HR 1526 - Read It Through First
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 need to lower their standards. 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.Conventional lenders only want to lend on properties that don’t need a lot of work. Therefore they won’t lend on a property that had been sitting artound 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!
The 3 Keys To A Successful Wholesale Deal (guest Blog Post)
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”
http://bit.ly/FlipMore –Sign up here
The 3 Keys To A Successful Wholesale Deal
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 at www.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”
http://bit.ly/FlipMore –Sign up here
Get Your QR Codes Today
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.
I love my new tablet.
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 find QR codes all over the place..
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.If you get in now, you’ll be ahead of the competition..
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.
Let me know if I can help in any way.
~Ben
What Do Bon Jovi And Defaulted Bank Paper Have In Common?
Flowing blonde hair? No.
An endless life span? You’re getting warmer…
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.
Don’t delay! Pre-register now!
Thu, Apr 21, 2011 2:00 PM – 3:30 PM EDT https://www2.gotomeeting.com/register/250621563
Thu, Apr 21, 2011 8:00 PM – 9:30 PM EDT https://www2.gotomeeting.com/register/227323282
Til’ next time, Jeff
All Real Estate Taxes Are Deductible…
Well like all things tax code; not always. In fact, many tax professionals get this one wrong too. Further, the same mistake is pervasive on both personal residences and investment properties.
A thorough review of your real property tax bill will reveal the total is the combination of many different items and it is in those details that the answers are buried. Let’s use a Sample Tax Record to take a closer look. Our example property was randomly pulled from HUD foreclosure list.
Review of the tax section reveals that the total tax bill is $6,114. The $6,114 is the total of $3,068 State/County Tax, $2,515 City Tax, and $531 Special Tax. There is also a space for Refuse if the local jurisdiction includes that as part of the total.
The requirements to be able to deduct a real estate tax are:
- the taxpayer must own the real estate, and
- the deductible taxes must be based on the assessed value of the property
In our example property the State/County Tax and City Tax clearly meet the requirements of being calculated based on the assessed value of the property. However, the Special Tax charges are not taxes based on the assessed value of the property. If there were a Refuse charge included that would not be calculated on the property’s value either.
If this were your property and you or your tax professional look at the 1098 provided by the mortgage company at the end of the year the $6,114 would likely be reported as the deductible property taxes. This would be incorrect as the $531 Special Tax is included and we just determined that is not deductible.
So what is included in the Special Tax charges? These are known as special assessments and occur when; for example, your city decides to install sidewalks on your block and divides the contractor’s bill between the properties that benefit from the improvement. There is a tax benefit to be had; however, you will not receive this benefit until you sell the property as these payments over time add to your basis in the property.
Basis is a term we have not talked about thus far on the blog. Basis is however, the foundation for the “what” of depreciation so we will continue to use our example property next week to bring us back to the continuation of our review of all things depreciation.
visit http://www.HMBCribs.com for more real estate investing information
5 Sure-Fire Ways To Get Crushed In A Commercial Deal
Let’s face it – not all commercial properties are cherry and not all commercial brokers or sellers are above board when it comes to disclosure. The commercial world is truly one of caveat emptor, or let the buyer beware. And because it’s not a consumer transaction, you won’t get much help from government regulatory officials if you get ripped off.
For this reason, it is imperative you conduct proper due diligence to understand where the major cracks can occur in the foundation of a commercial deal. Although this is no replacement for experience, proper education, a commercial lawyer, or a mentor, here are the 5 biggest ways you can start down the road of financial independence and end up on the streets of financial heartbreak:
1) You don’t know the real value – Different types of commercial properties use different valuation models and have different cash flow expectations. If you don’t know the “real” formula to use to value a particular type of income property, but rather rely on the seller or broker’s number, you could find yourself overpaying for the property.
2) You don’t understand financing – Although liquidity for commercial deals is out there, it is still tight. Currently, conventional financing is only available for performing properties. What does that mean? It means, for example, in an apartment building deal the building must be 90% or more occupied for at least 1-2 years. If you don’t have that, you will have trouble getting a lending commitment or you will have to infuse more cash into the deal.
3) You invest in bad areas – Section 8 financing sounds great because it’s “guaranteed,” but what happens when high crime chases even all those tenants away? High crime areas inevitably lead to high vacancy. You won’t be able to overcome high crime and high vacancy without turning around the entire neighborhood, so don’t let the high cap rate lure you in. There are enough good deals out there in good areas that you don’t need to be visiting your properties in a bullet-proof vest.
4) You get fooled by “pro-forma” numbers that are provided by a broker or owner – Surprise, surprise! Sellers and brokers like to give you “fantasy” numbers based upon sometimes unrealistic occupancy rates or rent numbers that aren’t in line with the current economic conditions. Sure your property will produce at a 23% cap rate – but only in 15 years and only if David Hasselhoff becomes President or stops eating hamburgers off the floor. Never, never, never, rely on the seller or the seller’s broker for numbers. There is no substitute for independent, third party evaluations.
5) You fail to conduct proper due diligence – I know this is somewhat a repeat of #4, but that should highlight for you how important it is to conduct proper due diligence. Inspections of the property. Environmentals. Audit of the books. Back-up bank statements. Affidavits of existing inventory. All the things a good mentor and commercial attorney can help you with. Your due diligence file should be HUGE.
6) You don’t have good management in place (In know…Good pickup. I only said I was giving you 5 tips. I started writing and couldn’t stop. Consider this your Bonus Tip – for FREE!!). I know investors that buy multi-unit buildings and are highly leveraged. In the first several years, when stabilization may be a problem, it is easy to get into problems if you have either an incompetent or dishonest management company. You have to conduct due diligence not only on the property, but also on the management company. And you MUST have someone locally that can check on the property periodically to ensure the management company is performing. Bad management equals high vacancy rates and lost money, so be careful!
Look for some commercial videos soon!
Need to understand commercial lingo, what the hottest commercial opportunities are right now, or how to start in commercial investing? I’m getting a commercial property author, investor and expert to give away some training videos for free to our subscribers to help you get started.
I’ve also got some good webinar stuff lined up on commercial investing so, if you want to take the next step, you can.
All I Want For Christmas Is My Free Con-doh, My Free Con-doh.
By: Jeff Shiller, Esq.
Or, the alternate title: How To Own a $240,000.00 Prime South Beach Condo For $4 Per Year.
Ever since the 1980’s, I’ve been trying to figure out ways to buy a cheap retirement home in Florida so I could wear white clothes year-round and solve crimes in my Ferrari (hold on a sec. I’m looking for a cheesy picture. Okay. Got it. I’m back).
After much deliberation, I think I’ve finally figured it out, and I’m sharing my top 2011 investment strategy with you.
The collapse of the Miami/Palm Beach County real estate market is legendary. And now, to add insult to injury, a large south Florida law firm caught up in the robo-signing mess had many of their FANNIE and FREDDIE foreclosure files pulled and re-assigned to new law firms. The resulting confusion between lenders, trustees and the local courthouses led to many Palm Beach County homes being sold to investors at foreclosure auction this month for as little as $200. Yes, that’s correct, 200 bucks.
Here’s the article:
http://www.sun-sentinel.com/business/fl-stern-foreclosure-sales-20101209,0,784272.story
According to the article, “56 percent of winning offers were from investors or individual buyers who in some cases spent no more than a month’s mortgage payment to get homes that sold for upwards of $240,000 during the real estate boom.”
It doesn’t take a rocket scientist to figure out that those investment numbers work. So if you’re like me and have thought about buying that dream 2nd home that could also generate rental income, get off your rocking chair and start thinking about purchasing some south Florida real estate!
Here’s the catch – you’ve got to get your location right and time your exit for maximum profit, so I’ll give you my formula for that.
According to Al Gore and the other global warming crackpots, sea levels will rise by as much as 0.7 meters by 2060.
So here’s the solution. Go down to FLA when the next bulk auction is scheduled. Buy your dream condo for $200. Make sure you buy above the 5th floor. Hold it for 50 years. Sell when the water hits the 2nd floor.
Voila… a Florida condo for $4 per year. And you get to sell for at least the insurance money. What a deal!
In all seriousness, look for my upcoming posts regarding condo investments. I’m going to address the dos and don’ts and pros and cons of buying a condo as an investment, and even speak with a real, live south Florida condo expert on the state of the market. Then we can get the bottom of this global warming problem.
Merry ChristmaKwanzaKa.
Til next time, Jeff
P.S. One of our readers sent the following article to me about the SAFE Act. It’s a good summary of my other SAFE Act articles. Thanks Kevin!
Exclude Capital Gains On That Rental By Moving In?
So you have an investment property that you have been renting and even at today’s value has a market value higher than your basis; how can you minimize some of that gain? Prior to December 31, 2008 there was a significant ability to reduce those gains by just moving in for two years. In fact, if you were married you could have exempted yourself from capital gains on a whopping $500,000 of equity build-up. Just in time for the market melt-down Congress reduced the sweetener though.
Prior to passage of the Housing Assistance Tax Act of 2008 (H.R. 3221) you only needed to live in the property as your personal residence for any two of five years that you owned the property and you could exempt up the full amount of exclusion. The two years could be any of the five years in any combination: live in the property for two years and rent for three years, rent the property for three years and then move in for two, or even live there every other year of the five if you really liked moving.
Under H.R. 3221 the period of time the property is not used as your personal residence is termed “non-qualifying use.” The ratio of non-qualifying use compared to the 5-year time frame reduces the amount of gain that can be excluded. For example, John who is married and files jointly lives in a property for 2 years of the 4 years he owns the property. Fifty percent of the time is non-qualifying use so his gain of $100,000 would only be excludable up to $50,000 and he would owe capital gains on the balance. If he had owned the property for five years; rather than four, his exclusion percentage would have increased to 60% leaving capital gains due on $60,000.
Third Party Loans Pave The Way
The TV show “Shark Tank” will teach one a lot about bridge loans or hard money as it is called. Hard money is a loan obtained from a third party who is not necessarily a lender like a bank or a mortgage broker. In small towns there are always a handful of locals who have enough capital sitting around to help a cousin or friend of a friend buy their first home. Often a home that is not lendable like a single-wide or one that needs considerable fixing up. On a larger scale a bridge loan would be a more formal financial arrangement for a commercial venture. For example, a plumbing contractor wants to fix up bank owned properties he has purchased for pennies on the dollar. The lending party will provide that cash to get the job started knowing the contractor will be able to pay it back once the remodeling is complete and the home has been rented or resold. Either way hard money is a great way to generate operating capital to get a business service started or bail out an existing construction job.
In these tough economic times, commercial real estate developers are often the first to falter financially. Take a large condominium project that started during the boom as an example. The first tower was completed and sold out quickly, so the second tower was started. When the bottom began to fall out, it is likely several of the first tower investors started to fall back on their note payments. Then construction costs soared and the 2nd tower project stalled. This is the perfect time for that developer to turn to a real estate capital lender like Madison Realty Capital. The developer is not going to qualify for a bail out from a bank or your typical mortgage broker so a bridge loan provider is the only option. There are not downsides since there are no other options at this juncture. The interest rate may be high and the loan term may be short, but if the developer offers an equity stake in his condominium venture, that bridge loan can turn into a win-win.
At some point the market will turn around, the bridge loan or hard money will have helped you through the hard times or the start-up. Now the future will be newly paved without any further financial headaches. Ideally, the money borrowed will be paid back and any further interim financing required will be less of a mystery. Indeed future hard money loans would be available at better interest rates with a proven track record of successfully completed projects.
Using Hard Money To Fund A Construction Project
You are ready to start construction, but the loan process is slowing you down. You should consider obtaining a hard money loan to get going on your project today. Hard money loans can be obtained quickly and with little upfront cost to you. What are hard money loans and how can I obtain one?
Hard money loans are a type of real estate loan that is provided by private investors, through brokers. The collateral for this type of loan is the value of the property. In the case of a construction loan it is the improved value of the property. In order to provide security to the lender, the hard money loan will have higher interest rates than a conventional loan, and will be limited to around 65% of the improved value of the property. The lender will also only lend from the first position, so that in the event of a foreclosure, they are the first party to recover their investment.
Hard money loans are short term loans, so you need to have an exit strategy before obtaining one of these loans, such as a plan to sell the property when completed or to refinance the property through traditional institutions.
Although the loan is limited to 65% of the improved value of the property, construction loans will generally cover all of the costs of construction, assuming that costs for construction are less than the value of the property upon completion.
If you have a business that is growing at a rapid pace and you are ready to expand by constructing a new building or updating your current building. Obtaining enough capital to obtain traditional financing for this construction can take a while. In this case, it would be worthwhile to pay a higher interest rate for a hard money loan, and be able to start construction within days.
Hard money lenders are available all over the country; a web search will turn up many lenders available in your area. Several websites will give you access to multiple lenders. Before approaching a lender, have your plan in place. Have complete details on all of the costs associated with the construction project, an appraisal of the completed property, as well as details on your exit strategy. Provide this information to the lender(s), and you should receive approval within a day or two, and be able to close on the deal within a week.