The Legalwiz "No B.S." Real Estate Investing Blog

Bill Bronchick's Coaching Program

2010-05-30T17:57:00.001-07:00

Have you checked out my coaching program yet?

http://www.realestateinvestortraining.com

Cash Back When You Buy a Home

2009-06-13T15:05:00.000-07:00

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

2009-06-11T15:05:00.000-07:00

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

2009-06-09T15:04:00.000-07:00

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?

2009-05-27T11:35:00.001-07:00

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

2009-05-15T12:41:00.000-07:00

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

2009-05-12T12:39:00.000-07:00

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

2009-05-11T12:36:00.000-07:00

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:

I make money
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.

A House is its own best comp

2009-05-09T12:35:00.000-07:00

An appraisal is a certification by a licensed professional that a house is worth a certain amount based on comparable sales. It is, however, an opinion of value based on one person’s analysis and experience. The actual “market value” is the amount a buyer is willing to pay and for which a seller is willing to sell under normal circumstances.

Investors often misunderstand the phrase market value. Here’s a good way to understand this: Imagine that a home has been on the market for several months. Typically, homes in this particular market sell within a few weeks. But if the seller doesn’t receive a single offer, you have to assume the property is overpriced. Several factors may contribute to the problem, including the condition, location, and layout out of the house. However, all these get factored into the asking price. In short, if the house is priced right for its location, condition and features, it will sell within the same time frame of other houses in the neighborhood.

Many times the real estate broker takes a listing at a higher price than “market” with full knowledge that the home is listed too high. Sometimes brokers do this to win the listing over competing brokers by telling sellers what they want to hear. Like the barber who says, “It’s a great haircut,” they’ll say, “I’ll get you a higher price.” Most often, having a price that is higher than market is the seller’s fault (rather than the broker’s) because the seller has unrealistic expectations about the property’s value.

However, you can’t always blame sellers. They get their information from other brokers, the sale prices of other homes in the neighborhood, information and misinformation from neighbors, and the most recent appraisal. Therefore, your job as an investor is to sift through the information and determine the real value of the property.

In the real estate business, the subject property is often its own best “comp.” This means that the final sales price agreed upon by the buyer and seller is generally the property’s true market value. It doesn’t matter what the real estate broker, appraiser, neighbor, or mortgage broker have said. The actual selling price will determine the property’s value.

A common trap for novice investors is the so-called “bargain” property. For example, a house is appraised at $200,000 and available for only $150,000. Certainly, there are cases in which a property is available for a real discount of 25 percent, particularly if the property is in disrepair or the seller is extremely motivated as in the case of a divorce or foreclosure.

Absent motivating circumstances, however, if the property in question sells for $150,000, the comp has been established for this house. The value of the property is what it sold for, regardless of what the appraisal shows. Many houses are listed on the MLS as “priced below appraisal” and, in fact, sit for months without selling. If a property was listed on the MLS at $150,000 for six months when the average number of days on market in that price range is 96 days, does the $200,000 appraisal mean anything? Obviously not!

A word to the wise: When you’re doing comparable sales, look at the sales history of the property itself. Knowing if it was previously listed, re-listed, or sold helps a great deal in determining a property’s true value. Don’t buy a house you think is worth $200,000 just because it is appraised for $200,000 – do your due diligence.

7 Ways to Flip a Property

2009-05-04T18:04:00.000-07:00

Flipping” is the buzzword of the year in real estate - flipping books, flipping articles in the newspaper, and even flipping shows on TV! What is flipping, how does it work and how you can profit?

Flipping simply means buying a property and reselling it quickly, as opposed to holding on to a property long term as a rental. Flipping comes in several varieties, most of which are legal and profitable, some of which are not.

Flip Strategy #1: Buy, Fix and Flip

Let’s start with the most common form - the good, old “fix ‘n flip”. This process involves buying a property that needs work, fixing it up, then selling on the “retail” market, that is, to a person who will live in the property. This method is tried and true, and works very well. You can easily make $15 - $50k on one deal, depending on your market and how good you are at finding bargains.

The danger in fix and flips is either paying too much or underestimating repairs. Be very conservative in your fix-up costs and length of time it may take to resell. Also, make sure you include in your analysis the cost of paying a real estate agent to sell the property.

Flip Strategy #2: Buy, Refi & Lease/Option

Rather than sell the fixed up property for all cash, sell for terms. Once you have completed the rehab, refinance the property at its new appraised value. If you did the math correctly, you should have little or no money in the deal. Sell the property on a lease with option to buy. The rent payment from your tenant/buyer should cover your mortgage payment (if not, consider an interest-only or adjustable rate loan that is fixed for 3 years). When your tenant exercises his option to purchase, you reap a larger profit, since you don’t have to pay a broker’s fee. If the tenant exercises his option after 12 months, you benefit from a lower capital gains tax rate.

Flip Strategy #3: Buy & Flip “As Is”

Don’t like to do fix-up work? Consider selling the property “as is” as a light fixer upper. If the local real estate market is hot, you should be able to sell the property in poor condition just a little below market. This is especially the case with houses in “transitioning” neighborhoods. Make sure, of course, that you acquire the property sufficiently cheap enough that you can sell it below market quickly and still profit.

Flip Strategy #4: Wholesale

Strategy #1, the fix and flip, is very popular, which means there are a lot of investors looking for rehabs. You can buy the property cheap and sell it for just a few thousand dollars more to another investor without doing any work. You won’t make nearly as much as the rehabber, but you will realize your profit quickly.

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Flip Strategy #5: Pre-Construction

In very hot real estate markets, prices are appreciating as much as 2% per month. If you time things right, you can put a contract on a pre-construction house or condominium, then flip it to someone else when the development is complete. If it takes 12 months for the development to be complete, and the condo price is $500,000, you could make $100,000 or more in one year! Of course, the opposite is also true - you could end up losing money if the local economy tanks and you end up with a worthless condo that you can’t sell for more than you paid. Use this approach very carefully...

Flip Strategy #6: Scouting

The Scout is an information gatherer, so not technically a property flipper. He is the “bird dog” who finds potential deals and sells the information to other investors. Many people get started as a Scout for other investors because it does not take any cash or prior knowledge to look for distressed properties. The Scout finds a property for sale, gathers the necessary information, and then provides this information to investors for a fee. The fee will vary depending on the price of the property and the profit potential. The Scout can expect to make five hundred to one thousand dollars each time he provides information that leads to a purchase by another investor.

Flip Strategy #7: Illegal Flipping

OK, I am not advocating this approach, because it is illegal. 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 federally insured, the government authorities have investigated this practice and arrested many of the parties involved. As a result, the public perceives is flipping to be illegal.

The fact is, “flipping” - as I described in the beginning of this article - is NOT illegal. Loan fraud in the process of flipping is what is illegal, so don’t confuse the two. The other six ways to flip are very legal, very ethical and very profitable!

The Basics of Foreclosure Short Sales

2009-05-02T18:02:00.000-07:00

You will likely come across dozens of properties in foreclosure with little or no equity, that is, the seller owes at close to or more than the property is worth. In these situations, lenders are sometimes willing to accept less than the full amount due, commonly referred to a “short pay” or “short sale.”

Negotiating a short sale with the lender is a difficult process, generally because it is a daunting task finding a bank officer who has the authority to accept a discount. You will have to call around to locate the lender’s “Loss Mitigation Department”. More than likely, each lender you deal with will have a separate name for this department, so be patient when calling. Much like getting your phone bill corrected, you can expect the process to involve a lot of waiting on hold and being bounced around an intricate maze of automated voice mail systems. Once you get in touch with the right person, then the negotiating begins.

From the lender’s perspective, a short sale saves many of the costs associated with the foreclosure process - attorney fee’s, the eviction process, delays from borrower bankruptcy, damage to the property, costs associated with resale, etc. In a short sale scenario, the lender gets the property back faster, so it is able to cut its losses. Your job as the investor is to convince the lender that it will fare better by accepting less money now.

The lender will want some information about the property, the borrower and the deal he has made with you. Specifically, the lender wants to know what the property is worth. The lender will generally hire a local real estate broker or appraiser to evaluate the property (called a broker’s price opinion or “BPO”). You can also submit your own appraisal or comparable sales information. In addition you will want to offer as much specific negative information about the property as possible. Also, include some relevant information about the neighborhood and the local economy if things are bad (copies of newspaper articles with “bad news” may help). A contract’s bid for repair estimates should also be submitted, which, of course, should be the highest bid you can obtain!

The lender will also ask for financial information about the borrower. Sort of a backwards loan application, the borrower must prove that he is broke and unable to afford the payments. The borrower must show that he has no other source of income or assets to repay the loan. This process may involve as much, if not more paperwork than an original mortgage application! The borrower should submit a “hardship letter”, which is basically a sob story about how much financial trouble the borrower is in. This may require a little literary creativity, and some help on your part. Don’t lie, just paint a picture that doesn’t look good.

Finally, the lender generally wants to see a written contract between you and the seller. The lender wants to make sure the seller isn’t walking away with any cash from the deal. Generally, the contract must be written so that the buyer pays all costs associated with the transaction, so that the “net cash” to the seller is the exact amount of the short pay to the lender. A preliminary HUD-1 settlement statement is often requested, which can be difficult, since many title and escrow companies simple won’t prepare one in advance of closing. You can prepare your own HUD-1, and simply write “preliminary” on the top.

Don’t be surprised if your first short sale bid is rejected. Lenders aren’t emotionally attached to their properties, so they aren’t as likely to give you steal. Many short sales fall through if the BPO comes in too high, which is often the case. You can’t pull the wool over a lender’s eyes – if the property isn’t is need of serious repair, it is unlikely you can convince the lender the property is worth a whole lot less than the appraised value.

The process of the short sale is not that complicated, but the success or failure of the deal depends upon how you present it to the lender. Many novice investors and realtors give up at short sales quickly because their first deal is rejected. Like any business, short sales takes practice to get good. Generally speaking, loss mitigators are pretty good at spotting an amateur investor. If you know what you are doing, the loss mitigators are more likely to make a deal with you.

Want to become an expert at short sale deals? Register for William Bronchick's upcoming Foreclosure Investing Boot Camp.

HUD properties, FHA, and title seasoning

2009-04-30T18:01:00.000-07:00

With HUD properties, title seasoning, FHA loans, and short sales, investors have had some confusion regarding the rules. This article will clarify all of these issues for you.

HUD is the United States Department of Housing and Urban Development, a government agency whose goal is to increase homeownership, support community development . The Federal Housing Administration (FHA), which is part of HUD, provides mortgage insurance on loans made by FHA-approved lenders throughout the United States.

HUD and FHA come into play in three different scenarios in the investor/foreclosure arena.

HUD Foreclosed Properties

When a person gets an FHA loan, it is funded through a private lender and the loan is insured or backed by the Federal Housing Administration. When the loan is in default, FHA pays out the lender and take an assignment of the loan. When the property is foreclosed, it is owned by HUD. HUD then offers these properties for sale to both owner-occupants and investors. The properties are offered on the local MLS computer database, but you have to submit an offer through a HUD-approved real estate broker. The offer is made under a bid process, under which the HUD will either accept or reject your offer depending on what other offers are submitted. An investor can buy, hold, or flip these properties if their offer is accepted.

FHA Loans and Title Seasoning

Then second place HUD comes into play is the FHA loan. If a buyer of your property gets an FHA loan, there is a title seasoning requirement of 90 days. In other words, if you are selling the property to an FHA buyer, you must have title recorded in your name for 90 days before the closing and funding of the FHA loan. This precludes you from doing a double-closing or a short term (less then 90 days) flip.

Keep in mind that the 90 day seasoning rule has nothing to do with HUD-owned properties as described above. In other words, you can buy a HUD property and flip it 3 minutes later so long as your end-buyer is not using FHA financing.

FHA Loans in Short Sale

The third place HUD comes into play is if you are working on a foreclosure short sale on a property that has an FHA loan. In this case the Federal Housing Administration is insuring the loan and must approve the short sale. You can buy a property with an FHA loan on it, then flip it without a title seasoning issue, unless your end-buyer is getting an new FHA loan.

In summary, don't confuse the FHA new loan 90-day title seasoning requirement with the two other scenarios, HUD-owned properties and and existing FHA-insured properties. For more information on HUD properties and FHA loans, visit www.hud.gov.

LEARN MORE ABOUT FORECLOSURE INVESTING AT THE
FORECLOSURE INVESTING BOOT CAMP

New seminar

2009-04-28T14:14:00.000-07:00

Join me May 30th and 31st for a new seminar, "Distressed Property Investing"

More info at www.distressedpropertyinvesting.com

Your attitude counts in this market

2007-10-06T11:45:00.003-07:00

In a flat or down real estate market, a negative attitude is contagious, particularly if you are sitting on a vacant house that you paid too much for. The news media will remind you every day how bad things are and will back it up with statistics, facts, and figures. When the average time on market for a house is 90 days, it’s hard to believe you can sell your property in 30 days or less. Don’t worry about averages – you only get average results if you do the average thing and think the average thoughts. However bad the news, you have to start with a belief that you are different, your property is different, and your results will be different.

The “Do or Die” Mentality

Search your own experiences and you may recall a time in your life when all reasonable things were done, yet a particular goal was not reached. You became unreasonable and did what nobody expected you to do and achieved what you set out to do, against all odds. Recall the “do or die” mindset you had when you decided to be unreasonable and achieve this goal. Apply this mindset to your most important goals on a regular basis and you will achieve big results in your life.

Create a Plan

Most sellers fail to plan, which is why they plan to fail. If you goal is to sell a house within 30 days, then you need a well-defined, written plan for that 30 days. Like going on a diet and exercise plan, the better plan you have and the more you stick to the plan, the more results you will have. If you snack between meals and exercise at half-pace, you don’t get the same results.

Foreclosure filings jumped 93 percent from last year, but...

2007-08-21T21:34:00.000-07:00

Here's the headline:

"July foreclosures up 9 percent from June
LOS ANGELES - The number of foreclosure filings reported in the U.S. last month jumped 93 percent from July of 2006 and rose 9 percent from June, the latest sign that homeowners are having trouble making payments and finding buyers during the national housing downturn".

Here's the fine print:

"The national foreclosure rate in July was one filing for every 693 households".

Perspective? Trying to figure that one out, but Realtytrac's data doesn't seem to go back far enough. In order, words what is REALLY scary... 3%? 5%? In my town, there's some areas with 1 in 10 houses in foreclosures and it's not falling into the earth.

Would love to know what the foreclosure rate was in the last three booms and busts as a matter of comparison.

Dopey Flipping Article

2007-08-05T19:41:00.000-07:00

Yahoo real estate posted a dopey flipping article:

http://promo.realestate.yahoo.com/best_places_to_flip_a_home.html

The premise is that flipping only works in hot markets. More BUBBLE BABBLE. Flipping is not market dependent, it is based on buying BELOW market, WHATEVER THE CURRENT MARKET IS. The only thing that changes is how LONG it takes to flip, which means you have to buy CHEAP and SELL CHEAP in a flat market.

Beware of the "Wholesale" Scam

2007-08-01T20:11:00.000-07:00

Every newbie investor hears that it is imperative to buy real estate “wholesale”, not retail. The problem is, most newbies don’t know what a wholesale deal is, and there are a number of operators out there scamming newer investors with what they are representing as “wholesale” deals. Consider this a public service announcement and something to think about…

The following is a common scam I am seeing:

1. Scam-Investor makes a deal with a builder or developer on 30 new homes that are “appraised” at $215,000, but really worth $200,000 (if they were worth $215,000, they’d be selling regularly at $215k) Scam-Investor can buy them “wholesale” from the builder for $185k

2. Scam-Investor approaches newbie investor and says, “You can buy wholesale homes with no money down”… and I have access to lots of them!

3. Scam-Investor buys home from builder at $185k and flips to newbie investor for $195k Using a charade of fake down payments and passing money back to the buyer under the table (which is loan fraud), newbie investor ends up with a property worth $200k, with a “no money down” loan for $195k

4. Scam-Investor walks away with $10k, newbie investor has a house with almost no equity, and he thinks he has $20k in equity.

5. Newbie investor can’t rent house for breakeven cash flow, then tries to sell it for $215k, finally coming to the realization property is only worth $200k Newbie investor dumps property for $180k, losing $15k

This kind of activity is very profitable for the fast-talking scam artists who prey on the lazy, uneducated newbie investors. I deplore such scammers who prey on people, but I also must warn the newbie - “Buyer Beware”. There’s no shortcut to getting rich in real estate, and there’s no substitute for hard work, education and doing your own homework. If you trust others to find you wholesale deals without knowing what wholesale is, you deserve the lousy deals you get!

So, what is a “wholesale” deal? Well, wholesale means WELL below retail. Before you can figure out whether a deal is wholesale, you need to know what retail is. An appraisal is not retail. A tax assessment is not retail. Asking or listing price is not retail, and neither is a computerized “guestimate” from a free online comp website, like ZILLOW. Retail is what someone is willing to pay for a property based on average time on the market for similar houses. So, you need to get access to the MLS or a paid listing service to research similar houses in the neighborhood that have sold by ordinary means within the average time period for the market. Seller concessions, owner financing, builder concessions, financing concessions, real estate broker kickbacks and the like will skew the numbers, so look carefully.

Once you determine retail, then you can figure out wholesale. A house worth $200,000 retail is not a bargain at $192,000 in today’s market. In fact, it’s not a deal at $188,000 or even $185,000. In my market (Denver), a true wholesale deal means at least 15% off retail, closer to 20%. In your market, that might translate to 30% under market, or maybe 10% under market.

The price range of houses you are dealing with also skews the figure, since higher-end homes tend to take longer to sell and you may need a larger discount. If the property needs repairs, then you need to get it EVEN CHEAPER. So, the formula should be X% under retail, LESS repairs, using a very conservative (high) repair figure. Having a local real estate agent, investor or mentor to give you a reality check is often helpful. And, make sure that person giving you advice does not have a stake in the deal.

Use your head, and don’t trust the values given to you by the person SELLING you the property! Do your own research and your own comps. If a person is telling you they have access to an unlimited number of “wholesale” deals, ask yourself, “How is this possible?” There’s no shortcut to success — as, Harvey Mackay says, “Beware of the Naked Man Who Offers You His Shirt”. I say, “Beware of the Homeless Man Who Offers You His House… for WHOLESALE”.

Should the Government Bail Out People in Foreclosure?

2007-07-28T16:07:00.000-07:00

As I wrote in my article, Can the Government Solve the Foreclosure Problem, the state and federal governments are considering using taxpayer money to bail out people in foreclosure. Is this a good or bad idea?

At first blush, it appears awfully unfair, in that the government would take your money and give it to someone who made an irresponsible financial decision and would thus profit from it. On the other hand, one could argue that the government’s lack of regulation on loans, in part, led to the problem.

From a purely capitalist, free-market position, I’d say, “Absolutely not - let the market correct itself and allow economic darwinism take its course”. From a sympathetic standpoint, what’s $300 million in the scheme of things, since most of it would go to HUD counseling agencies to help poor people refi and keep their homes?

Despite the animosity from people who object to paying for this “robin hood” program, it would help everyone, since less foreclosures helps keep your neighborhood home values up. However, the harsh reality is that $300 million wouldn’t change anything, and like most government programs, it would be nothing more than lip service and bureaucracy.

Nobody wants to see low income families on the street, but it is a bad precedent for the government to have too many programs to bail consumers out of bad financial decisions. True, some of the lenders are to blame, but they are already being punished in their pocketbooks. Many lenders who originated and sold these loans are now having to buy them back from the investors they sold them to.

As a final note, most states do not have extensive regulation of the mortgage broker profession. I am not much for excessive government ANYTHING, but having a sufficient fund to reimburse the victims of the worst predatory lending would be a good idea. Real estate brokers, attorneys, and other professionals pay into a fund managed by the state for the protection of clients that are scammed, and so should mortgage brokers. In my own state of Colorado, mortgage brokers have to carry a small bond, which is almost a joke. California, on the other hand, requires a mortgage broker to first be licensed as a real estate broker, which I think is a good idea.

Click here to view my You Tube Video on Subprime Mortgages.

What Every Landlord Should Know About Discrimination

2007-07-28T16:06:00.000-07:00

The Fair Housing Act of 1968, as amended, prohibits discrimination on the basis of race, color, religion, nationality, familial status, age, and gender. Many state and local laws also forbid discrimination on the basis of sexuality or source of income, and the Americans with Disabilities Act makes it illegal to discriminate against the disabled. If you harbor any such prejudices and would allow them to come into play when renting a housing unit, then you’re probably not cut out to be a landlord. However, many sincere real estate investors make honest mistakes that result in a lawsuits. The best way to avoid them is to be informed.

Read the rest of the story on William Bronchick’s Wealth Protection Blog.

Want to Get Rich? Go into Debt!

2007-07-24T15:23:00.000-07:00

Social security is the biggest ponzi scheme every invested and for those of us between the ages and 25 and 55, we’d ought to be worried whether the system will even be there by the time we reach retirement age.

Saving is good, but most people don't make enough income to be able to save their way to a healthy retirement. In order to retire wealthy, you need to go INTO debt. If you want to become a millionaire and you aren’t already making millions, you need to borrow, not save. I know that may sound unconventional, but most of the wealthy got that way by leveraging through debt. Ask Donald Trump.

Do you realize if you bought just a million dollars worth of real estate and just paid it off, you’d be a millionaire? In this market, it’s only about 4 or 5 houses in most markets. And, with inflation, that means the values will also go up, meaning you so will your rents. In other words, you don't have to necessarily adjust your strategy for inflation, it will do so automatically for you.

Debt is not always a bad thing, if you are using it properly for leverage. Once you master the leverage principle, you will become wealthy and retire better than 95% of Americans.

Stop Working, Buy More Real Estate

2007-07-19T11:10:00.000-07:00

Taxes are your biggest expense in your lifetime, so choose your source of income wisely! Real estate has some of the BEST TAX BREAKS of any investment in America!

The more you earn through your job, the more you get taxed, and the system is setup that way to punish hard workers and reward investors. Have you looked at the bottom stub of your paycheck lately and seen how much the government steals from you? Wage income not only requires work, it gets taxed at a very high rate, plus the government takes FICA, which is put into a system that may be bankrupt when you retire.

Real estate has so many tax advantages over wage income:

Capital Gains Rates

The maximum federal tax rate on capital gains is 15%, whereas wage income is taxed at 35%. There's state taxes, too, and some states offer further discounts on capital gains income. Remember, capital gains requires that you hold a property for 12 months or more before selling, as in the case of a lease/option.

Exemption for Principal Residence

If you sell your residence, the first $250,000 is exempt from gain or $500,000 if you are married. Remember, this requires that the residence was used as such for two of the last five years.

1031 Exchanges

Under IRC Sec 1031, you can roll your profits into more real estate and defer paying taxes altogether. Your tax basis rolls into the next property. The rules are rather stringent, in that the exchange must be completed with 180 days and the exchange property must be indentified with 45 days of the sale of the relinquished property.

Interest Deduction

You get to deduct interest you pay on debt you have used to acquire your real estate.

Depreciation

You get a tax deduction for the “wear and tear” on the structure, even if the property increases in value! Thus, you can actually break even or make money, but on paper show a loss to offset other income.

No FICA Tax

Your income from real estate is general NOT subject to FICA tax withholding. Regular self employment income is subject to 15.3% tax on the first $97,000, and thereafter your earned income is subject to medicare withholding (which you may never get back in your lifetime the way things are going!).

It’s not just what you make, it’s what you keep... plan wisely where your income comes from, and you will keep a lot more.

Want to keep more of what you've earned? Check out William Bronchick's Wealth Protection Materials.

Great Review, Unpaid Endorsement

2007-07-16T20:26:00.000-07:00

While randomly looking around the Internet, I found a nice review of one of my programs...

http://www.realliferealestateblog.com/2007/04/26/review-of-alternative-real-estate-financing-by-william-bronchick/

Alternative Real Estate Financing is one of my favorite works, a revision of an earlier course called, "How to Create a Real Estate Cash Cow". It covers how to buy and sell properties in a non-traditional way, using owner financing. The focus of the program is wraparound transactions, using installment land contract aka "contract for deed".

You can find it on www.legalwiz.com in the online store.

Bronchick Quoted in WSJ on Flipping

2007-07-13T17:11:00.000-07:00

The Winston Salem Journal did an interesting article on Flipping, insert some very nice quotes and advice from yours, truly!

Click here to read

Bronchick Gets Quoted on MarketWatch

2007-07-12T16:04:00.000-07:00

Interesting article on foreclosures which quotes me:

http://www.marketwatch.com/news/story/story.aspx?guid={0B5B0D3B-0630-460D-9F5B-5E3F20693614}&siteid=rss

Not sure how long before they archive it, so click quick!

BULL vs. Bubble

2007-07-11T19:04:00.000-07:00

Jim Kramer is a genius. He hosts a show called, “Mad Money” on CNBC. He graduated top of his class from Harvard and is one of the most respected names in the financial news industry. Jim has an expression - “There’s always a bull market somewhere”. I like this so much I am going to PILFER it and use it in my presentations because it so aptly applies to real estate investing.

If you invest in REITs, stocks or funds that are dependent on the real estate market, the housing news (bad news) is very relevant. If you are a dealmaker, a house buyer, and a bargain hunter, you look for deals that exist DESPITE the market. In other words, look at neighbhorhoods figures, not national or statewide figures on housing when investing. In every city there’s certain neighborhoods that are up or down, no matter what the citywide or statewide news about housing is telling you. Find those bull markets, and you will make money.

Buying “Under Value” vs. Buying Undervalued

2007-07-07T16:03:00.000-07:00

People often speak of buying a property “undervalued”, as if they are discovering something nobody else figured out. Stocks, land, and real estate can all be purchased undervalued, but this is different from buying property UNDER value. There’s a BIG difference, in fact!

Let’s say you think a company is ripe to expand within the next few years. You are speculating that the value of the company’s stock will increase, so you buy AT MARKET PRICE and hope you are right. You can also buy a property at MARKET PRICE and hope demand will increase and thus its value will go up. You can buy gold at today’s price and hope it will go up in price. However, in all cases you are speculating that the asset will increase in value and that it is CURRENTLY undervalued.

Compare this thinking to buying a property UNDER VALUE, that is below its CURRENT market value. If a house is worth $200,000 based on similar houses that have sold recently, the market value is $200,000. It may be an “up and coming” neighborhood with a good school district that most people have not yet discovered, so you can buy it for $200,000 based on the idea that the future value will be more, so it’s currently ”undervalued.”

Or, you can buy a property with a current market value of $200,000 and pay $150,000 because the seller is in a divorce or a foreclosure. In this case you are buying BELOW value, or with BUILT-IN value. Why is there built-in value? Simple - you can sell it tomorrow for up to $200,000! If you buy real estate undervalued, you have to wait until everyone else realizes what you suspect to be true, that the property SHOULD be worth more.

Bronchick Makes Wipipedia

2007-07-05T14:02:00.000-07:00

Flipping has now officially a topic on the online encyclopedia “Wikipedia“, citing my book Flipping Properties as a reference. Flipping Properties has sold over 200,000 copies all over the world, and is printed in Mandarin Chinese (although I imagine you can’t flip in China, it’s for people who speak the language in the U.S.)

BS = "Bubble Speak"

2007-07-02T13:01:00.000-07:00

I hate B.S. (”bubble speak”), that is, people who keep saying there’s a bubble. Since 2002, when I first wrote about this on my website, I de-bunked the ”B.S.” of a national real estate bubble. The media loves to talk negative, because negative sells papers, and papers sell ads.

This is not the first time in history we’ve seen this kind of “BS”…

“Houses cost too much for the mass market. Today’s average price is out of reach for two-thirds of all buyers”
- Science Digest 1948

“The era of easy profits in real estate may be drawing to a close.”
- Money Magazine 1981

“Financial planners agree that houses will continue to be a poor investment.”
- Kiplinger’s Personal Financial Magazine 1993

I prefer to take the advice of a more positive source:

"Life is too short to spend your precious time trying to convince a person who wants to live in gloom and doom” - Zig Ziglar

You can find all the statistics you like to convince you the “market” is bad, but you can always find ways to profit in ANY market with the right attitutude, the right knowledge, and a little bit of hustle.

I'll wait until the bottom...

2007-07-01T16:00:00.000-07:00

There’s going to be some GREAT opportunities over the next few years to buy properties at tremendous discount, and those who stand up, TAKE ACTION, and BUY NOW will get wealthy. Those who sit on the sidelines, will not.

Some people are thinking they should wait it out until the market hits ROCK BOTTOM before taking action. That may not be the best idea …

Remember when your favorite department store went out of business – what did advertise? 25% off. You found lots of bargains. Then it was 50% off, and you still found a few good bargains, but not as many. Finally, it was my wife’s favorite words, “FINAL CLEARANCE SALE 75% OFF” – then what’s left? Members Only Jackets. You waited too long and you missed out, right?

That’s what’s going on right now. We’re at the point of the first round of clearance sales, and the window of opportunity is closing. By the time the media says a particular market is hot, it’s generally a year too late.

The Interest Rate Factor

2007-06-30T22:54:00.000-07:00

So many people are still it out, waiting for the “bottom” before buying. Big mistake. The bottom is impossible to predict, and usually by the time the media reports the comeback, it’s about a year too late.

Certainly things may decline in a particular market, even yours. But, financing at today’s low interest rates gives you an edge. If you wait for prices to fall a little, you may get a bargain on price, but not on financing, as interest rates are likely to go up.

Take, for example, a $250,000 loan at 7% vs. a $240,000 loan at 8%. Over 30 years, the smaller loan will cost you about $40,000 more! If you are looking at good, long-term deals, buying NOW with 30-year fixed rates may turn out to be the best retirement move you make in your lifetime.

It’s a Buyer’s Market… Why Aren’t You Buying?

2007-06-29T18:59:00.000-07:00

People move like SHEEP when it comes to investing; they follow the pack like “SHEOPLE”. When the market is hot, they follow people in. When the market is soft, they follow people out. Unfortunately, that’s exactly why 95% of Americans retire broke, and 5% of Americans retire wealthy.

Ask the wealthy how they got that way and they’ll tell you - the majority of them by buying real estate, often in bad times, then holding on. In 1988, you had to be an IDIOT to buy real estate in my city of Denver, CO. However, I know a few idiots who bought 20 houses for $30,000 each in 1988 from HUD. Residential vacancy rates at that time were close to 20% in those neighborhoods. Now, the vacancy rates are 5%, and the properties are worth $180,000 - $200,000! I wish I was one of those idiots, because I got into the Denver market in 1993 when things were coming back and it was a “seller’s market”. I bought a sold nearly everything, made good cash flow, but wish I would have held more properties, because they doubled, some tripled by 2001.

Since 2001, the real estate market in Denver has declined steadily, but prices are still MUCH higher than in 1993, and even higher than 1988. What’s the point? The time to BUY AND HOLD is when things are DOWN, not towards the top when the sheep are buying. In my market, the sheep were buying up in 2000 - 2002, precisely when things were a SELLER’s market, and prices flattened, even dropped a bit since.

Even still, however, you can profit in ANY market once you learn what to do. My new book, “Defensive Real Estate Investing“ gives you the tools to make money in ANY real estate market. Don’t be a SHEOPLE. Learn how to be a fiver-percenter.

"The Sky is Falling", Says Chicken Little

2007-06-27T18:58:00.000-07:00

So the sky is falling, is it? This is the first time we’ve seen nominal prices fall in some 40 years, says the experts. Well, not really… prices rise and fall in different parts of the Country, just not as a whole, lumped together. It’s much worse in some parts, better in others.

WHO CARES?? Real estate is not like gold or the dollar where the prices are pretty much the same for it no matter where you buy it. Real estate is LOCAL, and if you pay attention to that “market” thing, you’d pay attention to what’s going on in your city, or more importantly, in your eighborhood. Even then, you can find below-market bargains in ANY market. In other words, focus local, focus on DEALS.
More to come, Bubble-heads!