Archive for January, 2012
Wrap Around Mortgage Q &A
Today, I want to take some time to answer wrap around mortgage questions I often receive. First, a legal disclaimer because I am not providing legal advice. Only general information. You need to seek competent legal advice based on your specific circumstances. With that said, let’s take on some tough questions.
Q #1: If you invest in a house by financing it with a wrapped around mortgage and the seller files bankruptcy, can the house be repossessed from you if you are the legal owner?
A #1: You’ll need to get competent legal advice here because circumstances will affect the outcome. Technically, the seller that is going into bankruptcy does not own a legal right to the property. If the original mortgage is current, you will probably prevail in court but it could be ugly. The bankruptcy trustee is going to at least want any money the seller has coming from the wrap around mortgage.
Q #2: What happens to the seller if the buyer in a wrap around mortgage declares bankruptcy?
A #2: The seller has a few options. Some better than others. As the holder of the wrap around mortgage, you are holding a second mortgage. The original lender has the senior loan. You can foreclose on the property but the original loan must be kept current. That could require you to make the original loan payments until the foreclosure is complete. If the original loan is in default, the original lender has the right to foreclose. If the property sells for more than what is owed on the original loan you will receive the balance. Another option is contacting the buyer and asking them to deed the property back using a deed-in-lieu of foreclosure. The advantage for the buyer is this can preserve their credit rating.
Buying Foreclosures Online – What You Need to Know
Foreclosure investing remains a highly profitable market as long as you know what you’re doing. When you do it correctly, online investing in foreclosures opens an enormous market where you will find the best deals. Many of the online sellers are big investors that bought foreclosures in bulk. They are wholesale flipping their inventory. It’s not uncommon for many of these to sell for as little as $10,000 to $20,000.
Being successful at investing in online foreclosure property means knowing and managing the risks. You’re bidding sight unseen on these properties other than the hand chosen pictures the seller serves up to you. You need to factor potential and real problems into your bidding strategy.
- The property is sold “As Is”. If the roof leaks, you can’t go back to the seller demanding repairs.
- Many states have a redemption period anywhere from 10 to 700 days. Hardly anyone ever redeems their foreclosed property but you might not be able to take possession until the redemption period expires. The most commonly redeemed property is farmland when the farmer is able to buy the property out of foreclosure when the crop comes in. Don’t bid on farmland and know the redemption laws in the state you are investing in.
- Another strategy around redemption periods is buying the redemption rights from the previous owner for a few hundred dollars.
- Know what you are bidding on. Some online auctions are selling the mortgage or liens rather than the property itself. It doesn’t make much sense to buy a mortgage that is in default unless you plan to foreclose on it.
- Previous owners become bitter when they are foreclosed on. It’s common for them to strip the house of everything including the kitchen sink.
- These aren’t courthouse step sales that require full payment in as little as 24 hours. However, you aren’t going to have much time to find financing after you make the purchase. You need to have it lined up before hand or risk losing both your deposit and the property.
You Need to Know the FTC Rule Regarding Short Sales
If you are investing in short sales or helping homeowners with short sales, you need to be fully aware of a Federal Trade Commission rule intended to protect consumers. As a real estate professional, it’s assumed you are a more sophisticated investor than the typical consumer. Unfortunately, there have been con artists taking advantage of homeowners attempting a short sale. That’s the reason the FTC came out with a ruling to protect consumers.
The ruling primarily covers three areas. First you or a short sale negotiator you hire cannot collect an up-front fee to negotiate a short sale on behalf of the homeowner. You or your vendor can collect a fee but only after an offer from the lender is presented to the homeowner and the homeowner accepts the short sale offer.
The second area covered by the rule requires certain disclosures to the homeowner. A short sale negotiator must disclose:
- The negotiator is not associated with the government and their services have not been approved by the government or the consumer’s lender.
- The lender may not agree to change the consumer’s loan.
- If the negotiator tells the homeowner to stop paying their mortgage, they must also tell them that they could lose their home and damage their credit rating.
- That the homeowner can stop doing business with the short sale negotiator at any time.
- That the homeowner can accept or reject any offer made by the lender.
- The amount of the fee the homeowner will be charged.
Have an Exit Strategy Before You Buy
If you’ve been a real estate investor very long at all, you should know how important having an exit strategy is. Frequently, the first question I ask new real estate investors is – “How do you plan to profit from the investment you are about to make?” Way too often the answer I get is – “Hmmm… I like the price I’m paying but I haven’t thought about how I’ll profit.”
When you invest in real estate without first having an exit strategy, you don’t have a plan to make a profit. When you don’t have a plan for a profit, you can’t determine what the property is worth to you. The asking price compared to the value to you can be very different depending on your exit strategy.
Long Term versus Short Term Investing
You’re first consideration should be whether you plan to hold the property long or short term. When you can invest in a property for little or nothing down, you probably want to go with a long term investment strategy allowing you to build equity over time.
There are many strategies to getting into a property with little or nothing down. Seller financing is one way. A seller offering seller financing has a much larger pool of buyers. They do this to obtain the maximum price for the property. As an investor, you can get in for very little cost but you have no equity. Your exist strategy should holding long term while profiting from rental cash flow.
If you want a short term investment to turn a fast profit, you’re going to want to buy the property as cheaply as possible. Probably wholesale. In today’s market, getting the best price on a property means paying all cash when others are making financing contingency purchase offers. When a seller is willing to sell at a deep discount, they usually wanted the money yesterday. You’ll get the best price when you offer all cash and can close in a matter of days – not weeks. Now you have plenty of equity in the property and can flip it to a rehabber or sell on the retail market for a nice fast profit.
Important Tips for Investing in Commercial Real Estate
Most people start their real estate career investing in residential properties. Eventually, they look to commercial investing because it can be much more profitable. Before you jump into commercial real estate there is different information you need and a different approach compared to residential investing.
Six Tips to Get You Started in Commercial Real Estate
1. Commercial real estate is valued differently than residential. Residential properties derive their value based on recent comparable sales of similar properties in the neighborhood. The value of commercial property is primarily determined based on cash flow. Two buildings, each with 6,000 square feet and located on the same downtown block will have different asking prices. A single tenant small grocery store is likely to have less cash flow than a multiple tenant office building for attorneys and CPAs.
2. Market and sector knowledge is critical to your success. If you have personal knowledge about a particular commercial sector, stay with that sector. If you have no knowledge about a sector, gain the knowledge you need before investing. Even if you’re only the landlord, you don’t want to invest in a hotel if you don’t know anything about the hospitality industry. Same thing with the manufacturing sector. You don’t want to own an industrial strip if you don’t know the best use of the property to maximize cash flow.
3. Different formulas are used in commercial real estate investing. Along with sector knowledge, you need to learn new profit and loss formulas before investing in commercial properties. In residential you may have only bought properties for 75% of after repair market value or rentals that cash flowed 20% above expenses. In commercial real estate, you need to understand cap rates, net operating income, and loan to value ratios. They’re not difficult but you’ll run into them often in commercial investing.
4. Patience is a virtue when investing in commercial real estate. You don’t always want to invest in whatever is currently on the market just because you have the money. First, you want to determine what you want to invest in based on tip 2 above. Next, build a network of professionals involved in the type of investment you want to make. Finally, wait for the right property to come along at the right price based on the formulas in tip 3.
5. Consider the long term impacts before investing. Beside the immediate cash flow, you need to understand what is likely to happen to commercial real estate in the surrounding area in the coming years. Is it located in a city where the core infrastructure has been neglected for years? If so, businesses will slowly begin locating elsewhere in the years ahead. Look at things such as a major employer in the area struggling financially and it’s becoming questionable if they will survive. Look at the tax base of the community. Has it consistently been declining along with associated services?
6. Don’t put all of your eggs in one basket. If you’ve had success as a residential investor, keep some on your holdings in residential. The commercial and residential sectors don’t always run in the same business cycle. Whether investing in stocks and bonds or real estate, smart investors always strive for a diversified portfolio.