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Foreclosures — From a Flood to a Dribble

Foreclosures — From a Flood to a Dribble
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It’s been an exciting seven or eight years for real estate investors. The flood of foreclosures that began in late 2006 raged for a couple to three years, then began to subside. All through this time, investors were snapping up properties, doing fix & flip, and turning homes into rentals for long term investment.

In the most recent three years or so, it’s been slimmer pickings. Investors have had to be more selective, market harder, and crunch the numbers more carefully. It has been working, as real estate investment is still making money. Large institutional investors jumped into the fray and converted tens of thousands of homes to rentals. This tightened supply and prices have risen, but we’re still out there doing profitable deals.

Underwater Homes Report & Outlook

CoreLogic recently released a report dealing with home equity, underwater properties, equity increases and more. Here are some highlights:

1. 10.8% of mortgaged homes have negative equity.
2. That’s roughly 5.4 million homes.
3. The aggregate value of negative equity increased by $ 7 billion from the third to the fourth quarter of 2014.
4. 20.0% of residential properties are under-equitied – meaning they have less than 20% equity.
5. 2.8% of homes, 1.4 million, have less than 5% equity.
6. Of residential properties with a mortgage, 1.0 million or 2.1% have a loan-to-value ratio of 100% to 105%.
7. Another 2 million, or 4% of homes, have a loan-to-equity ratio greater than 125%.
8. 3.2 million upside-down borrowers hold a first mortgage without a home equity loan.

Despite a lot of good news about home prices and buyers returning to the market, this data tells us that there are still a lot of homeowners out there in pain. While many under-water owners can remain in their homes and wait the market out, many will need to move for employment or other reasons.

With more than 5 million homes still in negative equity territory, there will be more foreclosures coming, just more a trickle than a flood. Those in positive territory but with less than 5% equity are also at risk, as they may not be sellable to cover costs. If the owners can’t bring cash to the table to close, they may just let the home go.

With 2 million homes with a mortgage 25% higher than value, it could be a very long time before prices correct enough to float those owners. The 3.2 million upside-down borrowers who only have a first mortgage will be candidates for investor marketing, short sales, or foreclosures at some point.

Though many economists place housing as the top factor in economic health in the U.S., it’s going to take more than rising prices to float the market. The economy is still in a funk, and employment opportunities are not healthy from a historical perspective. College graduates in particular are moving back in with parents or renting because they don’t have a down payment or enough faith in the housing market to commit to buying a home.

Real estate investment will remain healthy, but investors will need to sharpen their pencils and adjust their marketing to profit from this trickle of bargains to come. Real estate is local, and some markets will be better than others, but on average there will be bargains trickling down in the near to mid-term future. Investors holding rental properties may be able to profit by selling them at higher prices and buying replacement properties using a 1031 Exchange to defer capital gains. Profiting from both the improving price market and grabbing bargains as well should make for interesting investment activity in the next few years.

Make sure to check out Dean’s other Huffington Post articles:

2/24/15 Self-directed Retirement Accounts and Turnkey Rental Investing

2/17/15 Enthusiasm for 2015 Housing Markets

2/13/15 Trulia Asks: ‘Are We Past the Flipping Point?’

2/5/15 Is Multi-Family Worth a Look for Your Portfolio?
Dean Graziosi

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Peer-to-Peer Lending Is Growing in Popularity with Investors

Peer-to-Peer Lending Is Growing in Popularity with Investors
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Whenever a concept is catching on, there will be a lot of Internet chatter about it. There are quite a few articles on financial and investing sites these days about peer-to-peer lending. It’s a good thing, as investors are constantly searching for affordable funding sources for their projects, particularly fix & flip deals.

Peer-to-Peer lending addresses three challenges in the investment world:

1. Investors who want passive involvement, less time and hands-on activity.
2. Small investors who do not have large sums to commit to real estate.
3. Investors who want ready access to funds for their projects from less restrictive lending sources.

This concept is particularly suited to commercial properties including shopping centers, office buildings, self-storage facilities, and other real estate types. In the past the lenders involved in these projects were institutional and major banks. That’s changing with more peer-to-peer lending entering the marketplace.

Small investors who want passive involvement with limited capital:

Peer-to-Peer opens up real estate lending to the masses by allowing individual small investors to buy into deals with less money and take a passive role in management and income generation. One peer-to-peer online lender puts it this way in bullet points:

• Purchase a whole loan or a fractional interest
• Terms range from 6 months to 5 years
• Start with as little as $ 5,000
• Investments pre-vetted by industry experts

Now individuals with limited capital can own a piece of a major commercial property and share in the rental income and tax advantages offered by rental real estate ownership on a large scale. These are passive investments without management headaches, taking advantage of professionals. Tenant issues, rent collection, and marketing are all handled by people with experience in these areas.

Over time, commercial real estate has performed more like bonds than stocks or even REITS (Real Estate Investment Trusts). Different lease types allow owner/investors to tailor their leases to the tenants’ type of business and revenue flow. This helps to reduce fluctuations and risks, as well as in structuring a win-win situation for both the owners and the tenants. This creates a more stable cost structure for the tenant which maintains better occupancy over time.

Investors want better access to money with less hassle and fewer limitations:

Investors, particularly those doing rehab work, find the closing procedures of banks and institutional lenders to be cumbersome and limiting. Too much paperwork and other underwriter requirements make it a real hassle to fund projects. The time to put together the application and prove to these lenders the deal is a good one can be too long to keep the purchase alive.

Here are the bullet points on this side of the peer-to-peer process:

• Finance your real estate investment project fast
• Flexible terms
• Non-standard financing is our specialty
• Competitive, transparent pricing
• Funding for all 50 states

Those are all nice features in lending if you’re a fix & flip investor who needs to fund not only the purchase of a property but the rehab as well. For large commercial projects it can bring together hundreds of smaller investors to fund a project with less paperwork and in a shorter approval time frame.

Tax benefits:

Cash distributions to the investors in a peer-to-peer situation can enjoy some tax benefits depending on structure. It’s possible to offset the income distributions with depreciation and interest expense in some cases. At some point there will be tax benefits, even if they are delayed until the sale of the property.

Whether you’re a small investor who would like to own a piece of a major project or an investor seeking financing, peer-to-peer lending can be an attractive investment option.


Dean Graziosi

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Wholesale or Rental Rehabs — How Cheap Is a Good Deal?

Wholesale or Rental Rehabs — How Cheap Is a Good Deal?
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This week I was reading an article over at money.cnn.com titled “Buffalo’s $ 1 homes aren’t as cheap as they seem.” These homes are being sold by Buffalo’s Urban Homesteading Program, requiring that buyers fix any code violations within 18 months and live in the home for at least three years.

These aren’t fix and flip, rental or wholesale investors, but the experiences of these buyers can be good education for investors. The immediate reaction of an investor could be elation when they find they can get a home for a tiny price, and it’s hard to get any lower than a buck. Our first clue that dirt cheap may not be the ultimate deal is that fewer than 10 of these deals close each year.

An overview with dollar amounts for finished homes in this program tells us:

• $ 55,000 in renovation for one home, including all plumbing, electrical wiring, heating/cooling, and a new roof.
• Just removal of demolition trash on that home was a $ 2,000 bill.
• One buyer, in the process of spending $ 78,000 in renovations to their $ 1 home, became a licensed electrician training to do as much as possible without hiring others.
• One couple just getting started are using a lot of friend volunteer labor, have only spent $ 5,000 so far, but they expect to spend $ 30,000 before they’re done.

Rehab Profits are High for Good Reason

Fix & Flip investors, wholesalers, and even rental property buyers who do rehab all know that they can greatly increase their profits through rehab. Instead of just buying a ready to rent home at a discount, the rehab phase of the project can add a large profit component.

Someone is going to profit from rehab work, and the more work necessary the greater the potential profit. However, too many investors let their potential profits flow down to their contractors and repair companies. There are predictable reasons for this:

• Poor negotiation skills when seeking contractors.
• Allowing contractors to buy and mark up materials.
• Poor project management skills, going over budget and/or completion dates.
• Expensive project financing.

The first consideration is whether or not you want to be a hands-on project manager. It is certainly acceptable to put the entire job into the hands of a general contractor, but they will realize the bulk of the profits available from the work. The more you can take over, or the better you can negotiate, the fatter your ROI. You can improve the results if you offer the general contractor a bonus for coming in under projected costs if you don’t want to be involved that much.

If you want to maximize your profits, you’ll take control of some of the materials purchasing and sub-contractor hiring. Some proven profit-enhancers include:

• Get builder accounts at Lowes and Home Depot type stores.
• Select your materials and get price breakouts, do your own ordering and just have contractors pick up materials.
• Check out liquidators, companies and stores that buy in bulk materials from completed building projects. They often have what you need at deep discounts to even builder prices at the big stores.
• Using contract terms, keep projects on schedule, as holding costs can rip a hole in profits.
• Do your own hiring of sub-contractors, and get multiple bids. Hone your negotiation skills, but the low bid is often one you should throw out.
• If you need transaction funding to get through the process, do your research to find the lowest cost solutions. Sometimes it’s friends, associates, or relatives, rather than transaction lenders.

You can do all of the above perfectly right and still have a poor result if you buy wrong. This is a two-part process. If you’re wholesaling or doing fix and flip, you must have a good buyer list and know what a willing buyer on that list will pay for the home. If you’re rehabbing to convert to a rental home, know your market and prevailing rents.

Run the numbers to know what you can sell or rent the home for. Then do a thorough preliminary budget for the rehab, BEFORE you buy. Once you know rehab costs and ultimate sale or rental income, negotiate a purchase price for maximum profit.

Make sure to check out Dean’s most recent Huffington Post articles:

2/24/15 Self-directed Retirement Accounts and Turnkey Rental Investing

2/17/15 Enthusiasm for 2015 Housing Markets

2/13/15 Trulia Asks: ‘Are We Past the Flipping Point?’

2/5/15 Is Multi-Family Worth a Look for Your Portfolio?
Dean Graziosi