Cash Back When You Buy a Home

While buying a house is a huge investment, it can also be a way to save money. Programs offering cash back on real estate have become extremely popular and are available to most people, no matter whether they are buying a house by themselves or through a REALTOR, and regardless of whether this is their first home or a commercial property.

Step 1:

Get money back when working with a REALTOR if you search and find your own home but use a REALTOR to close the deal. According to real estate experts, you are entitled to a percentage back at closing time because you did the legwork. Do keep in mind that most REALTORS will not offer you a cash back reward unless you ask for it, so be sure everything is agreed to in advance.

Step 2:

Use a company that offers cash back on real estate upon closing the agreement. There are many certified companies that offer rebates, and one of the advantages of using a certified company is that all moneys are kept in escrow until closing time, so you are never at risk of losing your percentage, no matter how the process goes or changes.

Step 3:

Get cash back from the seller. If you are buying a home that is in foreclosure and paying actual cash for it rather than buying it through the bank with a loan, you are allowed by law to offer the actual priced quoted for the house, even if the seller is willing to take less for it. At the time of closing, you can take part of this money back as a credit towards repair, but you will still be legally able to report the total price on your taxes, increasing your break.

Caution:

Cash back payments that involve telling the lender (usually a bank) an inflated price for the house are illegal. While many real estate agents and homeowners are not aware of this problem, it is technically illegal to request a loan higher than the actual price of the property with the idea of getting some cash back from the seller at the time of closing the deal.

Commercial Real Estate – A Primer

When speaking with a group of real estate investors recently, the question arose as to how many of them have completed a commercial real estate deal in the last year, and surprisingly, the answer was none. It seems that many of them were either happy with the currently market conditions or they didn’t really have the aptitude to go about buying a commercial property.

Market specialization? No. It seems that the majority of real estate transactions go something like this:

1. Residential real estate is the sweet spot of the small real estate investor.

2. Commercial real estate is typically left for the small business owner, who has decided to stop renting.

3. Both of these sectors of the real estate industry do have some crossover, but the previous two statements are typically the norm.

So how exactly are commercial properties being bought, sold, being rented? What’s the best way to acquire commercial real estate, and who you need to help you in doing an acquisition?

Here are five key points to consider:

1. By far the most popular business entity for owning commercial real estate is now the limited liability company (LLC).

2. Commercial real estate is a much less popular subject, in part, because it isn’t as personal and doesn’t tug at our own financial purse strings.

3. Commercial real estate is a term to describe a property with 5 or more units. The significance of this is that FNMA only finances 1-4 units, which means getting a loan for a commercial project is more difficult.

4. Investing in commercial real estate is riskier and more costly than investing in residential property – but ultimately it can be far more profitable.

5. Commercial real estate is a business investment driven by economic factors, not so much the property itself.

Investing in commercial real estate can be a good way to invest but you should make sure you are well represented by an attorney and accountant before moving forward since buying commercial real estate can have significant tax consequences and if you’re buying or developing commercial real estate, it’s important to protect your financial interests with legal support. It may sound redundant, but the axiom location, location, location, is an important factor in buying commercial real estate too. Here is the key to buying commercial real estate: the one with the most information wins.

The winners are the people that recognize that the world of commercial real estate is constantly changing and understanding the nature of commercial real estate is a precondition to the timing question. They also understand the data and realize that information is the most critical aspect of any transaction. In other words, the most valuable commodity you can have in the commercial real estate market is information.

False Rumours on New Law Affecting Owner Financing

I’ve received a number of emails from people claiming that House Bill 1728 will eliminate owner financed deals to once every 36 months.

This is patently FALSE.

Become an informed citizen and read it yourself:

http://www.govtrack.us/congress/bill.xpd?bill=h111-1728

This bill aims to include owner financed deals within the definition of “Truth in Lending” law. I’ve always instructed in my courses and seminars that you should comply with Truth in Lending, which requires just a few simple disclosures.

The bill also would, in theory, make a person who sells a home a “mortgage originator”. This would require compliance with RESPA, which I’ve always instructed in my courses and seminars that you should comply with anyway.

Finally, the bill would require that you actually qualify your buyer. It prohibits, “lending without due regard of the mortgagor’s ability to repay”. Duh! Only a fool would put someone in an owner financed house deal without checking their income, debt and credit.

All in all, there’s nothing to worry about here for investors, it’s just a matter of compliance with some federal rules and a couple of disclosures.

Any comments or questions are welcome.

Can Foreclosure Investing Be Criminal?

I recently attended a “free” seminar on how to “get rich quick” in foreclosures. The speaker had a different angle than the usual “steal it from the homeowner” method.

The speaker suggested that you approach the homeowner with the following plan:

1. Tell the homeowner you will make up his back payments and give him some cash.
2. Take title to the property.
3. Lease it back to the former owner with an option to buy it back for one year.

The speaker suggested that after one year, the house would be yours if the former owner didn’t exercise his option. Sounds great doesn’t it? You could beat out all your competition who are trying to “steal” the same house.

Well, here’s the catch. The poor homeowner in foreclosure will be your best friend when you make up his back payments. However, when the year is up and he can’t get his house back, the trouble will begin.

In a number of cases, these homeowners will go to court and claim that the “sale/leaseback” was really just a disguised loan. He or his attorney will ask the court to “re-characterize” the transaction as a loan and place title to the property back in his name. If the court agrees, the loan is illegal, since it is usurious.

Here’s how it works: Let’s say that you find a house in foreclosure worth $100k. The balance of the loan $50k, and the homeowner is behind $5k. You agree to make up the back payments of $5k and take title. You then lease it back to the homeowner with an option to buy it back for $100k, its fair market value. What’s the problem?

The problem is that if the court re-characterizes the transaction from a sale/leaseback to a loan, you have loaned the homeowner $5k at 1000% interest! Think about it… you give him $5k, and he has to pay $50k ($100k option price minus the $50k loan balance) to get his equity back. 1000% interest is usury, and the court will set aside the loan. You will lose the house AND your $5k.

If you’re not familiar with the word “usury,” it means charging more interest than permitted by law. The consequences of a usurious loan are usually civil; the court will declare the loan void and the borrower won’t have to pay it back. If you get caught making usurious loans on a regular basis, you’ll be hearing the words “loan-sharking” and “racketeering.” These are CRIMINAL acts that will get you in jail. Many foreclosure real estate investors have been indicted on racketeering charges for doing exactly what I described above.

Many states have recently passed foreclosure legislation that restricts the type of transactions you can do with a homeowner in foreclosure, as well as require certain disclosure in contracts. Review your state law with a qualified attorney before buying a foreclosure property.

Illegal Flipping and Lender Seasoning

There has been a lot of negative press and misinformation lately about double–closings. Many people have been indicted recently under what the press has labeled “Property Flipping Scams.” Misinformed lenders, real estate agents and title companies will tell you that double–closings are now illegal. In fact, they are nothing of the sort.

A double closing is simply two back–to–back closings wherein the proceeds from the second closing is used to fund the first closing. Both closings are done in escrow so that the “middleman” can buy and resell a property for profit without using any of his own cash. The middleman profits because he buys the property below market and resells it for market price. This process has been done tens of thousands of times over the last 100 years – legally, ethically and PROFITABLY!

The so–called “illegal property–flipping schemes” work as follows: unscrupulous investors buy cheap, run–down properties in mostly low–income neighborhoods. They do shoddy renovations to the properties and sell them to unsophisticated buyers at inflated prices. In most cases, the investor, appraiser and mortgage broker conspire by submitting fraudulent loan documents and a bogus appraisal. The end result is a buyer that paid too much for a house and cannot afford the loan. Since many of these loans are insured by the Federal Housing Authority (FHA), the government authorities have investigated this practice and arrested many of the parties involved.

Despite the negative press, neither flipping nor double–closings are illegal.

The activities described above simply amount to loan fraud, nothing more. Newspapers have inappropriately reported the activity as illegal “property flipping,” rather than simply “loan fraud.” So, whenever you hear a real estate agent or mortgage broker say, “flipping is illegal”, you know they are misinformed.

The misunderstanding of the flipping business has not been without consequence. Many title and escrow companies simply will not do a double–closing. Fortunately, there’s many that still do double closings, but they are also keeping a close eye on potential fraud (as they should).

Some lenders have placed “seasoning” requirements on the seller’s ownership. If the seller has not owned the property for at least six months, the lender will assume that the deal is fishy and refuse to fund the buyer’s loan. This may be a problem if you bought a property cheap and are reselling it quickly for a profit (the good, old American way!). This should not be confused with LAW – it is simply an underwriting guideline for some lenders. Of course, guidelines are just that – by going up the chain of command, you can generally get approval from loan underwriting by showing the property is being resold for a higher price because either it was purchased in a distress situation (e.g., foreclosure) or that substantial repairs were made. Keep good records of your repairs to show to the lender.

If the buyer is getting an FHA insured loan, there is no way around the “seasoning” issue. FHA regulations prohibit the funding of a purchase where the seller has not owned the property for at least 90 days, NO EXCEPTIONS. This generally should not be a problem in a fix–and–flip situation, since it will likely take you 90 days by the time you acquire, rehab and sell. But, if you are planning on buying the property and reselling it in a double–closing, the end–buyer CANNOT go with an FHA loan.

BRONCHICK’S RULE:
ALWAYS REMAIN IN CONTROL OF YOUR DEALS!

A smart investor should stay on top of the process and anticipate these issues. If you are buying a property and reselling it quickly, particularly in a double closing situation, you must anticipate this problem and deal with it. Let the buyer, his real estate agent and his lender know that there may be a seasoning issue. If you stay in control of the loan process and steer your buyers to a mortgage company that doesn’t have a hang–up with double–closings, then seasoning won’t become an issue. Generally speaking, only FHA and subprime lenders have the “seasoning hang up” – FNMA underwriting guidelines do not prohibit funding a purchase money loan where the seller has not owned the property for a minimum period of time.

If you do get into a last–minute jam in a double–closing situation, there is a solution, which is called a “reverse assignment.” You simply assign your contract with the end–buyer back to the owner and step out of the deal. Your “consideration” for doing so, is the profit you would have otherwise made. This consideration can be documented in writing and secured by a lien on the owner’s property to be paid to you at closing.

Real estate investing is like weight loss

It amazes me how many people get started in real estate investing, only to fail when the going gets tough. As soon as someone discovers they can’t get rich in a week or two, they are on to the next “hidden guru” secret. It’s the same as weight loss - everyone talks about it, many try it, but few succeed. There are thousands of “get rich quick” and “get slim quick” gimmicks. No wonder both the real estate investing information and weight loss products industries make BILLIONS!

Weight loss isn’t easy... ask anyone who has tried it. However, the concept of weight loss is very basic - burn more calories than you ingest and your body will react accordingly. Unless you have a medical disorder, this formula works for just about anyone. Simple as it may be, the formula is HARD, meaning it takes a lot of DISCIPLINE AND HARD WORK. So, the weight loss industry has offered us thousands of ways to make it easier. Many of these solutions do work, but they only work if you put forth effort.

Now, let’s start with the premise you don’t need any of these “solutions” to make real estate OR weight loss work for you. You can eat less calories, go walking or jogging every day and you will lose weight. But, having knowledge of the caloric content of different foods is relevant. Also, for many people, knowing the carbohydrate content is relevant. Having the advice of a physician, dietician and personal trainer will help you prevent injuries and maximum your effort.

Same principle applies to real estate - you can go out and make hundreds of offers to motivated sellers and find a good deal. However, having information about how to solve the seller’s needs and construct an offer will help. Having an attorney, real estate agent or “guru” to assist you with constructing the offer and the paperwork will make it easier. Having advice from other people who have already done hundreds of deals will also make it easier for you to learn from other people’s success (and failures). However, whether it’s weight loss or real estate, the bottom line is not just knowing, but DOING. You can’t blame the diet if you don’t stick to it. Many people have successfully lost weight using the ZONE, WEIGHT WATCHERS, ATKINS and other similar plans. Many people have succeeded with the famous “guru” plans, but many have failed, likely because they didn’t give the required effort, NOT because the plan isn’t effective.

Both real estate investing business and weight loss are simple, but neither is easy. It takes a lot of work. Having a proven “system” or plan helps, but only if you stick to it. If the diet plan says, “exercise 3x times per week”, you can’t be sloppy about it and expect results. It’s like the people reading a book on the treadmill at the gym - if you can read a book, you’re not working HARD ENOUGH. Likewise, people call newspaper ads and say “hey, you wouldn’t want to sell me your house cheap, would you?” This is not DOING it is TRYING. You have to give 100% to a particular plan or formula before you say, “this stuff doesn’t work.”

Many people who are interested in weight loss join a gym or hire a personal trainer. From personal experience, I can say that both are great for weight loss. But, the weeks I didn’t show up, it was a BIG WASTE OF MONEY! The same thing goes for a real estate training system or mentor program - if you don’t put forth any effort, it won’t work! And, of course, you’ll likely get bitter about all the money you spent and blame the guru. After all, it can’t be YOUR fault!

That brings us to another topic - the “scam” side of the real estate and weight loss business. Sure, the “magic pills” that melt off fat are probably a scam. These snake oil salesman are offering the lazy and desperate people a solution - no work and results. Hah! If you bought into this scam you deserve to be parted from your money. Likewise, any real estate guru who promises riches with no work is also a scam. My favorite promise is “no selling involved” - that’s the biggest lie ever told. No business can be successful without a certain amount of selling of their product or service to customers - period! So, while there is a dark side to the weight loss and real estate investing information businesses, I assert that most people fail at both because of their own lack of action, not the fault of the “systems.” If you aren’t willing to work, another weight loss program or real estate seminar won’t get you any more results than you are currently getting - save your money and take MORE CONSISTENT ACTION with what you are currently doing.

However, if you are willing to work hard and take a lot of consistent action, a guru or program will likely give you more results. If you bought a book, course or program and already have results, another program, course or book will likely give you tools to get MORE RESULTS. I often hear about successes people have with my real estate programs, but a lot of them are not FIRST TIME successes. They are most often people who have already been successful, and, using my tools, became MORE successful. If someone asks me whether my program will make them successful, I ask, “what other programs have you bought?” If they have already spend thousands on other programs and have done NOTHING, I discourage them from buying mine. These people are looking for the elusive “holy grail” that all the other programs left out. More than likely, the missing element is lack of action on their part.

If you aren’t willing to take action on a massive scale, you won’t get more results by buying more products. If you have the discipline to work hard and take consistent action, then products and services will help you get there faster. Whether you are looking to get rich or lose weight, the bottom line is YOU!

The ethical real estate investor

Many people have a very 19th century view of real estate investors. They think that we are modern-day “robber barons” who prey upon distressed or ignorant people, take advantage of them, and laugh all the way to the bank. The truly sad thing is that some real estate investors think this of themselves, and think that in order to get ahead, they must behave unethically. The truth is that, in the long run, it pays to be a scrupulous investor. Do you really expect referrals if you “take advantage” of people? Of course not. Envision yourself as a problem solver and your business will be much more successful - and you’ll be able to sleep at night.

Help People With Their Problems

PT Barnum said, “There’s a sucker born every minute.” But in today’s world, “suckers” are a little harder to find. The Internet makes knowledge much more widely available, and people are generally more savvy then they’re given credit for. In fact, ignorance is much more likely to err on the side of overpricing a home than underpricing it, and besides, do you really want to make your living by taking advantage of people? Doing so will likely come back to haunt you. Instead, you should focus on finding people with problems. It’s your job to help them.

There are thousands of properties across the United States that people desperately want - need - to unload, and they’re willing to do so at a discount and with favorable terms. Perhaps the owners have been involved in a divorce, received a job transfer, or they’re under a tremendous amount of financial distress. Don’t think of yourself as "taking advantage" of the situation. Think of yourself as extending a helping hand. The sellers will be able to detect the difference in your attitude and will respond differently to you. And after all, they need to sell. It’s hurting them each day that their home is on the market. If you come along and are able to negotiate mutually agreeable terms, then it is a win-win situation.

Be a Full-Time Problem Solver

The surest path to real estate investment success is to focus solely on helping troubled people solve their problems. Many distressed sellers are embarrassed about their situation, or don’t want to tip their hand for fear that you’ll take advantage of them. So simply ask the following questions of anyone you find through a classified real estate ad. Why are you selling? When do you need to sell by? What are your plans after you sell? What is the minimum amount of cash you need in your pocket as a result of this deal? What do you plan to do with the proceeds from the sale of your home? If we were to close within a week and I paid cash for the full purchase price, what’s the best deal you could give me?

Do not act like an interrogator. Strike up a conversational tone. Truly desperate sellers will be anxious to talk to you. Keep the conversation moving and get all of the information you need. Casually ask the same question in different forms more than once to make sure their story remains consistent. As previously stated, many distressed sellers are embarrassed of their situation. Do your best to make them feel at ease.

You Can’t Solve EVERYONE’S Problems

There’s two requirements for every deal I do with a motivated seller:

1. I make money
2. I solve the seller’s problem

If I can’t do BOTH, I won’t do the deal. This is a good rule to live by, since doing one without the other is not good for your business. If you help the seller and don’t make money, you are working for charity (which is fine, but keep it separate from your BUSINESS). If you make money and don’t help the seller, you are a slimeball!

Don’t waste time on the phone with people who don’t need your help. Unmotivated sellers take time away from your real vocation - lending a hand to those who need it. Stick to your principles and you will not only be conducting yourself like a Good Samaritan, you will be building a real estate investment empire in the process.