A HELOC, or Home Equity Line of Credit, is the right to borrow money from a lender up to a certain amount of money. The “line” is a credit line guaranteed by your house, meaning that if you can’t live up to the terms of the line, then the lender has a right to foreclose on your house. Typically HELOCs (pronounced HEE-lock) have floating interest rates that can change periodically.

Who should get one: Someone who might need extra cash for home improvements, or is looking at borrowing money to buy a different house; i.e investors.
   
Who shouldn’t: Do not use a HELOC to splurge for things like vacations or to finance other consumer debts, like credit card . HELOCs are guaranteed by your house, which means the stakes are very high. Think about it guys…Your credit cards are UN secured, whereas the HELOC will be SECURED by your home.

The good news is, Home equity lines can be used by the borrower to pay for anything. You literally get a checkbook for the HELOC and you can write checks to your heart’s content until you’ve maxed out the line’s limit. Although HELOCs were originally designed for homeowners to pay for home improvements and other house-related projects, nowadays borrowers use home equity lines for almost anything. Most HELOCs also have online Internet access so you can pay bills online using your HELOC just like you would with a regular online checking account.

HELOCs and home equity loans can also be used as second mortgages at the time of purchase. Frequently they are the second purchase mortgage for 10, 15, or 20 percent of the purchase price when buying a home. Home buyers can avoid buying mortgage insurance (PMI) if they take out two loans instead of one, with no single loan exceeding 80 percent of the purchase price. HELOCs can fill this gap, wherein the first mortgage is frequently 80 percent of the purchase price and the HELOC is the second mortgage.

Like a credit card balance, you can pay down a HELOC at any time, without penalties.

There is bad news about HELC’s too. Home equity lines are serious stuff, since they’re secured by your house. If you can’t meet the payment obligations such as your minimum monthly balance, your homeownership is in jeopardy.  Make sure you do your homework and fully understand all the consequences as well as the benfits.  What may be a quick fix for debt relief or vacation plans could end up costing you your best investment.

The other thing is, like all mortgages, they are getting harder and harder to come by.  I even know several investors who have had their limits reduced repeatedly for no other reason than the bank just “re-evaluated” thier credit line.

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Adjustable Rate Mortgage (ARM Loan): An ARM Loan has an initial interest rate that is often lower than a conventional fixed-rate mortgage. This initial rate is usually locked in for one or more years. Once the initial term is over, the interest rate on an ARM loan may go up within specified limits over predetermined intervals during the course of the loan. The lower initial interest rate associated with an ARM loan translates to a lower initial monthly payment. The tradeoff, however, is the potential for a higher payment if interest rates go up as the ARM loan progresses.

Annual Percentage Rate (APR): The APR for your home loan is an annual calculation that includes the interest rate quoted by your mortgage company plus additional home loan costs such as origination fees and points. The important thing to keep in mind about your loan’s APR is that it will be higher than advertised interest rates because of these additional factors.

Closing Costs: With each real estate transaction, there are many expenses to pay and agencies to compensate. These fees, which are often shared by the buyer and the seller, are referred to as the closing costs. When you buy a home, the closing costs might include loan origination fees, escrow payments, title insurance, attorney fees and even discount points paid to lower your loan’s interest rate.

Escrow: During the home loan process, a neutral third party known as Escrow holds documents and money (including earnest money deposits) for safekeeping until the real estate transaction is complete. An Escrow account is also used once you complete your home loan to hold the property tax and insurance monies that are collected with each mortgage payment.

Fixed-Rate Mortgage: A conventional fixed-rate mortgage means that your interest rate will be the same for the entire life of the home loan. Financing for this type of loan is typically spread out over 10, 15, 20, or 30 years, depending on the needs and payment capability of the buyer. A fixed-rate mortgage provides buyers with the security of knowing exactly what their monthly house payment will be during the entire loan term.

Lock-In: Home mortgage interest rates vary from day to day. While you buy a home and secure financing, you may decide to lock in a particular interest rate with your lender. This lock-in guarantees that your home loan will be processed with this rate, even if interest rates rise before your loan closes.

Points: There are two types of points that can be applied to a home mortgage. Discount points are used to reduce the loan’s interest rate and origination points may be added to cover the expenses associated with processing a loan. One point equals one percent of the loan amount. This means that, to lower your interest rate by one point on a $300,000 mortgage, you’ll need to pay an additional $3,000 at closing.

Private Mortgage Insurance (PMI): When you finance more than 80 percent of your new home’s value, your lender will require you to purchase PMI. This protects the lender against loss if you default on your home loan. Your monthly PMI payment is added to the cost of your mortgage payment. It is important to note that when you have accumulated 20 percent equity in your home, you will want to check into canceling your PMI to lower your monthly mortgage payment.

Title Insurance: A home mortgage requirement, title insurance protects both the buyer and the seller against legal defects in a home’s title. This policy ensures that a property owner has the legal right to transfer a home’s title to the seller. If a problem occurs, the title company pays the associated legal fees to correct the situation.

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When a bank has to take a home back in a foreclosure, they will want to know what the house is “basically” worth. Many real estate agents and brokers supplement their commission income by doing BPOs, or Broker Price Opinions. Though the income from an individual BPO may only be between $50 and $150, these brokers do well by streamlining their procedures and forms. Many companies allow the completion of BPO forms online, and typically the broker will send some newbie agent out to do the job, and take a “split” of whatever the pay is for the BPO.

There are two major categories of BPOs, the Drive By BPO and the Internal BPO. The name “Drive By” implies the extent of this BPO, but the task and form requirements can vary for this BPO type. Of course, in general the drive by BPO will not require the broker to get out of their vehicle nor go into the home. Needless to say, I think even a total moron can figure out what this information is worth.

Don’t believe how silly and useless these documents are? Perhaps you should hear it from an expert. I read an atrticle recently by a realtor in Oklahoma by the name of Joe Pryor.  Here is an excerpt from his article:

“The BPO is a Brokers Price Opinion. Here is the main qualifications. First, you are a Realtor. Second, you sign up to do BPO’s. Third, you have the fastest finger in the west. What? Yes this is correct. When the order is sent out it is sent to many and it is first come, first served. You may have only made two sales in your life, and you qualify. You are paid very little and often it is reflected in the work. One example was in a neighborhood that was new in 2004 and only one builder. The 2005 house was sold originally at $99 SF. Current 2009 houses were selling at $103 SF by the same builder with the same features. The BPO came in at $105 SF. Great work wasn’t it. Three months later we closed it after protesting and getting another opinion. Meanwhile the seller was hanging in the wind. This year we have a house totally destroyed in the interior, and sold at $120K and that was amazing to get that. The BPO agent did not make an appointment, did a drive by, and came in at $170K. I could go on but on to the next nightmare.

A RMV is a Real Market Value. This has been explained to me without detail by a person at Well Fargo as their “staff appraisers” who have never been to Oklahoma to compare their value to the BPO, or as I like to say, the blind leading the blind. No one will tell me the exact process, but I believe it can involve looking at Zillow, or going by the taxable amount of the property. First, places like Zillow can be 30% off either way, or on the money. They do not have the time nor money to go into a detailed evaluation. Taxes are an equitable distribution of the neighborhood or area assessment. This is not a value to depend on, and some areas in the last few years vary widely on how they are dealing with this in a volitile market. 

This has got to stop. There are some really good BPO agents out there, but honestly a busy Realtor doesn’t want to take the time for say $45 to do a first class job. The RMV should become more transparent and I wonder if lenders really want for us to see the man behind the curtain pretending to be the Wizard of Oz. I know that appraisers aren’t perfect, but pay them a decent amount, and we will get closer to the truth. Short sales require a patient buyer willing to gamble on a long term process that may risk losing a lower interest rate on a quicker close. A seller of a short sale can even lose a job over a foreclosure in some cases. Both parties deserve better than what they are getting with the current system of BPO’s and RMV’s and change is necessary.”

The Internal BPO can also vary in tasks and form requirements. It is definitely more involved, and there are usually more photos required. This type of BPO can require contact with a homeowner in foreclosure, or with a tenant who isn’t aware of the situation. Can you imagine walking up to a tenant and trying got explain that his landlord is about to lose the house and he faces getting kicked out with little or no recourse?

The good news here, is that as an investor you can pay just about ZERO attention to a BPO, but it doesn’t hurt for you to know what it is.

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Here is how we did it:

We found out through our network about a couple who is going through a divorce. They were in foreclosure and had every intention of simply walking away from each other and the home and starting over again. Not an uncommon scenario, in fact in this economy is it extremely common. The number one reason for divorce is money and the number two is fidelity. Yep, people are more worried about who is paying for what than they are who is sleeping with who,, but that is another blog entirely.

So, as it turns out, the home is a 4 bed, 2 ½ bath at 2800 square feet. It is in one of the areas of Little Rock still moving, and is worth 160+ if it is the cutest house on the block. The problem is, that with three teenagers and no money the home is not the cutest on the block, in fact it needs a bit of TLC; about 10-15K worth of TLC. It will take just under $8000 to catch up the loan and they owe right at 90k. Now, part of their problem had to do with a variable rate mortgage (ARM) that went from 750 per month to 1200 per month. No problem there, we negotiated with the bank to bump it down to 750 for the next three years citing the economy, job issues the heart attack that the husband had, etc. They were happy to do it because…guess what…they don’t want the house back and were overjoyed to have the 8k!

Our total commitment is 18k to 23k and our total potential on a straight retail sale is 160k-the 90k loan-15k repairs- 8k to buy out of foreclosure, which equals 47k profit; just over DOUBLING our money. Oh wait, want to see how we could triple our money?

We could Lease Option the place at170k with 10k down and payments of 1150 per month. Now we make 400 per month over the next three years; another 14,400 bucks and all the while the owner/tenant is paying down the note. In three years say they have knocked it down to 85k. Our profit is then 10k down payment +14,4000 rent profit for three years + the 47k we talked about earlier + plus the 5k difference in the note that isn’t even in our name! $23,000 in, $76,400 out. Not bad for a crapped out economy, eh.

Now guys, in an ideal world, the house would be totally pretty and we would do no work on it, and we would negotiate to just start payments back up with the bank, but I think I have shown with a REAL LIFE EXAMPLE that with a little ingenuity, and a bit of education, you can pretty much do anything you want in real estate; the only limits are your imagination and creativity.

How do you think I know that?!

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35 Preston Drive, Jacksonville, Arkansas 72076: 3 Bedroom, 1 bath house with 1200 s.f. of living area. Asking $78,000 and currently rented at $700/mo.

This wholesaler, we will call him “Joe” wants me to buy an investment that will make me $700 bucks month, but I have to give up 78,000. I think any of you who have had even a little bit of training in real estate, not to mention basic math can see that this is NOT a deal; however, let’s take a look at it anyways, because I think we can all learn something here.

A quick look at the county data tells me the house was bought in 2007 by an investor from a bank; in other words it was an REO. The county has a value of 58 k on it and the home has central heat and air and was built in 1974. His square footage is a bit of an exaggeration at 1200; it’s actually 1168. The taxes are $630 per year.

Most of you know that I do not recommend zillow.com, realtor.com or any of the other sites out there as a replacement for a good realtor’s CMA, but for getting a rough idea of whether or not I would want to spend any time on a deal, or enroll one of my realtors to do the same, I often will check zillow for some basic numbers. Just as I suspected zillow believes the house is worth 82K, so this guy is asking pretty close to retail. I also checked realtor .com who said the median LIST price(not SALES price) for the neighborhood was 85K.

So, do we buy houses at retail boys and girls? And they all answered a resounding NO! But then, we already knew that; we are just looking at all the reasons why it won’t work for purposes of education.

I already know from experience that the insurance on this sucker will be around $350 per year if you have an umbrella policy like I do. If you don’t own many houses then you will not have one of those blanket style vehicles and the insurance will be higher, say $450 per year; but let’s just use $350 since this is just for example anyways.

A 100% loan at 20 years and 6% will cost me $640.48 per month if I escrow the taxes and insurance. Personally I try to never escrow taxes and insurance because I want to have use of my money during the year, not let it sit at some bank with no interest and then allow them to pay my bills with it; but if you are a new investor it might be easier on you. So I will make a $60 profit per month. Well, I’ll make a $60 profit per month as long as the renter pays me on time, nothing breaks and I don’t have to run an ad in the paper for a new renter.

What’s that you say? Interest rates are down and I can finance for 30 years? Okay, let’s look at that. First off, interest rates are down only for low risk loans. As an investor you are NOT going to get the owner occupant rate. Most of the banks I have ever dealt with will only go a maximum of 20-25 years on a single family investor loan. Of course I know a guy in Texas that used to tell the banks he was moving in, and then at the last minute “something changed” in his life and he decided to rent it instead. That might work for a while but eventually the banks will figure out what you are doing.

Okay, so you want to look at 30 years anyways…fine. Thirty year fixed with the same information as before will be a $549.22 per month payment. You will make $150 per month. Carpet and vinyl in Arkansas is about $2.25 per square foot installed. That’s $2700 bucks or 18 months of your profit. Paint will cost you 8 months profit. A water heater 5 months profit. You might want to look at what your future maintenance is going to be before you buy this sucker. How do you think I know that?

There is another problem with financing for thirty years as well. Interest! Yeah, I know, the tenant will be paying that interest, but let’s look at the numbers for just a minute, shall we? If we figure an average of 2% growth in terms of equity, your 78,000 home will be worth about 103K in ten years. The problem is, with a 30 year note, you will only have paid the note down to 65K; and based on the economy at this particular point do you really want to count on making your money with some future equity?

There are four main ways to make money in real estate. Depreciation, Appreciation, Equity and Cash flow. There are actually another six, but they are way too complex for this conversation, so let’s just look at the first four. Of the four only one is guaranteed to put money in your pocket now and that’s cash flow. As many of you know I am a student of Robert Kiosaki, and truly believe that an investment should pay you TODAY. Anything that does not put money in your pocket the day you acquire it is a liability. Ask all the folks with negative amortization loans in California, how they feel about equity and appreciation right now. One they aren’t getting and the other they never got!

Personally, I do not touch a rental unless I can make $300 per month minimum. Also, I base that on a 10 month year, because the average length of tenancy in Arkansas is 14 months and nationwide I read somewhere that it is around two years. That means that once a year I will be running an ad at $150 for the month and at minimum doing a cleanup and “make ready” at a cost of about $250.

The other way I look at any potential rental is that the numbers must still meet the MAO formula that I use if I was going to do a wholesale or retail flip on an ugly house.

MAO = (60%)*(ARV) – repairs

Your Maximum Allowable offer can be no more than 60% of the After Repaired Value based on a strong CMA and other evidence minus any repairs that are needed.

Given no repairs, this deal would still never make the grade based on the fact that the wholesaler is asking close to if not more than retail for the home.

Concentrate on making your money on the front end every time, all the time and you will not lose nearly as often. Remember that you will lose at some point. Investing in Real Estate is like riding my Harley. It is not a question of “if” I will lay the bike down it’s a question of “when”. You ride as long as I have and you know that you are going to lay it down eventually. My goal is to have you lay it down less, and to do less damage when you do lay it down.

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The Other Six – For Investors Only

These are among the subjects that I teach in my courses and coaching programs. These are advanced techniques that should not be attempted by the untrained. To use the words of Adam and Jamie from my favorite show “Myth Busters”, ” NEVER ATTEMPT ANYTHING ON THE SHOW, WE ARE TRAINED PROFESSIONALS AND DO THIS FOR A LIVING”. If you do these wrong you may only lose a few bucks, but if you really screw up, you may find out that you broke some law and are liable for damages to a seller or a buyer or both.

Buy Low. We call this Wholesaling a house or a Wholesale Flip. When you buy below market you get instant equity that will be converted into a profit when you sell. There is too much involved to go into the details here, but basically it works like this: Find ugly house, get seller to put ugly house under purchase and sales agreement, sell purchase and sales agreement to another investor via “assignment of contract” for a reasonable profit, cash check.  Offer a reason for the seller to sell low: fast closing, cash, assume some debts or liabilities, etc. Or just make a low offer. The seller may have his own reasons to sell it cheap, so you never know. This technique is an awesome way to get your feet wet in the world of investing because it takes no money for all practical purposes and only depends on your willingness to do some work and do some talking to people.

I started doing real estate part time in 1990, but I really did not get serious about it, until I became burned out with Civil Engineering around 2001.  I attended a free weekend seminar on the subject of investing where among other people I heard a man by the name of Ron LeGrand speak. He talked all about a number of tactics including wholesaling and like all the rest of the speakers tried to sell me his courses. Well, I bought his course for a number of reasons. One was the fact that he said that I had 30 days to look through the stuff he gave me for signing up and if I thought I made a mistake I got my money back no questions asked.

Being an engineer I was SURE his techniques would not work even on a good day so I determined to prove him wrong. I followed the directions and within 10 days I had my first wholesale flip under contract and it closed about two weeks after that. The course cost $4995.00 and it just so happened that I made $5000 on the flip. Needless to say I did not get my money back, and it has been an adventure ever since.

Sell High. Clean it up nice, make it easy to buy, and find the right buyer to get top dollar. This is a Rehab and Retail or “Retail to End User” deal. You still start with an ugly house, but you make it a pretty house and then you flip it to an owner occupant.  There is a ton of money in this method if you do it right, and to be honest it is my favorite way to do houses.  There are easier ways to make money in this business but there is just something that tweaks my ego when I see some young newlywed couple move into their first home, a home that I have had remodeled, a home that used to be the nastiest piece of crap on the block. I take that which is old and junky and make it new and pretty. I build monuments. Okay, maybe that’s taking it a bit far, but hey everybody has to do what they like and even though this is not the fastest, most stress free, uncomplicated buck in this business, I like rehabs.

There are many potential problems with rehabs not the least of which is hiring the contractors that are worth a rip.  In my book titled, “Stop Contractor Rip Offs Now” I go into great detail on that subject alone and even give the reader sample forms in MS Word that they can use to plan their rehabs and hire the guys that will do the work right as well as sample specifications to give them an idea of what needs to go into a contract to cover them and their assets. If you are interested in a digital copy go to http://www.reinetusa.com/store or you can get a paper copy at ammazon.com or lulu.com. (ISBN #978-0-557-03087-3).

Also, a word to the wise on doing a rehab: keep the work at about 1/3 or less of the total cost of what you have in the house according to my MAO formula.

MAO = (60%)*(ARV) – repairs

Your Maximum Allowable Offer can be no more than 60% of the After Repaired Value based on a strong CMA and other evidence minus any repairs that are needed.

In other words if you have a home worth 100k of it was the prettiest thing on the block, do not buy it if it needs more than 20k in work unless you REALLY know how to estimate repairs and you are highly experienced in running remodeling construction jobs. How do you think I know THAT?

Subject To. If you hang out with me very long you will learn that this is what I call getting a FREE HOUSE. This technique works best with pretty houses in pretty neighborhoods that can be flipped for a quick profit, but will even work with the homes in the poorer areas, provided they are rentable and don’t need any substantial work. The neatest thing about doing these deals is they are way less about the home and way more about all the paper attached to the home.

I think the best way to explain this type of deal is to give an example.  I got a call one day from a couple who had a major problem and needed a quick fix. He was a forklift operator for Wal-Mart and she worked as a waitress. They had an average home, in an average neighborhood. He had the opportunity to get a promotion from Wal-Mart but he would have to move nearer to their home offices which was a little more than a three hour drive from Little Rock. There was no way for them to afford two mortgages on their salary, and the realtor they talked to said to expect their home to stay on the market for 90-120 days based on their location and the market conditions at the time.

They called me and let me know what was going on. I got a deed for their house “subject to” their existing mortgage, and based on the equity they had offered them 10K in the form of a second mortgage on the property with no payments and no interest until I sold the house. What all this means is, the first mortgage stayed in their name, and I did not owe anything on the second until I got rid of the house.

The total of the first was 42k and the house was worth around 85k. The payment was about 400 per month. I rented it on a lease with the option to buy for $700 per month for nearly two years. That person did not buy, in fact she broke the lease a month before the two year term was up. The next couple were able to buy after about 6 months and I cashed out after paying the original owners their 10K. Here are the results of that sale:

Sales price:                                                                                 85K

First mortgage (paid down by tenants) :                       -40K

Second Mortgage paid off at closing:                                -10K

Subtotal , Profit on sale:                                                           35k

“option fee” collected and forfeited from first tenant     2k

Profit from rent for 2.5 years @300/month                     9k

Total Profit                                                                                     46k

Ok, it took me 2 and ½ years to get all that, but what did I have at risk? In the worst case scenario, I would not have been able to find  tenant owner and would have given the property back to the original owners, who would then have to list it with a realtor and make payments for 4 months, while they waited to get it sold.

Offer financing. You can often get substantially more for a property if you offer financing. This is especially true if you let someone buy it with little money down. You can also get good interest on the loan. Financing can work both ways; with the sellers in the form of taking back a second mortgage or with the buyers in the form of anything from “down payment assistance” to a “lease option” to straight out owner financing through either a land contract or “contract for deed” or if you are in Texas a vehicle called an AITD, “all Inclusive Trust Deed”.

There is no way I can go over all of these types of financing in a small space such as this, however here is a quick overview of each.

Taking back a second mortgage refers to a seller “loaning” the buyer some of the money they need in order to buy the home. It can be both an effective selling tool for the buyer  with little cash and a good investment for the seller if he needs out quickly. I always shoot for “No Payments and No Interest until I cash out when I resell the home to an end user. My justification for this is simple: If I am going to help the seller out by removing the problem of two mortgage payments, one at his old house and one at his new house, It is certainly fair that he not stick me with two payments, a first and a second. Besides, although he is in second position, it still gives him a secured interest in the home until I get it sold. It is fair for everybody. Everybody wins. Everybody makes money.

I use down payment assistance when somebody has no money and bad credit but still wants the chance to buy. It works like this. I install them as a renter with a one or two year lease, we agree on a future price, and we put it in writing. Let’s say the lease is two years, $700 per month and they gave me a $700 security deposit. Anything they pay beyond the $700 bucks  per month becomes part of their down payment should they decide to buy the house and be able to qualify for a loan.

A Lease option is the logical next step for folks in the financial boat I just described. These folks may have a few thousand to put down, but based on credit challenges, they just can’t qualify to buy right now. We settle on a price and I take a NON_REFUNDABLE OPTION FEE from them. If you use this method make sure it is very plain and written on paper that they sign in the presence of a notary or you will end up giving them back their fee in court when they say the big bad real estate investor took advantage of the poor defenseless little wannabe homeowner/renter.

If they have between 5 and 10 percent down I will owner finance to them but usually only on a 10 year balloon. I don’t want to be “married” to a homeowner for longer than that, and in this state, even if the buyer defaults on a land contract, the courts will treat the contract as a mortgage and you will have to drag the buyer through a bankruptcy and foreclosure and they may still get to keep the house. Remind me to tell you sometime about the home where I was forced to give away 100k in equity over that very thing. Hey, I still made 70k but when you compare that to losing a lake front house that you had intended on moving into, making 70k feels like a loss. How do you think I know that?

Change use. If there is a higher use for the property, you can convert it to make it worth more to the next owner. Sometimes this means making condos into apartments, or apartments into condos. Maybe converting a home into office space will get the biggest return. Most gurus will tell you that homes on busy streets are not a very good investment, and to some extent I agree with that statement; however, once you get a bit of experience, these homes that nobody else wants can be a freakin gold mine if you are savvy and can play the political game with the city.

I know you have seen this occur all over your town, but maybe were unaware of what actually happened.  As a city grows they need to convey more and more traffic from one area to the next. Many times that means putting a four lane where there was previously only a 2 lane residential road. These house become fairly undesirable for people because of the traffic noise and the inherent danger to children as the play near the busy streets.

Sometimes, an investor can buy a home cheap in these areas and turn it into a commercial office space. Many times, when the city changes the road they will also change the zoning so that you CAN change the use of a home. Sometimes you will have to have it changed.

Sometimes, just changing the zoning of an area makes it worth substantially more money. If you get in the growth path and are able to buy raw forest or agricultural lands and have them rezoned t residential or commercial property you can turn around and sell the engineering plans alone for big bucks, but be careful. This is NOT real estate 101, this is for proven operators whole know what they are doing. I want all of you to think big, but if you think that your first deal is going to be a 25 million dollar land development, you are probably going to be rudely disappointed. Go flip a house or two and get your feet wet.

Sell in parts. In real estate, the parts are often worth more than the whole. There are many examples of this from splitting off an extra lot or two from a larger parcel to selling timeshares and fractionals. Just as in the “Change Use” section, this is pretty advanced real estate investing, but it is a creative way for many investors to get extremely rich with just a single parcel of land. I am not going to go into these types at all, but I did wan tto give you a few definitions.

A timeshare is a form of ownership or right to the use of a property. It has also come to mean the properties of this type themselves. These properties are typically resort condominium units, in which multiple parties hold rights to use the property, and each sharer is allotted a period of time in which they may use the property. Units may be on a part-ownership or leased “right to use” basis, in which the sharer holds no claim to ownership of the property.

A fractional purchaser typically receives an undivided percentage interest in fee simple in an

individual residential accommodation and the related common areas of the applicable resort or other property, affording the purchaser the right to occupy such accommodation or one of similar size and type and use the property’s amenities for a certain number of days or weeks each year. A fractional accommodation is most often a condominium unit but can also be a townhome, detached single family home, or hotel suite. Some fractional projects participate in an exchange program, whereby purchasers have access to other properties of comparable quality located throughout the United States and abroad.

Finally:

Some of my friends have been asking me lately why I am starting to teach. “After al Al, You don’t have to work, and you make plenty of money sitting on your butt”, they say.  I have made my living and continue to make my living in real estate; it is by fair my first love. To be honest, whether I teach a single person what I do or not, I will still do deals. Some time ago I got to feeling like “is this all there is”. I read allot and have noted that this is a common problem among people who have achieved their goals, particularly at an early age. Many of them go on to teach others what they know. They do it for two reasons and these are the same reasons I am doing it: Its fun and it makes money.

The day it isn’t fun I will stop, trust me. I have worked many jobs that aren’t fun, and they suck. It is a chore to even get up in the morning and take a shower and go to them. I swore two things when I walked from my last engineering job; first, that I would never let another human being ever treat me again the way the sorry excuse for a waste of air main supervising engineer of that office treated me, and second that I would never again do any job that wasn’t fun.  One of my favorite quotes is “Do what you love and you will never work a day in your life”. I think Mark Twain said that, but I’m not sure.

I have a few courses and books available for those of you who would like to learn more about how to become what I call “gainfully unemployed” using real estate investing as the vehicle to do so. I also offer a coaching and mentoring program and a private “for students only” real estate forum where I and other experts do ongoing trainings, webinars and even some one on one counseling  and consulting for a monthly fee. If you have any questions drop me a line at Al@S4inv.com or visit me on the web at www.AskAlHow.com .

Whether you ever attend one of my courses or not, whether you and I ever meet or not, whether you make it in the real estate business or some other business, the best advice I can give is another quote by Mark Twain, “Keep away from small people who try to belittle your ambitions. Small people always do that, but the really great make you feel that you, too, can become great”; and one by me, “I have never met anybody who sucks at everything, everybody is great at something”. Find your something.

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There are ten major ways to make money in real estate, four of which are available in ALL properties. The other six will vary from property to property. Making money in this business is limited only by one’s imagination, and the prevailing laws in your country, state or province, county or parish, and city; however, there are different schools of thought when it comes to which vehicles you should use when you try to invest for a living.

The First Four – Count on Only One

Appreciation. Making money in real estate can be as simple as holding on and waiting. To really get the most appreciation in value, however, you should buy in an area where demand is growing faster than the supply. This is not always the easy thing to do. In theory you just get yourself ahead of the rest of the investors in the growth corridor and bingo, instant appreciation.  Here are the inherent flaws in this way of thinking.

First off, unless you are clairvoyant or one of the “founding fathers” of an area, you will never know for sure which direction everything is going to go. Once the sprawl is headed a particular direction you can certainly get on the train, but by that time prices are going to be heading up which of course means profits will be heading down.

In the current economy, many people who were counting on appreciation are now seeing the values drop below what they paid. Not a major issue if you are in it for the long haul, but what if you are in a negative amortization loan like so many folks in California and areas of Arizona like phoenix? In many cases, they may be better off walking away from the house and dealing with a foreclosure than waiting around for the value to turn around.

Equity. Provided you do not do the type of loan described in part 1, you gain equity with every payment you make. Get the lowest interest rate you can and more of each payment will go towards the principal. If you can in any way afford to do it, pay a bit more each month to the principal; even if it is only $50 or $100 bucks. This works especially well in the very beginning of the loan when the amortization schedule has you paying 99% of the payment to the interest and 1% to the principal.

A 250,000 loan on a 30 year fixed at 5% costs 1342.05 per month. Over the course of those thirty years you will pay $233,141.28 in interest; This means nearly 50% of the money you give the bank over the next 30 years will be interest and you will pay almost double what you negotiated for the use of their money.

Now, add a mere $100 bucks a month to the payment. With a little discipline you can do that, just go out to dinner one less time per month with your family. You just knocked nearly 5 years off the note, and saved more than 38,000 bucks in interest. If you bumped it up to $200, you save more than 65K in interest and pay off the loan in 22.5 years instead of 30. Go get yourself a sportscar with the 65K you saved.

Depreciation. The federal government has decided that eventually all things are worth nothing. What this means to you is that after all the tax law changes, you still get to declare a loss for depreciation that doesn’t really exist. If you are an investor, this can save you a lot at tax time, meaning more after-tax profit. To maximize this you need to buy property that has its value primarily in the buildings, because you can’t depreciate the value of land.

Now, there are a few quid pro quo’s you need to know about. After twenty seven and one half years, you cannot depreciate the property anymore. That is the point at which the feds say that it is now worth nothing. So, the problem comes if you sell something worth nothing for $500,000 you have a very large capital gain that the IRS is going to want 15% of. Don’t fret; our boys on the hill have got this one figured out too. Just buy another property for more than what you sold the half million dollar property for and do what is called a 1031 Exchange, you get to start the depreciation process all over and if you bought the other property for say $500,000 then there in no capital gain.

Cash flow. When you buy income property the right way, you not only have your tenants paying all the costs and paying down the mortgage loan, but you also have positive cash flow. Hear this guys, THIS IS THE WAY TO BUY PROPERTY. As far as I am concerned this is the ONLY way to buy property that you plan to hold. The other three ways to make money in this business are all what I like to call “phantom money”; in other words it may or may not be there and a bunch of it has to do with things completely out of your control.

An investor I know was in hot water with several commercial properties a couple of years ago when the market went south. Through a series of events, some of which were due to her own stubbornness and others which we completely out of her control, she became severely behind with the building payments. She found herself with no cash flow and millions of dollars in mortgages. I could give you all the long gory details, but the short version is that she had an opportunity early on to essentially walk away from the properties and no financial harm would come to her. She argued that she would lose a million in equity, to which my answer was, “if you have a million in equity, auction it and get the money out and retire and move to your second home in Costa Rica and walk away from all the headaches. Her replay was, “well I can’t get a million in this market…especially with an auction”.

She got very irritated with me when I told her the truth, but guys here is the truth. The “equity” you have in a property is only based on what somebody will ACTAUALLY PAY for it. If nobody will buy your property then it pretty much isn’t worth a penny. You can get three different appraisals from three different companies and a can guarantee they will be three different prices and NONE of them will be what the property sells for, particularly when you are in a hurry to sell it.

Said another way, Cash flow will buy your groceries and put gas in your tank; Equity, Depreciation and Appreciation will not!

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That being said, here is his question and my answer:

“I just made my first offer on an REO.  Any thoughts on how to get a “proof of funds” letter or something like that for the offer?  I don’t actually have the funds and if I did I wouldn’t necessarily want to show that to the bank.  The offer is for $100,000 on a $177,000 house. Please advise …”

Problem #1:

I called him and got a little more info: He wants to flip it, he does not have the funds needed to give the realtor for “proof of funds” and it needs 15k in repairs. So first off, according to my formula it isn’t even a deal.  For those of you who don’t know my formula, I never offer more than 60% of the After Repaired Value, (ARV) not including repairs. 60% of 177,000 is 106,200. If you subtract  15k from that your maximum offer can be no more than 91,200.

Problem #2

Okay, let’s say that he offers 90k instead of 100k. This is great, he is within the Maximum Allowable Offer, (MAO) right? Wrong. Remember, he wants to wholesale it. He has no intentions of keeping it for a rental nor does he want to rehab it and retail it to an end user.  This means he has to have a deal that is lower than MAO in order for him to attract another investor. If he doesn’t have this,  he is using what I call the “greater fool theory” of real estate, which means he is trying to find an investor who knows less than him. Not hard to do, but it will ultimately get you a bad reputation around town and you may find yourself relocating your business because nobody will deal with you.

Problem #3

So let’s say he makes an offer of 85k. This will make him 5k, not bad for a wholesale deal, considering he will never own the house, he doesn’t have to work on it, and he will not have to hold it and wait to sell in a slow market.  But wait; he is dealing with a realtor. He WILL own the house! See, the realtor is not going to let him sell his interest in the contract to another investor. That’s what  the realtor’s purchase and sale agreement is all about, protecting the REALTOR’S interests. Don’t think for a minute it helps you as the buyer or as the seller.  Read one all the way through sometime, you will see what I mean; the language is all about limiting the realtor’s and his broker’s  liability. 

Problem #4

Hey, if he has a buyer, why not just do a simultaneous close? Yes, I guess he could do that; however, here is the problem I see with a simultaneous close of that nature: First, when his realtor finds out what he did, this guy will get black balled from the realtors entire brokerage. Yes, I know most realtors are morons, but that is no reason to have everyone of them in town pissed off at you. Second, and more importantly, let’s look at his buyer. If the buyer has a brain cell one in his head, he will see the realty sign in the front yard. He will realize the wholesaler is making a few bucks off of him, and he will get pissed and walk from the deal or call the realtor to try and negotiate a better deal. Yes, technically no laws are getting broke here, but do you really want all those people mad at you? By the way, depending on the state an argument could be made that you are breaking the law by engaging in “Tortious Interference” and/or “Restraint of Trade” and you may find yourself going to court. Yes you might win, but do you really want to spend $2000-$3000 for an attorney and waste all that time? It might just be easier to just find another deal …or ten.

Problem #5

If you are going to play with REO’s you are going to have to deal with the bank’s rules. Period. End of story. If you do not have proof of funds, all you are doing is wasting the realtor’s time, the banks’ time, and the most important time of all…your own. Actually that’s not true, if you email ME about it, you are wasting MY time which is far more important….ok, just kidding; but you see my point right? That being said, let’s look at a couple of ways to get proof of funds:

• 1. Go to a bank and get proof of funds. If your numbers are right, (i.e. you used MY numbers not the ones we started with), and you don’t have crappy credit, you can by the house and flip it via a wholesale or a retail deal.
• 2. Find a hard money lender and get proof of funds from him. You will pay more than with a bank, but again, if you used my numbers, you will still make a good chunk of cash and these sorts of lenders could generally care less about your credit score.
• 3. Get a partner. Hey, a partner is great when you are getting started. They put up the money, you put up the work, everybody makes money. You might want to think about having two or three potential partners sitting backstage all the time.

The Bottom Line:

I think you guys can all see, that as this deal sits it is a “no deal”.  It is not feasible from not just one, but several angles.  For myself, if I could get it at $90,000 I might consider it for a retail flip.  177k is just over the median around here, and that means I would be able to find a buyer who could get a loan, or perhaps a lease option tenant with plenty of cash, who could  qualify and therefore cash out soon. Of course that is a completely different exit strategy than the one proposed by this wholesaler; and therein lies the point of this whole conversation. He only knows one way to do a deal.  Like I said at the start, I admire his tenacity, but right now he is having all the effectiveness of a car stuck in the mud; lots’ of noise and crap flying everywhere…not allot of forward movement.  You need to know EVERY exit strategy. You need to know ALL the ways to do a deal. Get trained guys. Once you are trained KEEP getting trained.  Education in this or any business is a lifelong endeavor, it is the key to success, and it will pay you high dividends.

More training and articles at:

www.reinetusa.com

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Before we get to the contract, let’s look at what leads up to it. The idea behind taking back a mortgage is fairly simple. Let’s say you’re buying a home for $100,000 and you have $5,000 to put down and can get an $85,000 mortgage. That means you are still $10,000 short. If they really want, or need, to sell the home “right now,” they could “loan” you the $10,000 in the form of a second mortgage.

Usually I make the pay-off period between two & five years, but it can be whatever you want; it is all part of the negotiation process.  I always shoot for “No Payments and No Interest until I cash out when I resell the home to an end user. My justification for this is simple: If I am going to help the seller out by removing the problem of two mortgage payments, one at his old house and one at his new house, it is certainly fair that he not stick me with two payments, a first and a second. Besides, although he is in second position, it still gives him a secured interest in the home until I get it sold.

If you DO set up a second with payments now, you need to let them know that once they start receiving mortgage checks, the payments become part of their income, which translates into additional IRS paperwork and, very likely, taxes. Many times, this is a good reason for them to take the no payments no interest scenario I suggest in that long term capital gains ( more than 12 months) of $10,000 will be taxed at only 15%, whereas if the payments are considered income and they are in the right tax bracket, they could be taxes as high as 30% or more.

To cover yourself, it would be good to go over the terms of the mortgage with your seller. First, they must be aware that the first mortgage is ahead of them when it comes to getting paid. If you default, they might not get paid..  If the property is foreclosed by the first lender, the primary lender has first claim on any proceeds from its sale to recover the unpaid debt, plus any penalties and unpaid interest that accrued as part of the foreclosure, as well as court costs and legal fees. Of course you need to assure them that you will not default

 If you use this sort of vehicle, make sure your real estate attorney prepares the document for you, and as I mentioned earlier, in the spirit of transparency in business make sure you fairly cover both yourself and your seller. There are enough deals out there for everybody who wants to do the work to become a millionaire. I have walked away from many deals, but still I prosper and I believe it is because I think in these terms, “everybody wins or we don’t do the deal”.

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Are there houses to buy that realtors don’t deal with?

Holy Smoke! Once again I am AMAZED by the morons out there!  I came across this question at http://answers.yahoo.com while doing a search for something else. Although the question is a good honest question the answers are such a blatant billboard to stupidity  that I feel I MUST copy the whole thread and put my own two cents worth in.  This is exactly what worries me sometimes about information online; so much of it is in no way, shape or form rooted in reality. A person posted the following question:

“I live in Washington, and am getting ready to buy a house. Someone told me some information that I don’t know if it is true or not, I couldn’t find any details on my own. He told me that realtors don’t necessarily know about all the houses out there, and that it’s possible to get a better deal on the houses that they don’t deal with. 2 examples are:

1. He said there are sometimes mass built housing communities  that sell their houses direct at cheaper prices, without allowing realtors access to sell them or get commission on them.

2. Bank foreclosures, and similar. Do realtors have all access to these and try to sell them?

So is there any truth to either of these things? Or are they untrue?”

I will deal with this guys question at the end, but right now I want to post the answers and then look at each one in turn.

Answer #1

“I recently bought a house and from that experience I believe a good realtor is worth every penny of their commission. First of all you can do some looking without a realtor and yes there are houses that are for sale by owner and you may save some money. However you have to do a lot of work to find those houses and coordinate with the owner for a showing. In the end you may find that your time is worth more than you saved in a purchase price. Generally a good realtor (one that does it full-time and has been doing it for several years) is going to know more about the market then you possibly could. It is there job and if they are good at it, it will show. Good realtors will know of houses that are about to list, were listed but delisted for some reason, and just the general trend of the market in which you live. There may be some big companies that are building whole developments who have an open show house that you can go and look at, ultimately though if these houses don’t pre-sale they will get MLS listed. Realtors work pretty hard making appointments for you and showing you around and with the state of the market right now my guess is you could save just as much by using a realtor to find a “motivated seller” who is willing to knock 5-10% of the price instead of going around the realtor.”

Well I agree with this guy …sort of. A good realtor may or may not be worth every penny of their commission. This person suggests that the realtor is some sort of expert on the market.  That sort of thinking is what has us in this economic mess we are in today! You and only YOU are responsible for your due diligence.  I suggest you talk to not just one realtor but SEVERAL realtors. Also you should talk to the neighbors in the area where you want to live. Visit with people who own businesses in the area, especially the “mom and pops’ businesses. They can tell you more about what stuff is worth and the quality of the neighborhood than anybody else because they live and work in it.  Get online and pull demographic data.

 If you depend on a realtor for your info, you may or may not get what you are paying for. Remember, in most states it takes about $250.00 and 40 hours of class time to become a real estate agent.  Don’t think for a minute your agent is a real estate guru or YOU will be having a class of your own… in the school of hard knocks! That being said, I am totally not opposed to  a realtor doing some of your leg work for you.  Why not call half a dozen realtors? I know they are each going to want you to sign a contract granting them “exclusive right” to work with you, but simply tell them “NO”.   Hey, if they can bird dog a property for you, great, like this guy says…it will save you time, but in the end you are going to pay the realtor 5%-7% of the sale. Yes, I know…the seller pays that part. Right. So, Who gives the seller the money to pay it? The buyer…DUH!

That was the part that made me chuckle about this guys answer. The realtor will find a “motivated seller” who will knock 5%-50% off the cost of the house.  Cool. That will cover the realtor’s commission. You just paid within three percent of what you would have paid without a realtor.

Oh, yeah….read this guys’ answer again.  He apparently does not know the difference between “there” and “their”, and it is pre-SELL not pre-SALE.

Answer #2

“No one is REQUIRED to use an agent and if the home is not in the MLS they have no way to know about it except through eyeball contact.  However, NEVER purchase real estate without a professional at your side making sure your butt is covered.”

Again, I agree with parts of what he said.  While it is true that there is no law requiring the use of an agent, the whole bit about the MLS and eyeball contact is totally crazy.  Get online and do a Google search on the term “FSBO”.  This stands for “For Sale by Owner”.  You will find about a gazillion sites dedicated to folks trying to market and sell their own home.  I know because I list houses on many of them. Go to craigslist.org, plenty of listings there too.  Check the paper. You DO NOT have to waste time and gas driving all over town praying to see a FSBO lawn sign.

Of course, I totally recommend that you drive the neighborhood where you want to buy, but that is not necessarily for finding a house as much as it is for approving the neighborhood. As for having a professional at your side I would ask any prospective realtor how many deals they did last year and how much money they made. If they did not make more than me, then they probably would have a hard time convincing me that they were very “professional”. Oh, and one more thing; how is the agent going to “cover your butt”? If you believe that ANY agent is going to stick their neck out for you, and/or stand up for you in court you have another thing coming.  More on that in my reply to answer #4.

Answer #3

“Realtors can only sell homes they are contracted to sell. If a house is for sale by owner you will save a lot of money.”

This answer is False and False. Realtors can sell a home, buy a home, or do anything else with a home they want to. They are people just like the rest of us. Now, in my experience, realtors typically only sell homes that are on the MLS, but even then, the chances are, that they do not have the contract to list on the house they sell; that after all is the whole purpose of the MLS. It gets all the houses out there listed by different agency’s available to ALL the agents. If this person’s statement were true, you would have to go to a different realtor for every house you looked at, because they would all be listed by different realtors and none of them could sell the others house…absolutely ridiculous.

The second part is false as well. Many times, I have found that a private owner wants more for his house than what the realtor would list it for, and in some cases they think their house is plated with solid gold. Just because it is a FSBO does not automatically mean you are getting a deal, and thinking like that will get you screwed. Do your “due diligence”.

Answer#4

“As a buyer, you don’t pay a Realtor, the seller does. You MAY be able to get a cheaper price if the seller doesn’t have to pay the Realtor. The seller sings a contract with a Realtor agreeing to pay them if their house sells within a certain amount of time. Mass built housing often sell houses from within so that they don’t have to pay a Realtor.

Banks often sell properties that are foreclosed on. Houses can be dangerous buys, though, because they aren’t always in great condition. Look on the websites of banks in your area for foreclosed properties if you are still interested. You can get a good deal, but it is a gamble as you don’t know how much money will be needed to fix potential problems.”

I think he meant that the seller signs a contract, although I HAVE been known to sing after really making a great deal.

As for the silliness about the buyer paying the realtor, well we covered that in answer #1. Then this answer gets really stupid. Though it may not be true for all states, most that I know of require that the sales people in large developments like the one this person is talking about be licensed realtors.  Just because a person makes salary or salary and a bonus instead of straight commission does NOT mean that  you the buyer are not one way or the other paying for it.  Again BIG …..DUH!

I have yet to see a bank that will sell a home they own to a private party without  the use of a realtor. I’m not saying it isn’t possible, I have just never seen it; and I have been a real estate investor since 1990. Banks DO unload properties to investors in what we call “Bulk REO” packages, but that is a different scenario altogether from the one that the guy with the original question has asked.

My Answer:

Ok, now that I got all my ranting out of the way let me answer this guys question.  First off, I have to say that realtors don’t know about MOST deals that are out there, but that is NOT a valid reason to not use them.  I buy maybe 20% of my homes from realtors. The rest of the sellers are generated through various marketing techniques that I have learned over the years.  If you are interested in learning those techniques, then I can train you  or you can go to some other guru’s courses or seminars, but if you just want to buy a home to live in like this guy, then that is probably more time and money than you want to spend.

 Where the mass built subdivisions are concerned, you will just have to look.  In this market, deals are great just about everywhere you look, but always remember that you and you alone are responsible for getting the best deal. Your realtor isn’t interested in the best deal for you; hell, the more you pay for the house,  the higher their commission.  The banker is not looking out for you, they have a hard enough time looking out for themselves; all the banks with “going out of business” signs lately should tell you that. The title companies will help you get clear and marketable title, but even that has its limitations.   The appraisers want you to be happy so the appraisal will probably “just squeak by” regardless of the price. I have seen the same home appraise for 175k and 150k the same week. So which appraisal is true? The home inspectors need to justify their existence so they will find something wrong with the house,  I promise. And the list goes on. Let me say it again: YOU ARE RESPONSIBLE FOR YOU OWN DUE DILIGENCE.  

With regards to the bank owned, foreclosed and other properties of that type, I have to say I totally agree with the person who answered that part in answer #4, even though he didn’t have a clue in the first part of his answer.  If you have no idea how to do an inspection, if you have no idea what it costs to do a rehab in your area, if you do not know how to hire contractors and how to get a construction job completed, then you have no business buying a house that needs work.  Just go get yourself a home you like, at a retail price and live in it 20 years. Along those lines, I wrote a book about that very subject called, “Stop Contractor Rip Offs Now” that may be helpful. You can get a digital copy at www.reinetusa.com/store  if you want to pay a bit more for a paperback you can go to lulu.com or Amazon.com.

By the way, why are you so worried about getting a deal anyways if you are going to live in the house yourself?  It’s not like it is an asset. Assets are things that put money INTO your pocket every month. Your house, your car, your boat….these are things that SUCK money from your pocket every month.  It is not an investment folks, it’s a liability.  The house that is an investment is the one you buy and flip for a 40k profit 3 months later, or the one you collect 950 a month rent on, but the debt service and maintenance only cost you 500 per month. These are investments, not the home you live in.

So my final advice is this…If you are buying the house to live in, just buy what you like and can reasonably afford the payment on, realtor or no realtor. If you are buying with the expectation of making money, then you better enroll in one of my courses or one of the other courses of countless others out there who know how to do this business. If not, no realtor (or anybody else for that matter) will be able to help you. How do you think I know that?

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