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.
What Is Hard Money Lending?
A common situation that is occurring within the real estate industry itself is hard money lending. This is when a loan is made for the purchase of real estate, where the property is in the areas of residential or commercial and it does not conform to the traditional bank lending standards. In many cases this kind of lending could involve real estate where the owner is behind on the mortgage payments, there is a bankruptcy or a foreclosure has taken place. These kinds loans are used where traditional bank loans are simply do not exist. This is why hard money lending has many distinct advantages that can benefit property owners such as:
You could avoid bankruptcy: There are many people who purchase real estate and they get in over their heads, where they simply can not afford the property. In many cases these same people have high amounts of debt which makes the prospect of bankruptcy seem like a realistic possibility. When you receive a hard money loan you can be able to use what is known as a deflated rate, this allows you to pay more of the principal back on property. As this continues on a regular basis you will be able to own the property quicker and be able to pay off your debt faster compared to other forms of lending. This will help improve your credit rating by showing that you are making your payments consistently and it will ultimately allow you to avoid bankruptcy.
You can be able to purchase real estate easier: For many people who are investing in commercial properties or even apartment buildings hard money lending is ideal. There are times when you are trying to purchase a piece of real estate where the lending standards are very tight and many investors are afraid to invest. One way to be able to overcome this dilemma is to receive a hard money loan. In general hard money lenders do not rely heavily on your credit report like many traditional lenders; instead they are concerned about if the investment makes sound financial sense. Where, the property is generating enough income to be economically viable during both good as well as bad times.
Clearly hard money lending is a great way to be able to receive the kind of financing that you are looking for. Above are just two of the distinct benefits that hard money lending has to offer. It is through understanding these different benefits that will help you determine if receiving a hard money loan is right for you.
Hard Money Bankers Open Office In Cincinnati
Adding to the headquarters in Baltimore, Maryland Hard Money Bankers, LLC announces the opening of a new office in Cincinnati, Ohio. Matt Adams, a successful real estate investor and entrepreneur has been brought on to manage the new office.
Hard Money Bankers, LLC, founded in 2007, is a private real estate lending company that lends private money to real estate investors when traditional loans are not the right fit.
The company’s dedication to its customers can be seen through friendly service, attention to detail, and consideration of their borrowers. The new office will be no different. Mr. Adams will continue to provide excellent service to all current and potential customers.
As well as providing hard money to borrowers, Hard Money Bankers aims to educate real estate investors as well. A new interactive web site, dedicated to educating and informing real estate investors was launched earlier this month and has received much acclaim.
The new office in Cincinnati, Ohio will also work with brokers on hard money deals to help them place their Borrowers into the right hard money loan with Hard Money Bankers.
Hard Money Bankers was founded by three real estate minded individuals with varying backgrounds. Jeff Shiller, a real estate attorney, has been involved with hard money lending for nearly a decade. Mr. Shiller has gained notoriety though various avenues in the real estate industry including owning a title company and counseling real estate investors. Chris Haddon began his real estate career as a loan officer for Sun Trust Mortgage which led him to co-found a successful real estate investment company. Jason Balin has held nearly every position in the real estate world. From real estate agent to mortgage broker to real estate investor, Mr. Balin has excelled in numerous successful real estate ventures.
Hard Money Bankers anticipates a large response to the new office as Cincinnati, Ohio is a great market for real estate investing.
Visit http://www.hardmoneybankers.com or call (800) 883-8290 for more information.
Hard Money Bankers Announces Largest Quarter In Company History
Hard Money Bankers, LLC announces today that its first quarter numbers are the best in company history in terms of both number of loans closed and total volume. The company has seen steady growth since being founded and sees more growth on the horizon.
The real estate market has seen its ups and downs in recent years and many real estate lenders have been hit hard with the drop in the market. Hard Money Bankers has been able to avoid such volatility and continues to be a strong force in real estate investment lending by continuing to work with well qualified, experienced real estate investors.
Hard money lending in general has seen growth in the past few years despite the tightening of conventional loans. Loans from banks are typically credit based and with the recent credit crunch, even previously over-qualified borrowers have been denied loans. Most hard money lenders including Hard Money Bankers rely more on the equity in the project to determine loan worthiness.
Hard Money Banker’s borrowers are typically experienced real estate investors looking to rehabilitate and resell a property or obtain short term financing for other business ventures. Hard Money Bankers helps dozens of borrowers every month to obtain the financing they otherwise couldn’t get.
The growth that Hard Money Bankers has seen is not typical in the real estate lending world. Hard Money Bankers principal Jason Balin says the rapid growth is due to “working with the right borrowers, performing the proper due diligence, and only funding sensible deals”. Doing so not only keeps production up, but also limits loan defaults.
However, borrowers are not the only ones profiting from Hard Money Bankers successful lending practices. Hard Money Bankers has a stable of capital investors who earn returns on the mortgage notes they back. These investors have also seen profits rise as Hard Money Bankers continues to expand its loan portfolio.
For more information about Hard Money Bankers and hard money lending, please visit http://www.HardMoneyBankers.com.