Archive for May, 2011

6 Short Sale Tips

Every worthwhile real estate mentor has valuable trade secrets. In this blog, I’m sharing a few of my short sale secrets that will make closing your next deal much easier.

#1. Submitting a complete short sale package is critical. As we all know, every lender’s loss mitigation department is swamped with more requests than they can possibly process. When they receive a less than complete short sale package, it goes to the bottom of a very big pile. Each lender has different requirements. Be sure you know the requirements of the lender you are dealing with. Here is a generic list of the minimum they want to see:

  • Cover Letter
  • 3rd party Authorization to Release Information
  • Seller’s Hardship Letter
  • Seller’s Financial information
    • 2 years W2′s
    • 2 month’s pay stubs
    • 2 month’s bank statements
  • Supporting Hardship Info – unemployment, job transfer, medical/disability statements, etc.
  • Repair estimate for the property, when applicable
  • Very recent comparable sales for the property
  • Signed buyer contract
  • HUD-1 Net Sheet
  • First mortgage holder may want to see what a second mortgage holder wants for a payoff
  • FHA and VA have their own forms and requirements

Commercial Mezzanine Loan Basics

Commercial mezzanine loans are considered by some to be complex by those working to better learn real estate investing. They really are not all that complex. However, what makes them seem complex is they are often for large amounts of money, structured differently than traditional loans, and use terminology different from traditional lending sources.

As you learn real estate, you’ll come across the term “capital stack”. This is language used to describe the order that lenders and property owners are entitled to cash flow from the commercial property. Typically, this would be the first mortgage lender followed by a mezzanine loan and the last claim to cash flow is the owner with equity in the commercial property.

Some real estate coaches over simplify mezzanine loans by describing them as a second mortgage. I make that point because I want you to learn real estate correctly. If you own a commercial property and are looking to take some of your equity out, you need to understand how a mezzanine loan works.

Typically, commercial first mortgages have clauses that second mortgages are not allowed on the property. Even if they don’t have a specific clause about this, they effectively accomplish it with low LTV percentages like 70%. That is the incentive that created mezzanine loans because they are not secured by the commercial property.

There are several ways that mezzanine debt is structured. One common way is for the lender to be secured in some way by the equity the owner has in the property. This can be done by directly partnering the property owner and the lender. Essentially the lender becomes a part owner in the corporation or LLC that owns the property. Part of the contract will entitle the lender to a portion of the cash flow from the property. Once the first mortgage is paid, the mezzanine lender takes their payment before the owner is entitled to the remaining cash.

Make Your Profit When You Buy Wholesale – Not When You Sell

For many investors it seems counter intuitive that profits in the wholesale market are made when you flip the property rather than when you buy it.

Here’s the key, the people on your buyers’ list are also real estate professionals. They know the market. They know what they are good at. They probably have a few trade secrets they don’t share with anyone. Not even you, their trusted wholesale partner.  

If you think you make the most money in a wholesale deal buying a house at the deepest discount and flipping it to the highest bidder on your buyers list, you’d be wrong.

Let’s say you find a $150K property discounted 45% based on the After Repair Value (ARV). In other words, it will retail at $150K and you can grab it for $82,500. This gives you a profit spread of $67,500. It needs a major bathroom remodel that will cost $18,000. There is still a potential profit of $49,500 in the deal. You want to wholesale it to a rehabber and take a $22K profit for yourself while leaving them $27,500 of ARV profit.

Looks like a great deal right? With those numbers, any rehabber on your list should grab it right?

Probably not if you haven’t done your up-front work correctly.

You see, the rehabber looks at it differently than you do. While the profit margin looks good to your rehabber, the amount of time it will take to turn the property doesn’t work as well as other deals. A bathroom remodel is time intensive. It takes a week to rip out the tile, bath tub, sink, and other components. More than likely, he’ll need to repair the subfloor before he can even begin remodeling. There are a lot of materials involved and he might have to wait for some to be delivered. What he sees is a project that will take six weeks to turn that $27,500 profit. So he passes on the deal and you haven’t got a clue why.

Selling Investment Property with a Wrap Mortgage

When it comes to wrap around mortgages, most real estate coaches will tell you it’s a great creative financing tool. And of course, it is. What most real estate couches forget to share with you is that it makes just as good of tool when it comes time to sell your investment property as well.

Like any investment, there is a time to buy and there is a time to sell. It all depends on your particular investment. As a real estate coach, I frequently remind students they always need to be evaluating their investment portfolio. You should always know which of your investment properties is bringing in the least profit. At the same time, you should also be on the look out for a more profitable investment.

Hopefully, you see where I’m going with this as your real estate coach. When you think you’re onto an investment opportunity that is more profitable, it’s time to run the numbers to determine if you should sell one to buy the other. That means looking at the possibility from every angle. One of those angles should be selling the least profitable investment with a wrap mortgage.

A wrap mortgage can add to your portfolio profit long or short term (depending if you include a balloon payment in a few years). You as the seller and lender in the deal collect the spread in the interest rate as well as a higher loan payment on the equity you have in the investment. Let’s say you purchased an investment property for $100,000 several years ago and can sell for $150,000 today. It’s been a good investment and turns a profitable rent every month. However, it is the least profitable of your investments and there are better opportunities in today’s market.

Landlords Go Green

If you aren’t familiar with the term “going green” by now, you must be living in a deep dark dungeon and it’s time to let some energy saving sunlight into your real estate training. “Going green” is an abbreviation that stands for everything environmentally friendly.

There are hundreds of ways to make your rental properties more eco-friendly. Some are definitely more affordable than others. One of the biggest drawbacks for landlords going green is that the rewards for energy conservation go almost exclusively to the tenants unless you offer free utilities with your rent. If you do, I don’t need to convince you to go green because you’ve already seen the cash that it will save you.

In many cases, your true motivation is that a serious percentage of tenants are looking for eco-friendly landlords and expect to find green features in your rental units. This is particularly true of younger and upscale renters.

For existing properties, installing green features begin when repairs and replacements are needed:

  • Installing Energy Star appliances
  • Tank-less hot water heaters
  • Vinyl windows
  • Improved insulation
  • Water barrels