Archive for September, 2010

Build Your Real Estate Portfolio at Wholesale Prices

During May 2010, banks took back 273,962 homes through foreclosure. That was a typical month in today’s recession driven market. These are houses without modified mortgages to make them more affordable, nor were they short sales, nor did they sell on the courthouse steps. These are houses the banks took back as REO. With an average price of $182,500, the total value of these homes is almost $50 billion every month. 

Bulk REO is a batch of houses, commercial properties, or raw land that banks and other lenders package together with the intent of selling at a deep discount in order to raise cash and remove the toxic assets from the books. The packages are auctioned ‘as is’ to preapproved investors, hedge funds, and others able to pay cash or qualify for a large loan. Needless to say, bulk REO offers investors the opportunity to make excellent profits. 

Banks have several reasons for not holding onto bulk REO packages. These include the associated costs of taxes, maintenance, insurance, and utilities. The bottom line is that banks need money right now, not more bills. 

Fannie Mae’s Real Estate Market Forecast

In recent testimony before the US congress, Federal Reserve Chairman Bernanke referred to the overall economic outlook as “unusually uncertain”. In its August Economic and Mortgage Analysis report, Fannie Mae followed suit by offering little hope in the near term by expecting what we have seen so far in 2010 to continue into early 2011.

As the economy moves well into the third quarter of the year, what earlier was optimism is wavering but has not turned into pessimism. This is based on the most recent downward revision of the year’s second quarter gross domestic product (GDP) growth from 3.7% to 2.4%. In stable economic times, either of these growth rates would be acceptable with 3.7% warning of possible inflation ahead and 2.4% cautioning of a slowing economy. What makes a 2.4% GDP growth rate worrisome in today’s economic environment is that every robust recovery from a recession since WW II has seen a first year growth rate above 6%.

Most economists believe 2009 was the first year of recovery but it only saw a GDP growth rate of 3.2% and we haven’t seen anything near 6% yet. Major indicators show that we have not slipped back into the dreaded double dip recession but the recovery has stagnated and there will not be a robust recovery.

Creative Use of Lease Options for Low Cost Rehabs

There are many creative uses for lease options for both residential and commercial properties but few people realize lease options can be a great cost-lowering tool for rehabbing properties. A little creativity gets you in and out of the property for substantially less cost than if you purchased the property outright.

When you purchase, you need to either pay all cash or make a substantial down payment and pay a bunch of closing costs and junk fees to take out a mortgage. People trying to unload a property in poor condition are willing to give you a an assignable lease option. Being able to assign the option to another buyer means no closing costs for you.

When you use a lease option your only cost to get into the property is a modest purchase option fee. Now you have control. Just be sure you include a clause in the option contract allowing you to make improvements to the property. It’ll be easy to convince the owner of a junk property to make improvements costing him nothing.

Your next savings comes from a reduced rent based on the poor condition of the property. How much can be knocked off the rent varies based on the property condition and the local rental market. In today’s market, a 40% reduction can be expected. That means if the going market rate is $700 and you add a lease option premium of $150 per month, the going lease option rental rate will be $850. But based on poor property condition you discount the $700 market rate by 40% down to $420. Add the lease option premium back in to come up with a $570 monthly rent with the $150 being credited towards your purchase price.

Big Change Coming to Fannie and Freddie

The word “stagnation” is beginning to replace the word “recession” as the economy stabilizes and slowly recovers but there are more bumps along the bottom than most of us would like. Now, with the government’s intervention to stimulate the economy into recovery over, it continues to look at reform to prevent a relapse of what drove us into the recession in the first place.

Mid July saw the US Congress pass the Wall Street reform package. On going in the background, the Obama administration is engineering changes to the real estate mortgage industry. Between the quasi government controlled Fannie Mae, Freddie Mac, and the fully government controlled HUD, 90% of the $10 Trillion mortgage market is currently controlled by the government.

The Obama administration doesn’t plan to release details of how it wants to change the mortgage industry until January but a preview of the upcoming national level housing summit revealed the current thinking of what those changes might be. Treasury Secretary Timothy Geithner commented that he expects the US Government to continue playing a role guaranteeing mortgages; however, the goal of coming changes “is to make sure that any government guarantee is priced to cover the risk of losses, and structured to minimize taxpayer exposure.”

Successful Online Real Estate Transactions

Whether you are looking to buy, sell, or rent real estate, you need to keep the proper perspective of what technology can do for you. Although over 80% of all real estate transactions begin with the prospect or client performing an internet search, in the end it always requires your salesmanship to close the deal. While people buy many different products online everyday, it’s the rare real estate transaction that is completed without human interaction.

With that in mind, I highly suggest that you do not model your online presence in the way that most major real estate companies do. They tend to over emphasize brand loyalty in an age when people are hungry for information and less enthusiastic about brand names. If you take a close look at most major real estate websites, you’ll find they do not encourage interaction with individual realtors. Instead they encourage searches based on home pricing, square footage, locations, etc. While that is important, it doesn’t highlight the services individuals provide.

As an independent investor, you want to stand out from the crowd. Don’t focus on selling your brand. Instead, focus on the services and properties that you are offering. This means updating your online material as your offerings change.