up the profits; therefore, the builder is motivated to sell these existing homes. The builder can be flexible to a point; however, he has to have cash to pay off the loan to the bank for each home he sells.
The Weavers really want the house but they have a problem. They have been pre-approved for a loan up to $190,000. The Weavers happen to own a very nice 22 foot fishing boat. The boat is in great shape and Mr. Weaver had it appraised at $20,000. It happens to be in the Winter time when the demand for boats is not too great. I has been said that the two happiest days in a boat owner’s life is the day they buy the boat and the day they get rid of it.
Mr. & Mrs. Weaver made an offer to purchase the new home with a loan of $190,000 cash to go to the builder plus their boat as $20,000 down payment. After a short consideration period the builder accepted the offer. Even the builder may not have need of a boat, but the deal gets the builder’s $170,000 loan paid off to the bank, plus he get $20,000 cash from the buyer’s loan. He can market the boat and probably sell it in the Spring to make some boat buyer’s FIRST happiest day.
Lesson Learned. When potential buyers are short on cash, they should look for other assets they may use as part or all of the cash requirement. It could be a boat, a car, an airplane, motorcycle, Jet Ski, etc. Afterall, this is nothing in the world but using barter to make transactions and the Barter System has been around a lot longer than money. The way our money is being devalued, more bartering may be in the Vogue.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
The builder is asking $210,000 for the home that the Weavers would like to buy. He has a construction loan on the home (with his bank) for $170,000 that he needs to pay off when he sells the home. Because of the slow market, the construction loans on these unsold homes are quickly eating up the profits; therefore, the builder is motivated to sell these existing homes. The builder can be flexible to a point; however, he has to have cash to pay off the loan to the bank for each home he sells.
The Weavers really want the house but they have a problem. They have been pre-approved for a loan up to $190,000. The Weavers happen to own a very nice 22 foot fishing boat. The boat is in great shape and Mr. Weaver had it appraised at $20,000. It happens to be in the Winter time when the demand for boats is not too great. I has been said that the two happiest days in a boat owner’s life is the day they buy the boat and the day they get rid of it.
Mr. & Mrs. Weaver made an offer to purchase the new home with a loan of $190,000 cash to go to the builder plus their boat as $20,000 down payment. After a short consideration period the builder accepted the offer. Even the builder may not have need of a boat, but the deal gets the builder’s $170,000 loan paid off to the bank, plus he get $20,000 cash from the buyer’s loan. He can market the boat and probably sell it in the Spring to make some boat buyer’s FIRST happiest day.
Lesson Learned. When potential buyers are short on cash, they should look for other assets they may use as part or all of the cash requirement. It could be a boat, a car, an airplane, motorcycle, Jet Ski, etc. Afterall, this is nothing in the world but using barter to make transactions and the Barter System has been around a lot longer than money. The way our money is being devalued, more bartering may be in the Vogue.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
How To Find Good Mortgages To Invest In - Part II
What makes a GOOD Mortgage Investment? One that returns ALL of your principal and all of your interest as agreed. The best way to insure this happens is to make sure there is plenty of equity to protect your position.
Why do you have to have plenty of equity? Because if you continually invest in mortgages, sooner or later you are going to buy a mortgage in which the person making the payments stops paying. This can be a payer that you thoroughly checked out before you bought the mortgage and he checked out great. Excellent pay history, excellent credit, good job, etc. However, things happen. People die, get sick, lose their job, etc. If you buy many mortgages it can and probably will happen.
When you look at a mortgage to buy, you have to assume that you may end up owning the property that secures the mortgage. A question you must be able to answer BEFORE you buy the mortgage is: “If I have to foreclose on this mortgage, is there enough equity in the property that I can be reasonably sure that I can get my investment back?”
To analyze this potential investment you need to consider:
“How much is the maximum investment in this given mortgage you can make in relationship to the value of the property?
Some “general” rules used by different investors have been:
“Do not invest more than 70% to 75% of the value of the property. This is a GENERAL rule. You have to develop your own criteria based on your Real Estate marketplace.”
You have to take into consideration how much it will cost you, above your investment, to sell the foreclosed property. Such as: “What are comparable properties selling for in the area where the subject is located?”
This is one of the reasons why it is very important to have a professional appraisal done BEFORE you buy the mortgage. If you do have to take the property there may be repairs needed before you can sell the property again. When you do sell the property there may be sales cost to pay, back taxes, etc.
What I have found some mortgage investors do if they have to foreclose is to get the house ready for sale, then agree to finance it for a new buyer. This makes sense since the investor is already investing in mortgages. This allows the investor to get a TOP DOLLAR price (because many people who can’t qualify for a conventional loan are looking for a home to buy). It also allows the investor to more thoroughly check out and qualify the new buyer.
I have not intended in this article to scare anyone away from investing in mortgages; however, one needs to know some of the pitfalls and bad things that can happen. If one knows bad things can happen, they can prepare for it.
As stated in a previous article, I restate that mortgage investing can be one of the most lucrative investments one can make, and safe if the investor does proper due diligence.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Why do you have to have plenty of equity? Because if you continually invest in mortgages, sooner or later you are going to buy a mortgage in which the person making the payments stops paying. This can be a payer that you thoroughly checked out before you bought the mortgage and he checked out great. Excellent pay history, excellent credit, good job, etc. However, things happen. People die, get sick, lose their job, etc. If you buy many mortgages it can and probably will happen.
When you look at a mortgage to buy, you have to assume that you may end up owning the property that secures the mortgage. A question you must be able to answer BEFORE you buy the mortgage is: “If I have to foreclose on this mortgage, is there enough equity in the property that I can be reasonably sure that I can get my investment back?”
To analyze this potential investment you need to consider:
“How much is the maximum investment in this given mortgage you can make in relationship to the value of the property?
Some “general” rules used by different investors have been:
“Do not invest more than 70% to 75% of the value of the property. This is a GENERAL rule. You have to develop your own criteria based on your Real Estate marketplace.”
You have to take into consideration how much it will cost you, above your investment, to sell the foreclosed property. Such as: “What are comparable properties selling for in the area where the subject is located?”
This is one of the reasons why it is very important to have a professional appraisal done BEFORE you buy the mortgage. If you do have to take the property there may be repairs needed before you can sell the property again. When you do sell the property there may be sales cost to pay, back taxes, etc.
What I have found some mortgage investors do if they have to foreclose is to get the house ready for sale, then agree to finance it for a new buyer. This makes sense since the investor is already investing in mortgages. This allows the investor to get a TOP DOLLAR price (because many people who can’t qualify for a conventional loan are looking for a home to buy). It also allows the investor to more thoroughly check out and qualify the new buyer.
I have not intended in this article to scare anyone away from investing in mortgages; however, one needs to know some of the pitfalls and bad things that can happen. If one knows bad things can happen, they can prepare for it.
As stated in a previous article, I restate that mortgage investing can be one of the most lucrative investments one can make, and safe if the investor does proper due diligence.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
How To Find Good Mortgages To Invest In - Part II
In Part I we discussed some of the ways to find “Mortgages”, but we didn’t get to the “Good” part. Once the word gets around, AND IT WILL, that you have money to invest in mortgages, you will have several to choose from. “WORD OF WARNING”: Don’t get too eager just because these are the first ones and you are excited to buy a mortgage. You MUST do your Due Diligence or your career as a ‘Mortgage Investor’ will quickly change to ‘Owner Of Real Estate You Don’t Want’.
Just like other investment opportunities, be it Stock Market, Commodities, etc, there are good and bad investments in mortgages. However, there is one GREAT difference. If you do your diligence, you will be able to know you made a good investment and not have to depend on speculation. That’s one of the main reasons I like mortgage investing as opposed to many other investments. “YOU ARE IN CONTROL OF YOUR MONEY”.
OK, lets talk about Due Diligence and other factors when analyzing a mortgage. The note broker calls and tells you he/she has a mortgage for sale; or, maybe you located a private party through the newspaper who has a mortgage for sale. NO DIFFERENCE IN DUE DILIGENCE. My point is: No matter where or how you find the note, you still use the same safety precautions.
If I could pick out one single area that has caused investors the most problems, it would be greed. Trying to get the highest dollar return and not checking out either the property securing the mortgage and/or the party making the payments on the mortgage. This includes pressure such as, “You have to act fast or this deal will be going to somebody else.” If this situation arises, my advice is to say, “Well that’s too bad, but I’ll have to let it go.”
Mortgages available for sale are kinda like buses – “If you don’t get this one, there will be another one along in a little while.”
A good place to start is to check out the broker or the party that brings you the opportunity, unless of course, it is a mortgage for sale you located yourself.
The next party I would check out (as much as is practical), is the party selling the note.
Is this a “Mom & Pop” type deal wherein a private party has sold probably the only Real Estate they will probably ever sell and carried back a mortgage?
Or, Is the seller a “Flipper” who buys mortgages and resells them to investors?
Or, Another kind of “Flipper” who buys a property and does nothing to it and flips it to another with a marked-up price with nothing down?
Or, A rehaber – a party that buys property in need of repair, fixes it up and resells it to another party?
The point is – There are all kinds of people who sell property and finance it for the buyer. Also, there are many buyers who want a home and don’t really care about price or interest rate. They are more concerned with; how much is the down payment, and how much are the monthly payments.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Just like other investment opportunities, be it Stock Market, Commodities, etc, there are good and bad investments in mortgages. However, there is one GREAT difference. If you do your diligence, you will be able to know you made a good investment and not have to depend on speculation. That’s one of the main reasons I like mortgage investing as opposed to many other investments. “YOU ARE IN CONTROL OF YOUR MONEY”.
OK, lets talk about Due Diligence and other factors when analyzing a mortgage. The note broker calls and tells you he/she has a mortgage for sale; or, maybe you located a private party through the newspaper who has a mortgage for sale. NO DIFFERENCE IN DUE DILIGENCE. My point is: No matter where or how you find the note, you still use the same safety precautions.
If I could pick out one single area that has caused investors the most problems, it would be greed. Trying to get the highest dollar return and not checking out either the property securing the mortgage and/or the party making the payments on the mortgage. This includes pressure such as, “You have to act fast or this deal will be going to somebody else.” If this situation arises, my advice is to say, “Well that’s too bad, but I’ll have to let it go.”
Mortgages available for sale are kinda like buses – “If you don’t get this one, there will be another one along in a little while.”
A good place to start is to check out the broker or the party that brings you the opportunity, unless of course, it is a mortgage for sale you located yourself.
The next party I would check out (as much as is practical), is the party selling the note.
Is this a “Mom & Pop” type deal wherein a private party has sold probably the only Real Estate they will probably ever sell and carried back a mortgage?
Or, Is the seller a “Flipper” who buys mortgages and resells them to investors?
Or, Another kind of “Flipper” who buys a property and does nothing to it and flips it to another with a marked-up price with nothing down?
Or, A rehaber – a party that buys property in need of repair, fixes it up and resells it to another party?
The point is – There are all kinds of people who sell property and finance it for the buyer. Also, there are many buyers who want a home and don’t really care about price or interest rate. They are more concerned with; how much is the down payment, and how much are the monthly payments.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
How To Find Good Mortgages To Invest In
No Question, buying and holding (reselling) private Real Estate Mortgages can be a very lucrative investment or business. By “private” we mean mortgages, (Trust Deeds, Land Contracts, Contracts For Deed, etc.) that wherein one party, the Seller (not a Bank or other Institutional Lender) has sold a Real Estate property to another party and has taken back a mortgage from the second party or the buyer.
Now there are other types of “Paper” or Notes that fit the above description that may be secured by collateral other than Real Estate. Mobile homes, business fixtures & equipment, inventory, cars, boats, phone, etc. We are not going to discuss these here, however, we may do so at a later time because investing in these types of notes can also be very profitable, sometimes more so than Real Estate Notes because of the greater risk. When the risk is greater, the possible profits are also greater as are the possible losses.
So, back to the question; How do we find “Good” Mortgages to invest in? There are a number of ways to do this. If you get active in buying private Mortgages or lending direct, the word will quickly get around and you will have more deals to look at than you can probably handle. Let’s discuss some of the ways to start finding those Mortgages.
* Check ads in the classified section of the newspaper – Look in “Money Wanted”, “Mortgages
For Sale”, or “Investor Needed”.
* Run your own ad: “Mortgage Buyer”, or “Money To Lend On Real Estate”.
* Develop a relationship with a Real Estate Broker that has access to Multiple Listing Service
“MLS”. The Broker can access MLS and find out sales that were made wherein a seller
financed the property. Contact the seller to see if he wants to sell the Mortgage.
The best bet, in my opinion, is to contact a “Note Broker”. This is a person who specializes in finding Mortgages for sale. The Note Broker finds a buyer for the Mortgages and charges the mortgage owner a commission. Or, the Broker may buy the Mortgage himself to resell it to an Investor. You can find these Brokers in several ways, such as:
a. Check the Yellow Pages for Mortgages, or Note Buyers.
b. Check ads in the newspaper which may read: “We Buy Mortgages”, “Mortgages For Sale”,
“Top Dollar For Your Note”, etc.
c. Ask among Real Estate Brokers if they know of any other Brokers who buy Notes.
If you can’t locate a good source, check with the following reference:
Bill Mencarow
The Paper Source
317 S. Sidney Baker, PMB 304
Kerrville, TX 78028
www.PaperSourceOnline.com
email – info@papersourceonline.com
Phone: 830-895-5025
Bill publishes a monthly Newsletter called “The Paper Source”, which is a Newsletter about the Note Business. Bill has a registry of Brokers all over the country. He could probably refer you to someone. You might even want to subscribe to the Newsletter to learn more about the business. If you contact Bill (or Allison, his wife & partner) tell him I referred you!
We have just scratched the surface here. We will continue next time on “How To Find Good Mortgages To Invest In - Part II”. I would appreciate your comments.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Now there are other types of “Paper” or Notes that fit the above description that may be secured by collateral other than Real Estate. Mobile homes, business fixtures & equipment, inventory, cars, boats, phone, etc. We are not going to discuss these here, however, we may do so at a later time because investing in these types of notes can also be very profitable, sometimes more so than Real Estate Notes because of the greater risk. When the risk is greater, the possible profits are also greater as are the possible losses.
So, back to the question; How do we find “Good” Mortgages to invest in? There are a number of ways to do this. If you get active in buying private Mortgages or lending direct, the word will quickly get around and you will have more deals to look at than you can probably handle. Let’s discuss some of the ways to start finding those Mortgages.
* Check ads in the classified section of the newspaper – Look in “Money Wanted”, “Mortgages
For Sale”, or “Investor Needed”.
* Run your own ad: “Mortgage Buyer”, or “Money To Lend On Real Estate”.
* Develop a relationship with a Real Estate Broker that has access to Multiple Listing Service
“MLS”. The Broker can access MLS and find out sales that were made wherein a seller
financed the property. Contact the seller to see if he wants to sell the Mortgage.
The best bet, in my opinion, is to contact a “Note Broker”. This is a person who specializes in finding Mortgages for sale. The Note Broker finds a buyer for the Mortgages and charges the mortgage owner a commission. Or, the Broker may buy the Mortgage himself to resell it to an Investor. You can find these Brokers in several ways, such as:
a. Check the Yellow Pages for Mortgages, or Note Buyers.
b. Check ads in the newspaper which may read: “We Buy Mortgages”, “Mortgages For Sale”,
“Top Dollar For Your Note”, etc.
c. Ask among Real Estate Brokers if they know of any other Brokers who buy Notes.
If you can’t locate a good source, check with the following reference:
Bill Mencarow
The Paper Source
317 S. Sidney Baker, PMB 304
Kerrville, TX 78028
www.PaperSourceOnline.com
email – info@papersourceonline.com
Phone: 830-895-5025
Bill publishes a monthly Newsletter called “The Paper Source”, which is a Newsletter about the Note Business. Bill has a registry of Brokers all over the country. He could probably refer you to someone. You might even want to subscribe to the Newsletter to learn more about the business. If you contact Bill (or Allison, his wife & partner) tell him I referred you!
We have just scratched the surface here. We will continue next time on “How To Find Good Mortgages To Invest In - Part II”. I would appreciate your comments.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Tuesday, August 10, 2010
Big Bucks With Options - Part II
A quick review: Mr. Adams purchased an Option for $450 to buy 40 acres of land for $40,000. He then did research with County Planning & Zoning, utility companies, and an engineer. He then determined 1) The 40 acres could be developed into 40 one acre lots, the size of the lots, 2) The close proximity of the property to the city and 3) Assurance that zoning would allow manufactured homes to be place on the lots. Doing the math shows the following:
Gross Sales proceeds from 40 lots @ $32,500 per lot is $1,300,000
Less: Cost for streets & other off-sites $160,000
On-site improvements for 40 lots $400,000
Cost for sales commission (20%) and other overhead $260,000
TOTAL ESTIMATED COST TO DEVELOP & SELL is $820,000
NET ESTIMATED PROFIT…………$480,000
Mr. Adams compiled the above and other promotional information into sales presentation brochures and presented them to several developers already experienced in developing and selling lots for manufactured home owners.
Mr. Adams decided that a 100% Gross Profit would be a fair return on money that he didn’t even have to pay. Therefore, he asked $40,000 for his Option to purchase the land. Hardly had he made the presentation to the first developer when his offer was accepted. As stated before, lots acceptable for mobile homes were in short supply. The developer could see a quick profit of $400,000 as soon as he could get the site work done.
So our hero, Mr. Adams, with a little research work was able to make a profit of $39,550 in a few weeks. Not bad!
There are deals like this available in any market at anytime. It takes a little knowledge about the Real Estate market. Even if you don’t have this knowledge, you can find assistance. Ask around for a good Realtor who knows the market. Many of them do.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Monday, August 9, 2010
Big Bucks With Options
As we left off in our last post, Mr. Adams has obtained an Option from Mrs. Walters to purchase 40 acres of land on the outskirts of the city. In doing a little homework, Mr. Adams has discovered there is a shortage of lots that allow manufactured homes. In discussing this situation with dealers of manufactured homes, Mr. Adams has also obtained the names of developers who have been selling developed lots to buyers of homes from these dealers. They have explained to Mr. Adams that the majority of buyers of manufactured homes do not usually already have land or a lot to put the mobile home on. Some of these home buyers have the home placed in a mobile home park wherein they rent the space for the home. However, many of these buyers would rather have their own land to place the home on.
In doing a little more homework, Mr. Adams does some research on the land itself. He had already done much of this before, in order to buy an “Option To Buy” the land.
The land is located on a County Road with frontage. Water and electricity are available along the road. The homes in the area require septic tanks for sanitation. In checking with the County Planning & Zoning Mr. Adams discovers that the maximum density is a one acre lot, primarily because of the septic tanks. Mr. Adams then visits an engineer he knows who has planned similar size land tracks for development.
He discovers that for approximately $10,000 per lot he can get the following improvements:
1000 gallon Septic Tank (installed) = $6,500
Water Lines from road to lot = $1,000
Driveway and Pad for home = $2,000
Electric Meter Loop = 500
Other off-site improvements, such as streets and dirt work, should be approximately $160,000 for the forty lots. Figuring another $40,000 for miscellaneous costs, the engineer’s estimated total to develop 40 lots which are ready to move onto, is $560,000.
Next Mr. Adams, in talking again to mobile home dealers, appraisers and developers who have been selling lots, discovers that the fair market price for a developed one acre lot is $32,500. This would compute to a total gross sale for 40 lots to be $1,300,000. Armed with all this research, Mr. Adams is now ready to take the next step and sell his Option.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
In doing a little more homework, Mr. Adams does some research on the land itself. He had already done much of this before, in order to buy an “Option To Buy” the land.
The land is located on a County Road with frontage. Water and electricity are available along the road. The homes in the area require septic tanks for sanitation. In checking with the County Planning & Zoning Mr. Adams discovers that the maximum density is a one acre lot, primarily because of the septic tanks. Mr. Adams then visits an engineer he knows who has planned similar size land tracks for development.
He discovers that for approximately $10,000 per lot he can get the following improvements:
1000 gallon Septic Tank (installed) = $6,500
Water Lines from road to lot = $1,000
Driveway and Pad for home = $2,000
Electric Meter Loop = 500
Other off-site improvements, such as streets and dirt work, should be approximately $160,000 for the forty lots. Figuring another $40,000 for miscellaneous costs, the engineer’s estimated total to develop 40 lots which are ready to move onto, is $560,000.
Next Mr. Adams, in talking again to mobile home dealers, appraisers and developers who have been selling lots, discovers that the fair market price for a developed one acre lot is $32,500. This would compute to a total gross sale for 40 lots to be $1,300,000. Armed with all this research, Mr. Adams is now ready to take the next step and sell his Option.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Thursday, August 5, 2010
Want To Invest In Real Estate With Limited $$$ ?
If I wanted to invest in Real Estate today and had little or no money, one place I would look at would be single family houses in NICE neighborhoods. I would find houses that would fall into any of the following categories:
Houses that are vacant, probably with a “For Sale” sign in the yard.
Houses wherein the owners are having trouble making their loan payments.
Houses listed “For Sale By Owner” in the newspaper. Don’t forget to look in “The Shoppers”, “Thrifty Nickle”, etc.
Houses that have signs or are listed in the paper “For Rent”.
I might even run a little ad myself reading “House Wanted For Rent”. How do I contact these owners? If they are still living in the house I would arrange a meeting, preferably in the home where I could sit down with the owners and negotiate a deal.
Houses that are vacant, probably with a “For Sale” sign in the yard.
Houses wherein the owners are having trouble making their loan payments.
Houses listed “For Sale By Owner” in the newspaper. Don’t forget to look in “The Shoppers”, “Thrifty Nickle”, etc.
Houses that have signs or are listed in the paper “For Rent”.
I might even run a little ad myself reading “House Wanted For Rent”. How do I contact these owners? If they are still living in the house I would arrange a meeting, preferably in the home where I could sit down with the owners and negotiate a deal.
In my discussion with the owners I would try to find out what the REAL situation is.
For Example:
Why do they want to sell or rent?
How much is owed on the property?
How much are the monthly payments?
Are the monthly payments current?
How much does average utilities cost monthly?
Are there any other expenses such as Homeowners Association fees, etc.?
Based on how I felt after gleaning this information, I would make the owners an offer to lease their house with lease payments equal to the current monthly payment. This offer would grant me the right to sublease the property. I would also require a 2 year option to buy the property for an amount equal to what they owe on the property now. The “Option Agreement” would contain a clause stating that I could renew the option for an additional 2 years with a payment of $500.00 at the time the option was renewed. Then, additionally, I would make the contract contingent upon me finding a tenant to sublease the property within 60 days.
I would then advertise "Lease With Option To Buy" (in such and such neighborhood) "Credit No Problem" in the local newspapers and in any freebies I could. I am confident I would receive many responses to my ad. (If I don’t, no big deal, my 60 days expire and all I have lost is my time – which is valuable).
There are many people with some cash who want a home to own; however, they have bruised credit or some other reason why they can’t qualify for a loan to buy a home. I would require an option fee of $2,000.00 (or more, depending on the ability of my party) and also a rent amount of at least $100.00 above the amount I am paying. The sale price would be at least $5,000.00 above the current mortgage balance ($5,000.00 more than my option price is.) Then I would give a credit of $100.00 per month for each month that the rent is paid on time. My experience has been that lease options really are motivated by applying a credit from part of the rent towards the purchase price.
I am confident that in today’s market, I could repeat this process over & over – (I have done it when the market was not as bad as it is now). In San Antonio we have over 1,500 properties posted for Foreclosure in January 2010; the MOST in 20 years.
THE DEALS ARE OUT THERE! As an old highly respected investor, entrepreneur, and builder Bill Zeckendorf said, “You make money when the blood is running in the streets.” Well friends, it’s running in the streets now.
By the way, if you are an investor or want to be, I recommend the book “Zeckendorf” – You may find it on Amazon. This man, William Zeckendorf, was the innovator of many things we have today – Shopping Malls, Condominiums, etc.
OK, back to our homeowners who we wish to contact. How do we find them? You can do this online; go to your County Tax Appraisal website. By entering the address, you should be able to find the owner of that property.
Finally, I know I ramble a lot, but if you have any questions about any of our information, please contact us – NO CHARGE!
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Private Mortgages: Interest -vs- Yield
What is the difference between interest and yield? Can the interest on a mortgage be changed without an agreement by both parties (Mortgage Lender and the Borrower)? Can the yield be changed without an agreement by both parties?
There are BIG differences between the two.
There are BIG differences between the two.
“INTEREST” is the interest rate stated on the Mortgage note. This interest rate CANNOT be changed without an agreement between both parties. Could there be an occasion wherein the parties would agree on the change in the interest rate stated in the note? YES.! There could be any number of reasons this could happen.
Here are a couple of examples.
There could be a balloon payment coming due which the borrower or payor is unable to pay. The Lender (note owner) might agree to extend the payment in exchange for an increase in the interest rate.
Subordination of this loan to a new loan. Say the mortgage is on a lot. The payor wants to build a home on the lot. The bank will agree to loan the money to build the house; however, the bank must be in senior or first loan position. Since there is already a loan on the property, the borrower asks the existing lender if he will subordinate (take second position behind the bank).
The existing lender might agree to this in exchange for an increase on the current face rate on the note. The bottom line is that usually the borrower wants something from the lender.
Sometimes the lender will agree to whatever the borrower wants by renegotiating the note – Most often with an increase in interest.
There could be a balloon payment coming due which the borrower or payor is unable to pay. The Lender (note owner) might agree to extend the payment in exchange for an increase in the interest rate.
Subordination of this loan to a new loan. Say the mortgage is on a lot. The payor wants to build a home on the lot. The bank will agree to loan the money to build the house; however, the bank must be in senior or first loan position. Since there is already a loan on the property, the borrower asks the existing lender if he will subordinate (take second position behind the bank).
The existing lender might agree to this in exchange for an increase on the current face rate on the note. The bottom line is that usually the borrower wants something from the lender.
Sometimes the lender will agree to whatever the borrower wants by renegotiating the note – Most often with an increase in interest.
Could there ever be a time when the lender (note owner) would offer to decrease the interest rate on the note? The answer is YES! Why would the lender do this? The answer will be in the discussion of “Yield”, which comes up next.
Now let’s talk about YIELD – Yield is the anticipated return on a purchase of a mortgage note. “Yield” and ”Return on Investment” are synonymous.
Most private mortgages purchased by investors are purchased at a discount. For example –
Let’s assume that an investor is purchasing a mortgage note with the following numbers:
Balance Owed: $42,500.00
Note Interest Rate: 8%
Monthly Payment Amount: $406.15
Monthly Payments Remaining: 180
In this example, the investor desires a 12% Yield (Return) on his investment. We will use a financial calculator (in this case a Hewlett-Packard 12C – my favorite for many years).
By using the numbers given, we enter into the calculator the following numbers:
Number of Payments Remaining: 180
Monthly Payment Amount: $406.15
Now instead of the face rate of 8% – we enter the yield desired by the investor = 12% – Then we solve for present value = $33,841.09
Therefore, in this example the investor is purchasing the note at a discount of $8,658.91. The figures are very close to what investors are buying at today. The required yield, however, could vary greatly depending on what kind of property secures the loan, credit of the payor (borrower), payment history, etc.
In a future post, I will tell you how a person can become a Mortgage Investor without having to be wealthy in order to do it.
Now – About an example wherein the Mortgage Investor (Lender) would propose to decrease the interest rate for the borrower. Let’s use the same example as above. In this case the investor wants to increase his yield. A rule I learned from an instructor (Robert Ward) when I took my first CCIM Course many years ago is “More Sooner is Better” – Write that down in your things to remember.
OK – In our example the investor offers to decrease the interest rate from 8% to 4% if the borrower (payor) will increase the monthly payments to $812.30.
This might be very appealing to the borrower because now he would pay-off the loan in 58 months instead of 180 and thereby save $25,993.60.
What does that do for the investor? Let’s review the numbers:
Number of Payments: 58
Monthly Payment Amount: $812.30
The Investment Amount: $33,841.00
Using the HP-12C again, we calculate that now the investors yield is 14.35%. HOW ABOUT THAT PAPER MAGIC?
OK – In our example the investor offers to decrease the interest rate from 8% to 4% if the borrower (payor) will increase the monthly payments to $812.30.
This might be very appealing to the borrower because now he would pay-off the loan in 58 months instead of 180 and thereby save $25,993.60.
What does that do for the investor? Let’s review the numbers:
Number of Payments: 58
Monthly Payment Amount: $812.30
The Investment Amount: $33,841.00
Using the HP-12C again, we calculate that now the investors yield is 14.35%. HOW ABOUT THAT PAPER MAGIC?
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Investing In Mortgages
As we discussed previously, debt instruments can come in different flavors – Mortgages, Trust Deeds, Contracts, etc. In order to simplify somewhat, henceforth, we will just lump these together and call them “PAPER”.
Further on when we talk about what you are buying when investing in paper, we will call the actual document that spells out the details of payment the “NOTE”. At any point in these posts is you do not understand what we are talking about, please let me know and I will try to clarify. PLEASE do this because it can (and will) sometimes be very confusing. It is NOT a simple subject HOWEVER it can be and is a very lucrative investment program.
Further on when we talk about what you are buying when investing in paper, we will call the actual document that spells out the details of payment the “NOTE”. At any point in these posts is you do not understand what we are talking about, please let me know and I will try to clarify. PLEASE do this because it can (and will) sometimes be very confusing. It is NOT a simple subject HOWEVER it can be and is a very lucrative investment program.
Investing in paper can be, and should be, very rewarding if the investor is prudent and knowledgeable. In goal, these posts are to make you more knowledgeable and point out some things to help you be prudent.
I’m sure you’ve heard that the three most important things about Real Estate are Location, Location, and Location. The three most important things about investing in paper are Equity, Equity, and Equity. You want to be sure that if the worst happens and you have to foreclose on the security property that you have enough equity in the property to get your investment back. HOW DO YOU DO THAT?
You do it PRIOR to buying the note. As we discussed in a previous post, you need to establish the true market value of the property. This can be done by an independent appraisal (just like the bank does it) or by your own experience or by a trusted person that you know who is very knowledgeable about the local Real Estate market.
If you intend to keep the note (not resell it at a profit, which we will discuss later) your due diligence is not over. Some things you need to pay close attention to are:
Is the payor keeping insurance on the property? (If improved property; house, etc.) Be sure you are named as additionally insured on the policy and you get proof from the insurance company each year that the insurance is renewed.
Is the payor keeping the Real Estate taxes paid on the property? Demand that the payor send you a copy of the taxes paid receipt. You can always check with the Tax Collector’s office to check this out.
If improved property, drive by (or have someone drive by) the property occasionally to make sure it is being reasonably kept up.
If possible, obtain a credit report on the payor on the note. Also, check the payor’s employment situation. With this information plus the credit report you should be able to determine if the payors seem capable of making future payments on the note.
Check the pay history on the note with the person selling you the note. You want to know if the payor has consistently been on time with his payments. Verify this with actual documents such as canceled checks, deposit slips or service records if the note is serviced by another party. Be cautious if the pay history is handwritten by the owner on tablet.
Is the payor keeping insurance on the property? (If improved property; house, etc.) Be sure you are named as additionally insured on the policy and you get proof from the insurance company each year that the insurance is renewed.
Is the payor keeping the Real Estate taxes paid on the property? Demand that the payor send you a copy of the taxes paid receipt. You can always check with the Tax Collector’s office to check this out.
If improved property, drive by (or have someone drive by) the property occasionally to make sure it is being reasonably kept up.
If possible, obtain a credit report on the payor on the note. Also, check the payor’s employment situation. With this information plus the credit report you should be able to determine if the payors seem capable of making future payments on the note.
Check the pay history on the note with the person selling you the note. You want to know if the payor has consistently been on time with his payments. Verify this with actual documents such as canceled checks, deposit slips or service records if the note is serviced by another party. Be cautious if the pay history is handwritten by the owner on tablet.
Actually, even if you intend to sell the note, your buyer will want to know all this information as well. Next time we will talk about Interest, Return, and Yield. Is Interest the same as Yield?
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Options For Big $$ - Part II
In our last post we went through some definitions and other preliminaries about Options, who the players were, etc. To better understand the power of Options let’s discuss some case histories. Now in a previous series of posts (see the Eddie Nivens story) we talked about doing Lease Options with Shared Future Appreciation between the Optionee and the Optionor. This is one of my favorite programs because it is so easy to do. You are working with highly motivated sellers (Optionors) and you don’t need much money to make it work. If you missed this series I suggest you pull it up from our post archives in the “Investor Corner” section. Just look for the Eddie Nivens story.
Now, meanwhile back at the ranch, let’s get into some examples of using pure Options. You probably have heard about “Flipping” houses or other properties wherein a party (Buyer, Flipper) enters into a Sale & Purchase Agreement with a seller, puts up some earnest money, then goes out and finds another party that they can contract to “Sell” the property to before they have actually closed on buying the property. Then they either assign the Sale & Purchase Agreement to the third party or do a “Double” escrow wherein they close on the purchase with the first party, turn right around and close on the sale to the third party.
This is really nothing but a form of an Option. In my opinion it is much cleaner, better, less paperwork, etc., to just buy an Option on the property than it is to go out and find another party who would like to buy the property and sell the Option to them. By buying and selling the Option it also saves time and money for both the eventual Optionee (buyer) and the Optionor (seller). Less closing costs, etc.
I’ve been promising a case history, so let’s do one.
Mr. Adams is a Land Developer, Entrepreneur, Real Estate Investor, etc. Mrs. Walters is a widow who owns several Real Estate properties. Mr. Walters had been the one who handled and managed the Real Estate. His passing has left Mrs. Walters owning the Real Estate with little experience or interest in trying to continue to manage these properties. Therefore, she has most of these properties up for sale. Also, Mrs. Walters’ cash flow situation is not good. She really needs to sell off some of those properties.
One of the properties is a 40 acre piece of land located fairly close, but outside the city limits. Mrs. Walters has the land listed for sale at $1,000 per acre or $40,000. Mr. Adams knows that there is a shortage of lots with restrictions allowing Manufactured Homes (mobile homes, but God forbid, NOT trailers). After spotting the 40 acres for sale, Mr. Adams visits several Manufactured Home dealers located on the same side of town where the land is.
In checking with the County Tax Office Mr. Adams discovers that there is the previous year’s taxes owed on the property, in an amount of $450.00. Mr. Adams makes the following offer to Mrs. Walters.
1. Mr. Adams will pay the back taxes on the land as consideration for the Option to buy the land for a price of
$40,000. The Option is for a period of one year.
2. Mrs. Walters accepts the offer and they enter into an Option Agreement which Mr. Adams has recorded at the
County Courthouse.
BENEFITS TO THE PARTIES:
1. Mr. Adams has total control over the land for only $450.00 . If he does exercise the Option, he will get the $450.00
back as the taxes will be paid. He knows if the land were developed into Lots allowing mobile homes, it would
sell quickly.
2. Mrs. Walters is hard pressed for cash flow. The Option pays the taxes and stops the penalties. Even if Mr. Adams
does not exercise the Option, her taxes are paid.
We have seen the beginning of an interesting deal. – What comes next? As Paul Harvey would say, see the next post for the “Rest of the Story.”
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Now, meanwhile back at the ranch, let’s get into some examples of using pure Options. You probably have heard about “Flipping” houses or other properties wherein a party (Buyer, Flipper) enters into a Sale & Purchase Agreement with a seller, puts up some earnest money, then goes out and finds another party that they can contract to “Sell” the property to before they have actually closed on buying the property. Then they either assign the Sale & Purchase Agreement to the third party or do a “Double” escrow wherein they close on the purchase with the first party, turn right around and close on the sale to the third party.
This is really nothing but a form of an Option. In my opinion it is much cleaner, better, less paperwork, etc., to just buy an Option on the property than it is to go out and find another party who would like to buy the property and sell the Option to them. By buying and selling the Option it also saves time and money for both the eventual Optionee (buyer) and the Optionor (seller). Less closing costs, etc.
I’ve been promising a case history, so let’s do one.
Mr. Adams is a Land Developer, Entrepreneur, Real Estate Investor, etc. Mrs. Walters is a widow who owns several Real Estate properties. Mr. Walters had been the one who handled and managed the Real Estate. His passing has left Mrs. Walters owning the Real Estate with little experience or interest in trying to continue to manage these properties. Therefore, she has most of these properties up for sale. Also, Mrs. Walters’ cash flow situation is not good. She really needs to sell off some of those properties.
One of the properties is a 40 acre piece of land located fairly close, but outside the city limits. Mrs. Walters has the land listed for sale at $1,000 per acre or $40,000. Mr. Adams knows that there is a shortage of lots with restrictions allowing Manufactured Homes (mobile homes, but God forbid, NOT trailers). After spotting the 40 acres for sale, Mr. Adams visits several Manufactured Home dealers located on the same side of town where the land is.
In checking with the County Tax Office Mr. Adams discovers that there is the previous year’s taxes owed on the property, in an amount of $450.00. Mr. Adams makes the following offer to Mrs. Walters.
1. Mr. Adams will pay the back taxes on the land as consideration for the Option to buy the land for a price of
$40,000. The Option is for a period of one year.
2. Mrs. Walters accepts the offer and they enter into an Option Agreement which Mr. Adams has recorded at the
County Courthouse.
BENEFITS TO THE PARTIES:
1. Mr. Adams has total control over the land for only $450.00 . If he does exercise the Option, he will get the $450.00
back as the taxes will be paid. He knows if the land were developed into Lots allowing mobile homes, it would
sell quickly.
2. Mrs. Walters is hard pressed for cash flow. The Option pays the taxes and stops the penalties. Even if Mr. Adams
does not exercise the Option, her taxes are paid.
We have seen the beginning of an interesting deal. – What comes next? As Paul Harvey would say, see the next post for the “Rest of the Story.”
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Wednesday, August 4, 2010
Making Big $$ With Real Estate Options
Much is written and said about making money with options by Stock Brokers, Commodity, Gurus, etc. They don’t know a thing about a much more profitable, SAFER, way to invest in options. That way is buying and selling Real Estate Options. Almost anyone, with a little coaching or training, can invest in Real Estate Options with VERY little money and reap big dividends with minimum risks. I doubt that you could buy a stock or commodity option for $10.00; however, I have bought Options to buy Real Estate for as little as that. I have known other people who got it down to $1.00. Unbelievable, right? But it’s true.
Now, where in the world would we find properties that we could buy an Option to buy with a small amount of money? Right in the local newspaper and in your area Realtor’s Multiple Listing Service (MLS). This is especially true with today’s lousy (in most areas) housing resale market.
Maybe first, so that we all know what we are talking about, we should explain a few terms, names, etc. about Options. You can’t tell the players without a scorecard.
What is an Option? An Option is a contract between two (or more) parties concerned with one party (the Optionee) buying an Option to purchase, Lease, or whatever, Real Estate from another party, (the Optionor).
Let’s further identify these two parties:
1. The Optionor: This is the party who owns or controls the Real Estate in question.
2. The Optionee: This is the party who wants to buy the Option to buy the property from the Optionor.
The Option, as stated, is a contract which should be in writing. It must contain language showing that the Optionee paid some consideration for the Option. The Option should be for some specific period of time; a month, a year, 5 years, etc. The Option must also include the purchase price of the Real Estate if the Optionor does exercise the Option.
Now, once the Option Agreement is signed by both parties, the Optionee has control over the subject Real Estate for the entire time period of the Option. To protect the Optionee I would recommend that the Option be recorded at the County Courthouse. This protects the Optionee in that if any title search is done it will show that the Option exists.
There are many variations and Objectives that can be included in an Option Agreement. In essence, maybe to better understand an Option Agreement, just look at a standard Sale And Purchase Agreement wherein the buyer has deposited earnest money (somewhat like an option) to buy the property from the Seller. If the Buyer defaults on the agreement he loses his earnest money.
In the next post (coming soon) we will go into some case histories to better explain and to show you how you can make BIG $$ using Options.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Now, where in the world would we find properties that we could buy an Option to buy with a small amount of money? Right in the local newspaper and in your area Realtor’s Multiple Listing Service (MLS). This is especially true with today’s lousy (in most areas) housing resale market.
Maybe first, so that we all know what we are talking about, we should explain a few terms, names, etc. about Options. You can’t tell the players without a scorecard.
What is an Option? An Option is a contract between two (or more) parties concerned with one party (the Optionee) buying an Option to purchase, Lease, or whatever, Real Estate from another party, (the Optionor).
Let’s further identify these two parties:
1. The Optionor: This is the party who owns or controls the Real Estate in question.
2. The Optionee: This is the party who wants to buy the Option to buy the property from the Optionor.
The Option, as stated, is a contract which should be in writing. It must contain language showing that the Optionee paid some consideration for the Option. The Option should be for some specific period of time; a month, a year, 5 years, etc. The Option must also include the purchase price of the Real Estate if the Optionor does exercise the Option.
Now, once the Option Agreement is signed by both parties, the Optionee has control over the subject Real Estate for the entire time period of the Option. To protect the Optionee I would recommend that the Option be recorded at the County Courthouse. This protects the Optionee in that if any title search is done it will show that the Option exists.
There are many variations and Objectives that can be included in an Option Agreement. In essence, maybe to better understand an Option Agreement, just look at a standard Sale And Purchase Agreement wherein the buyer has deposited earnest money (somewhat like an option) to buy the property from the Seller. If the Buyer defaults on the agreement he loses his earnest money.
In the next post (coming soon) we will go into some case histories to better explain and to show you how you can make BIG $$ using Options.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
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