Archive for December, 2011
Using a Wrap Around Mortgage to Sell Investment Property
There is a time to buy and a time to sell real estate investments. If you find it a time to sell an investment, you may be discouraged by the lack of buyers and even more discouraged by the lack of buyers that qualify for a loan in these times of tight lending standards. If this is your situation, you may want to consider selling with a wrap around mortgage.
Wrap around mortgages first became popular in the 1970s when interest rates shot up as high as 18%. The wrap around mortgage became popular because buyers were able to take advantage of much lower interest rates on homes with mortgages written before interest rates went shy high. How times have changed. Or have they?
At that time, real estate prices were more reasonable than today. The problem with the real estate market at the time was buyers couldn’t qualify for mortgages. Not because real estate was too expensive for their income but because the interest rates made the payments to high. Bottom line is buyers couldn’t qualify.
While today’s interest rates are at historic lows and home prices have dropped, the root problem remains the same as it was when wrap around mortgages became a popular financing alternative in the 70s. Buyers can’t qualify for conventional financing.
If you want to sell an investment property today, you need to consider seriously either the wrap around mortgage or seller financing. Generally, seller financing is more appropriate if you own the property out right. If you have an outstanding loan, you need to write a wrap around contract.
You gain big advantages in the market when you offer buyers some type of financing assistance. One benefit is you attract more potential buyers. The other biggie is you can often not only sell for full market price but at a 10% premium just by offering financing assistance.
With more potential buyers, you can be more selective whom you sell to. A few short years ago, many of today’s buyers would have easily qualified for conventional loans. It’s not that buyers changed. The lenders changed the rules. With a large pool of potential buyers to select from, it shouldn’t be difficult culling out the most qualified. Those not likely to default on the payments.
Short Sales and Bankruptcies Mix Like Oil and Water
The year 2007 total for U.S. bankruptcy filings came to 850,912. Of those, 822,590 were personal bankruptcies (nonbusiness). By the end of 2010, the total jumped to 1,593,081. This year is on track for another 1.5 million bankruptcies. That’s about a 94% jump from when our economy was in good shape to where we find ourselves today.
The reason I bring this to light is that as a real estate investor you never want to become involved with the short sale of a property involved in a bankruptcy. The only time you combine a bankruptcy and a short sale is before the borrower declares bankruptcy. The genuine threat of bankruptcy as part of the borrower’s short sale hardship can convince a lender to approve a short sale.
Before going further, I want to be clear that I’m not offering any legal advice. I’m not an attorney and I don’t know the facts in your situation. I’m only sharing information. You need to check with a competent attorney regarding your situation.
Once the borrower files for bankruptcy, the short sale process becomes much to complicated to justify pursuing it. The bankruptcy filing stops all collection activities. A short sale is considered a collection activity. Instead of working only with the lender and borrower on the short sale, you now have to work with a court appointed trustee of the bankruptcy and the lender and the borrower.
If you think you have the perfect short sale property and want to go through the process, this is what you should expect. First you need to obtain a court document known as an “Affidavit of Abandonment for Real Estate and Asset”.
Obtaining that document requires proving to the court that the borrower has no equity in the property. You begin this process by collecting evidence such as contractor estimates, appraisals, market reports, and other supporting documents.
There Can be No Economic Recovery Until Real Estate Recovers
Real estate is the corner stone of our economy. A recovery of the real estate sector has always brought us out of past recessions. This one will be no different.
We know a big surplus of vacant houses has existed on the market for years. Much of this is caused by the foreclosure catastrophe. If nothing changes, we will eventually work through the glut and return to normal in several more years. But do we really want to continue in a very slow recovery for years to come?
The government has made several unsuccessful attempts to reduce foreclosures and thereby stimulate the economic recovery. All of us are aware of the government’s Making Home Affordable Program and spinoffs like Home Affordable Modification Program. No single program or combination of programs has made a noticeable improvement in the recovery of the residential real estate sector.
Some expert’s have advocated the government intervene to force a reduction of mortgage principles so that homeowners can refinance at today’s lower mortgage rates. While this may be a viable option, it would come at another heavy expense to taxpayers.
A better solution is establishing tax incentives for investors like you and I to buy up the glut of houses and either turn them into rental properties or sell them on the open market for market value.
There are several advantages to putting an investing incentive in place. Foremost, only after the surplus dries up will the market return to normal and housing values begin appreciating again. When that happens, homeowners and investors alike will be able to refinance or again sell properties at a profit.
This is a much less expensive alternative to taxpayers. Congress should enact an investment incentive allowing investors to immediately depreciate the value of properties instead of requiring it be done over multiple years. Although I don’t favor controls on investors, if the government enacts this incentive, it is also likely to require the property be held for a period of time that could be several years in length.
Overall, increased immediate depreciation would have the compound affect needed for a rapid real estate recovery. The tax savings for investors would make more investing funds available. These funds would be plowed back into the real estate market to further reduce the excess inventory. Reducing the inventory takes pressure off the lenders’ balance sheets when the FDIC reduces the amount of reserves lenders are required to hold in anticipation the loans will not be repaid.
Critical Sales Advice From a Real Estate Mentor
The real estate profession is about providing a service. Unfortunately, too many people approach it with the attitude of a salesperson. Having an attitude of a salesperson will hold you back in any profession. People resist being sold to.
Many readers will recall the dinner hour before the advent of the “do not call” list. These were salespeople calling when they were most likely to find people at home. The practice by salespeople of calling during the dinner hour was so annoying that a federal law was passed allowing people to enter their phone number on a do not call list. Salespeople face harsh financial penalties for violating the list.
I’m not saying that real estate professionals are anywhere near that annoying. The point is that people don’t like having sales pushed on them. When it happens, they resist. They will hang up the phone. What they seldom do is make a purchase.
Let’s contrast that with what happens when services are offered. Whether you are a landlord, or rehabbing properties, or wholesale flipping, you are offering a service. When you offer your services, you look for a good match with what the buyer needs. Instead of trying to close the deal beginning with your opening conversation, you should be looking for ways to exceed your clients’ expectations.
Taking this approach makes a huge difference in both your business success and your self-esteem. You stop thinking that you have been rejected as a salesperson and start thinking your services just weren’t a good match at the moment.
It will improve our business because those that don’t buy from you will walk away with a positive experience when you try to help them. The opposite of trying to avoid a salesperson. When they come across someone that is a better match for your services, they are much more likely to recommend you even when they didn’t complete a deal with you.
Multifamily Investing – With Caution
It depends very much on your geographical location but there are signs the multifamily sector may have peaked – at least temporarily and in certain locations. In primary markets like NYC and Washington D.C., big institutional investors have driven cap rates of return down below 4% in some recent deals. There are even reports some class A properties have been bought for negative cash flow amounts.
Additionally, most everything desirable has been purchased. Where land is available in the primary markets, the big guys are starting to build apartments again. Because land is limited in the major markets, other large investors are expanding into secondary markets like Seattle and Charlotte. There is even some renewed activity for third tier markets in the Mid West. However, these remain focused on class A properties.
Obviously, smaller investors are looking for class B and C properties. On that front, there was a 47% increase in multifamily loan originations in the second quarter of the year compared to the first as reported by the Mortgage Bankers Association. Just as important, up until recently, about the only lenders making loans in this sector where Fannie and Freddie. A significant number of the recent up tick in loan applications were accepted by regional and local banks.
While high-rises dominate the primary markets, garden apartments – low-rise buildings surrounding a common courtyard – saw a dramatic increase in sales volume. These are properties small investors can get into individually or with small partnerships. This sector accounted for a full two-thirds of multifamily transactions in July and May saw a 165% increase year on year.
Here’s where the short-term risk is in multifamily housing. Until development begins with some vigor in this sector, competition among buyers will remains strong – driving higher prices. Forecasts for more development remains very low in primary markets but is increasing in others. The other variable is the shadow market for residential houses. In markets with high foreclosure rates, the shadow inventory has the potential to affect apartment rent rates. Lenders have demonstrated they intend bringing REO onto the market gradually so as not to force prices down further.