Single Family Homes - The No Risk Investment! - Part 7 If you will start living by the philosophies presented in those books you
will find yourself discovering a bright New World of success. Then you will
be ready to become a real estate investor.
The correct frame of mind is “I can do this! I will do this! I won’t
stop until I succeed!” This attitude will propel you over the inevitable
problems you will encounter as you begin making offers. Remember you
will hear "No" twenty times before you get to a "Yes!"
What is the Financial Environment?
Real estate economic conditions are constantly, slowly changing. In
your area unemployment and local economic conditions will play a part in
your success in dealing with homeowners. Another factor is interest rates.
Sometimes they are high and sometimes low.
The political climate can also have an effect on your local real estate
market. The government influences the direction of interest rates up and
down. When mortgage rates are low it is much easier to sell a home. Even a
distressed homeowner can often find a buyer in time to solve his problem.
When interest rates are high you will find more motivated sellers.
They will have a difficult time finding a buyer and will be more interested in
listening to what you can do to help them.
For the last few years there has been a migration to the southwestern
states. We have a growing economy and population. Here in Phoenix and
the Valley of the Sun there has been a building boom. 30,000 to 35,000
building permits for single-family homes have been issued each year for the
past seven years. While mortgage interest rates are low builders have no
trouble selling that many homes each year.
The same holds true for resale homes. Resale homes stay on the
market an average of 38 days before they are sold.
As I write this interest rates have just nudged up to 5.5%. Twelve
months ago mortgages were going for 4.6%.
For every quarter point that interest rates rise thousands of people can
no longer qualify to buy a home. Anyone with a home to sell has a much
more difficult time finding a buyer. The lesson here is that even right in the
middle of boom times conditions can develop that create a higher number of
motivated home sellers.
Home prices go up! Sometimes quickly and other times more
slowly…. but up! Yes, occasionally there is a dip in certain types of real
estate in some areas. But just ask anyone in your neighborhood what he or
she paid for his or her home ten years ago!
That means the value of any property you own will be growing day by
day. And this is happening during a period when the overall rate of inflation
in the country is about two and a half percent. Home prices here in the
Phoenix area are climbing at a rate closer to 6% annually.
It is predicted that interest rates will move to an up trend over the next
few years. Home buying and selling conditions will change again. It is all
part of the normal ebb and flow of conditions in any real estate market.
When people can't buy homes they rent them. When there are more
people trying to rent the same number of rental homes what happens to
monthly rental rates? They go up! This allows those of us who own income
property to get an even better return on our investment. It also means that as
interest rates move up we should intensify our home buying efforts. There
will be more homeowners willing to help us buy their property. That’s how
they reward us for solving their real estate problem.
There are always deals just waiting to be found. It’s just a little easier
to find them during certain periods in the economic cycle.
Now just a word of caution about the larger cycles in our economy.
From roughly the 1960’s into the 1980’s we experienced fairly high rates of
inflation. Real Estate prices were climbing with only a few interruptions.
During much of this period it was hard to make a mistake in real estate.
Even if you paid too much for a home inflation would lift the value of
the property fast enough to soon put you into a profit position.
During the years that President Carter was in the White House interest
rates soared into the range of 25% and more. No one could sell his or her
home, because no buyer could qualify for a mortgage. That’s when the
concept of no money down became very popular. Some homeowners would
do anything to get out from under their homes. No money down deals were
made ever more practical because most home loans could be assumed with
no qualifying at that time.
As I write these words we are in a period of very low inflation.
Economists predict inflation will be low to flat for the next few years. We
real estate investors cannot count on inflation to save us from our mistakes.
We must be sure that we do not over-pay for property and that any home we
buy will generate enough income to show us at least a small profit.
There is a chance that even further along the timeline we will enter a
period of disinflation. That means material investments such as real estate
will actually decline in value. That is difficult for most of us to understand
since we have lived all our lives attempting to beat inflation.
Single-family homes are still the best investment for the next few
years. Just consider this as an alert to a situation that could be developing.
There will come a time when you might want to switch your investing
efforts from real estate into something else…. but that’s years away.
If you would like to learn more about what the future may hold for all
of us I recommend Harry Dent’s book “The Roaring 2000s Investor”.
5-
6
SIX
Structuring Deals
The first thing you must find in order to buy a property at a bargain
price is a motivated seller. The second thing you must have is the ability to
structure profitable deals that will solve a seller’s problem and be profitable
for yourself.
One of the best ways to find distressed sellers is through foreclosure
notices. If you would like to learn more about this technique we suggest you
purchase a copy of “The Million Dollar Foreclosure System.” It is one of
our best selling manuals. We will explain more about foreclosures later.
In an earlier part of this manual we listed a number of other ways to
find homeowners who have an urgent need to sell their homes. Now we will
cover how to structure deals.
Since you will be concentrating on single-family homes you will soon
be able to quickly recognize the value of any particular home. When you
find a motivated seller you will have an excellent idea of the fair market
value of the home. Next you will learn, from the list of question you’ll be
asking, the amount of equity the owner has in the home and their motivation.
The owner’s equity is the difference between the value of the home
and the amount still owing on the mortgage.
For example if the home’s current market value is $100,000 and the
remaining balance on the mortgage is $75,000 the homeowner’s equity is
25% or $25,000.
To have room for a profitable deal you usually won’t waste time with
any seller who does not have at least a 20% equity in his home.
To illustrate a few of the many ways to create a profitable deal we will
use an example property that has a fair market value of $110,000. $80,000
remains to be paid on a first mortgage. That means the owner has equity of
$30,000. That $30,000 gives you room to maneuver in creating a deal. In
our example the owner has agreed to sell the property to you for $100,000,
$10,000 below fair market value. She is giving up $10,000 of her equity in
order to sell the home quickly. Here’s how the deal might look:
1. You arrange a new 1st loan and get the seller to carry back a second
loan. You would give the seller as little cash as possible, perhaps
$2,000 for moving expenses and have her take back a second for
$18,000 (that’s the remainder of her equity) with a low rate of interest
and a long payback period.
Home’s market value $110,000.00
Purchase price: $100,000.00
1st loan $ 80,000.00
30 years @ 7.5% = $560.00 monthly
2nd loan $ 18,000.00
15 years @ 5% = $142.00 monthly
The first loan you arrange through a mortgage broker and the
proceeds are used to pay off the existing first loan. The seller carries back
the second. The total monthly payment on the two loans is $702.00. The
house rents for $1,000.00 per month. That leaves $298.00 per month before
taxes and insurance (about $200 monthly), but even subtracting those you
would still have positive cash flow. You can adjust the terms for the second
loan to make the deal work.
You have flexibility in structuring the owner carry-back second loan.
The ideal would be long term and low interest, as with the 15 year, 5% loan
indicated above. You could even make the loan assumable, so the home
would be easier to sell should you decide to do so.
The second loan could be for a shorter period and a different interest
rate. It could have interest only payments for the first year and then
amortize over the remainder of the period. There could be no payments for
the first two years and then the entire balance would be due and payable (not
a good idea). Those are just a couple of possibilities, there are many others.
The owner’s equity gives you room to put together a deal that will be
profitable for you and acceptable to the seller. You can get a free, easy to
use financial calculator at www.RealData.com . You’ll find it by clicking on
“Downloads”. The calculator will help you structure financing in various
ways.
The point here is that the seller is going to help you buy the home by
allowing you to make a small down payment and then pay off the remainder
of her equity over a period of time through the second loan. The second loan
is called “seller carry back financing.”
2. In our example suppose the seller wants a $2,000 cash down payment that
you do not have. Offer to make the down payment in monthly payments over
the next 12 months. When you have ownership the monthly rent may
produce enough positive cash flow to cover all or part of the extra monthly
payments.
3. As another substitute for the down payment offer the seller free use of the
garage, any storage or office space on the property for a certain period of
time. You could still generate monthly income from renting the remainder of
the property.
4. If you need cash to close the deal borrow on an insurance policy or other
assets. Some investors use the checks available with their credit cards. Be
careful here; be sure the property will produce enough to cover the cost of the
deal plus the extra credit card payments.
This is the same as making the down payment in monthly installments.
If the property won’t cover this extra monthly expense you may have to
come out of pocket with cash to make up the difference. If it is just for a few
months it is much like a forced savings plan. Just don’t get over extended.
5. For the down payment trade something you own – boat, car, pool table,
etc. Or trade a service that you can perform or a service that someone owes
you like painting, plumbing, five years of tax preparation, etc.
6. Pay someone to co-sign for a loan and use the proceeds for the down
payment. If you have some cash, but poor credit this may be a solution.
7. Borrow the down payment from friends or relatives with a formal, written
agreement that they will share in any profit. This is best done with a property
that you plan to buy and sell as quickly as possible. This is called flipping.
Be sensible with this. Don’t try it on your first deals. Wait until you really
know what you are doing. At that point you may be fully invested, but come
upon a deal so good you just can’t let it get away. That’s the time to go to
friends and relatives. Be generous with them and they not only will be eager
to get in on another deal, but they will brag to their friends who will soon
want a piece of the action.
8. If there is a realtor in the deal ask her to take a note for her commission
and use that amount for the down payment. They hate this, but if they know
they will represent you in other deals they may agree. If nothing else perhaps
they’ll take half in cash and half in payments on a note. Remember agents
have to share their portion of a commission with their broker. Some agencies
like Remax rent office space to agents and don’t take a percentage of
commissions. It is best to discuss this with an agent before you begin a
relationship. Ask if they will be willing to help you affect a purchase now
and again by taking their commission in a note.
(In most parts of the country real estate sales commissions fall into the 6% to
7% range. They are negotiable, but most sellers agree to the rate that is
customary in their area. The seller agrees to pay the commission when he
signs the listing agreement. Traditionally upon sale of the property the
commission is split between the seller’s agent and the buyer’s agent.
If the seller’s agent finds a buyer not represented by another agent the
seller’s agent is entitled to the entire commission. Agents are generally
bound to pay a set portion of every commission to their employing broker,
except in the case of Remax and a few other similar brokerages.
The primary benefit of contracting with a real estate broker is a listing on
the Multiple Listing Service (MLS). This service allows every real estate
agent in the area to find a listed home with a simple computer search. This is
a powerful sales tool. The MLS is usually owned by the local Board of
Realtors and is available to their members only. The word Realtor is a
trademarked term. For an agent to use that designation they must join the
organization and pay yearly dues. It is not part of any branch of government
and it is not necessary for a licensed real estate agent to join that
organization.)
9. What if the owner just will not agree to the terms you need for a profitable
purchase? Offer to lease the property with the right to sublease. Of course,
you would have to be sure you could sublease it for more than you were
paying in lease payments. This can allow you to control the property for
three or so years and produce an attractive monthly profit. At the end of the
lease period you may be able to negotiate an acceptable purchase.
10. Lease the property with an option to buy. This will be one of the most
powerful tools in your bag of tricks. Like the deal just above this allows you
to control a property with little more cost than one or two months rent in
advance.
11. In our example property above suppose the sellers were so distressed that
they could no longer keep up the monthly mortgage payments. They wanted
to sell quickly before the lender began to foreclosure. To add to their
troubles they had no other place to live. You might solve their problem like
this:
Offer $8,000 for their equity
1. $600 in cash at the closing.
2. One year of free rent in the home.
3. $680 when they move out after 12 months.
6-5
One year of monthly payments on the first loan amounts to $6,720. Add
the $600 and $680 in cash and you have a total of $8,000. You can do this
deal with just $600 of cash up front and then 12 monthly payments of $560.
If you already own a property or two the positive cash flow from them may
easily cover that figure. In effect you have purchased a property at $30,000
below fair market value for just $600 cash.
If giving them free rent would put too much strain on your resources offer
to lease the home to them for a year at a reduced rate. Perhaps a reduced rent
of just two or three hundred dollars per month. If their car is being
repossessed offer to buy them a cheap used car to help them through their
crises.
Look for the seller’s number one problem and then find a way to solve it.
That is how you do profitable deals. Remember it all starts with a motivated
seller. If they are really motivated they will listen to an offer that will give
them some relief from their dilemma.
Assumable Loans?
There was a time when it was much easier to do deals because most
home loans could be taken over with a simple assumption. For practical
purposes assumable loans are a thing of the past.
Before March 1, 1988 all VA loans could be assumed with no qualifying.
Now you can generally assume VAs, but you must qualify just as if you were
getting a new loan and you must release the home seller from any liability for
the loan.
FHA loans originated before December 1986 are assumable with no
qualifying, but not if they were created after that date.
As you can see it has been many years since home loans have been easily
assumable. During that time most of those properties have been refinanced
or sold with new financing, so even more assumable loans disappeared.
Where an assumable loan remains the loan balance has been paid down while
the value of the home has climbed.
Now those homeowners may have 70% to 80% equity in their homes.
With that much equity they can quickly get a home equity loan to solve any
financial problem.
One of the keystones of the great “No Money Down” promises you have
heard were home loans that were easily assumable. Those days are over.
Now you must be even more creative in your deal making, as we have
illustrated above.
Can You Qualify?
If you can qualify for new financing it will be much easier to put deals
together. It is worth your time to establish a relationship with a mortgage
broker. Many are aggressive in helping their clients qualify for loans. They
often can make suggestions that you will find very valuable.
If a financial problem is preventing you from qualifying for real estate
loans ask the mortgage broker for his suggestion on what you might do to fix
your situation.
In our book “ The Best Real Estate Investment Nobody Knows About” we
discuss the advantages of investing in new homes. As I write this you can
buy a new home with a FHA loan for just 3% of the purchase price (or less)
as a down payment. That’s just $3,000 for a brand new, $100,000 home. If
the interest rate is 6% your monthly payment would be about $725.00 with
insurance and taxes. The home would easily rent for between $800 and
$1000 per month. Get the manual to learn more.
When you are talking about home mortgages the interest rates you most
often see are for the buyers who will be living in the home. If you are asking
for a loan to buy a rental home you will be getting an investor’s loan. This
loan will carry an interest rate from a half to a full two percentage points
higher than the homeowner’s loan. Your mortgage broker can advise on this
and he will shop for the lowest rate available. This document and accompanying materials are designed to provide authoritative information in regard to the subject matter covered in it. It is for illustration purposes only and presented with the understanding that the author and publisher are not engaged in rendering legal, accounting or other professional opinions. If legal advice or other expert assistance is required, the services of a competent professional should be sought. |
