Top 5 Must-Haves For Flipping Houses

By Glenn Curtis – Investopedia.com

Many people assume that they can simply 1) buy a house, 2) apply a fresh coat of paint, 3) trim some bushes, and then 4) resell the home at a profit. Unfortunately, this process, called “flipping” is not that easy. After all, if it were, everyone would be doing it.

There are several skills and people that every potential investor/flipper should have in place before even considering entering into a real estate transaction of this nature. In this article we’ll look at the top five “must-haves” you’ll need to succeed in this endeavor.
1. A Group of Experts

While a house flipper can certainly go it alone, it will certainly help to retain individuals that are familiar with the legal, accounting and construction ramifications of flipping houses.

Flippers typically work against the clock, so they must renovate a home on budget and then turn it around and sell it before the financing costs eat up their profits. In any case, a bevy of experts including a real estate agent, an attorney, a contractor or renovator, an accountant, a home inspector and an insurance agent can ensure that the work is completed in a timely and efficient manner.

2. A Handyman or Knack for Home Improvement

The house flippers that make the most money buying and selling homes tend to be handy people. That is, they have the ability to step in and lend a helping hand when time or money constraints kick in. Most flippers can do things like change a sink, install a countertop, do basic electrical or plumbing work, and/or shingle a roof.

Why is being handy so important?

The obvious answer is that if you can do the work yourself, you won’t have to pay someone to come in and do it. However, there are other advantages to being handy as well. For example, there are times when it will be impossible to get an electrician to install an attic fan on short notice. There are also times when a job must be completed without warning at the last second in order to obtain a certificate of occupancy. In these instances, having the ability to navigate your way around a tool box is very valuable.

3. A Good Lay of the Land

The buyer should know about the area in which they are buying property. A buyer should know, for example, what characteristics (acreage, number of rooms, type of home, etc) are the most desirable in the area in which they are looking to buy. Equally important is knowing what houses in the general vicinity have sold for and if there is likely to be any future development in the community (such as a new school, condominium or shopping center) as this could affect supply and demand.

4. A Good Estimator
By definition, house flippers attempt to buy a property and then resell it at a profit in relatively short order. In order to do this, however, the flipper must typically make some structural and/or cosmetic changes to make the property more appealing to the next buyer.

If the flipper underestimates the costs associated with the refurbishment he or she may be exposed to large monetary losses. Therefore, a flipper should be familiar with construction materials (their use and their cost), as well as local construction codes, the cost of local labor and the time it should take to do a given job.

This is no small feat. In fact, it takes even the most seasoned construction professional many years before he or she is aware of all the nuances that exist. In any case, before becoming involved in “flipping”, be certain of your abilities to estimate a job in terms of both cost and time.

5. A Dose of Patience

One of the biggest obstacles to making money in the real estate market is that buyers tend to overpay for a given property.

Why do buyers overpay?

Typically, buyers become emotionally attached to a property or develop some other bond with it, which in turn forces them to enter into a contract on less than favorable terms.

However, savvy flippers have the ability to avoid emotional purchases, and the desire to find diamonds in the rough and properties on the cheap. They also understand that if they aren’t buying a property at a favorable price and with favorable terms, it makes sense to simply move on to greener pastures.

The bad news is that patience is a difficult virtue to teach and hone. In general, either you have it or you’ll lose a lot of money trying to learn it. (To read more about choosing the right house, see Smart Real Estate Transactions and Investing In Real Estate.)
Bottom Line

While quitting your job and becoming a full-time house flipper may sound like an attractive proposition, be sure that you have these five “musts” before investing in a real estate project.

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99 Real Estate Leads and No Real Estate Deals?

Some say there is an industry standard that says:

“For every 20 real estate leads you call, you’ll get at least 19 No’s and 1 Yes.” Well, imagine contacting 99 home owners who had a home to sell and having nearly all of them say “No” to your business.

In this blog post I’m going to tell you why and how this happened to me so you’ll know what not to do when talking with real estate leads.

A few years back I came to a point in my life where I wanted a real estate deal really bad! I wanted a deal so bad that I pulled out some old newspapers (a few days old) that I had been saving and circled all the real estate leads I wanted to call. My goal was to call 100 home owners and at least get my first deal.  Statistically I guess I should have a goal of getting at least 5 deals, but I would have been satisfied with 1 real estate deal.

So I picked up the phone and started dialing…

Ring Ring Ring!

First call goes straight to voice mail. I leave a message.

Ring Ring Ring!

Second call goes straight to voicemail. I leave a message.

Ring Ring Ring!

Third call goes straight to voice mail. I leave a message.

Ring Ring Ring!

Fourth call goes straight to voice mail. I leave a message. (I’m getting a little annoyed now)

Ring Ring Ring!

Seller Says: “Hello?”

I introduce myself and begin running through my script of what to say…*Click* in mid sentence.

First rejection…It’s cool. I have 95 more real estate leads to call, so it’s not a big deal.

As I began dialing number after number, it was like a pattern of voice mails and rejections. There were some soft promises of, “I’ll think about it and get back to you”, yet not a single firm Yes!

I burned through 99 real estate leads and didn’t get a single deal.  It all happened in one day and by the end of the day I was completely exhausted and didn’t even bother calling the last lead!

I seriously doubt it would have been a deal. Now that I think about it…I know it wouldn’t have been a deal given my state of mind after being completely drained.

What happened that day? Why wasn’t I able to nab a deal?

After analyzing all the conversations and analyzing myself.

Here some of the main problems I noticed:

Reading From a Script & Not Being in Control

Reading from a script is ok, but you don’t wan to sound rehearsed. If you’re going to do it then you at least have to make it sound natural to the person on the other end. Reading from a script can help guide the conversation and get the answers you need to make a decision. However, it’s important to position yourself accordingly when you’re on the phone. How do you sound to the other person on the end? Do you sound like a buyer/investor or do you sound like a salesman?

Many people get frustrated when they get phone calls out of the blue and you have to be able to build that rapport (relationship) from the beginning in order to set the tone for the rest of the call. If you’re on the defense in the conversation, then you’re climbing an uphill battle because you’re answering the majority of the seller’s questions instead of the other way around. Rapport building points are not something you’re likely to find in a script.

These were the problems I had. I didn’t build rapport. I sounded rehearsed and didn’t maintain control of the conversation. I didn’t position myself as a solution.

Not Listening during the conversations

The problem with using a script is that it could prevent you from listening to the seller unless they answer the question you happen to be on. My advice has always been to use a script as a guide or memory jogger because there will be questions that you need to ask and they might not be on your sheet.

A perfect example of not listening was when a motivated seller was telling me about their home repairs and then moved on to telling me about the neighborhood. After she finished discussing the neighborhood, I said, “So does the home need any repairs?” She called me out right on the spot and said, “Weren’t you listening?” I was kind of listening, but that just happened to be the next question on my script. You absolutely must listen when talking to people on the phone or you’ll likely lose out on the deal like I did.

The presence of negative energy

As I dialed number after number I didn’t take any breaks. Maybe to run to the bathroom or grab a quick glass of water. Other than that, I was diving striaght through this list like no tomorrow. As I kept getting voice mails and kept getting rejected, I would get more and more frustrated. If you get frustrated during a process like this, you’re frustration (negative energy) can easily carry over to the next call and it can be heard by the person on the other end. This can be a big turn off and the conversation will get cut fairly quickly. My advice is to take breaks and stay positive. Motivate yourself or talk to someone who can make you feel better. Then continue on with taking action.

Have you ever talked to someone on the phone and you can just hear a negative attitude in their tone? It’s like someone pissed in their cereal. Sometimes I’d get negative energy from some leads as well. Some either assumed I would low ball them because of being an investor or some just didn’t feel like talking. They had the old “Are you going to buy at full price or what?” mentality. Those are the type of real estate leads, I simply don’t deal with. My time is too valuable and if we’re going to do business, then we need to be on the same page.

Contacting unmotivated real estate leads

Let’s face it! A big handful of the leads I was contacting were unmotivated. As I analyzed all the things I was doing wrong, I also noticed that I was talking to people who wanted to sell, but didn’t need to sell. Motivated leads need to sell their home because there is some sort of problem that they desperately need to get rid of. Foreclosures are huge problems right now and many people out there need a solution.

If you talk with people who say they have time to wait and aren’t looking for a quick sale, then they are most likely unmotivated. It’s one thing for a person not to accept a low offer. It’s another thing for them to tell you that they’re not in a hurry before they even hear your offer. I’m not one to make insultingly low offers, however I do need to position myself to make some money. This is a business and if they have a problem with you making money more than you helping them sell their home fast, then they’re not that motivated. Unmotivated sellers can waste your time, so it’s best to end the call quickly and move on.

Understanding that No means No!

As I write this blog post, I had to stop for a few seconds to answer the phone. It just happened to be a telemarketer. How ironic is that? She wanted to give me an estimate on my windows. I told her I’m not interested. She said, “Well have you changed your windows?” I said, “Yes, but I’m not interested in any additional remodeling right now.” She said, “Well we also do estimates on sliding doors and our estimates are good for 1 full year.” I’m not INTERESTED! (My tone raised a bit). She said, “Ok thank you for your time!”

This made me think back to how many times I was told “No” on that dreadful day and how I kept trying to sell my real estate services to the person on the other end. There was one call in particular where a person kept saying that they weren’t interested and I kept trying to push and convince them. If it’s one thing I’ve learned and have been taught over and over again, you never want to try and convince someone to do business with you. It’s either they get it or they don’t. Your time is better spent with people who get it because the majority of your deals will come from people who will do whatever it takes to get rid of their problem. Position yourself as a solution and 9 times out of 10, you’ll get the deal.

Cold Calling versus Direct Response Marketing

The last point I want to make is that cold calling a real estate lead verus having the lead contact you can play a role in getting the deal as well. I’ve always believed that if a lead contacts you, then they are much stronger. Why? Because they saw you as a potential solution and they picked up the phone and dialed your number. They may have even taken the time to visit your website and fill out all the required information you asked them to fill out. If they’re not motivated, then they most likely won’t even do that.

This is exactly why I now concentrate on attracting motivated sellers and buyers. I have no doubt in my mind that cold calling works. In fact, I still do it every now and then. However, when you can pick up the phone and say, “How can I help you?”, you instantly gain control of the conversation because you’re asking the question and you’re letting them know right off the bat that you can be a potential solution.  It would be kind of strange to call someone out of the blue and say “How can I help you?”.

If you’re able to elicit a direct response from a real estate lead, then you’ve achieved the goal of direct response marketing. All you have to do next  is close the deal…if it’s really a deal!

I’m sure there are tons of reasons why I didn’t get a deal that day. However, in this post I wanted to point out the major ones that I knew contributed to that day.

Can you think of more? Have you ever called a bunch of real estate leads in a single day? What was your experience?

Share below by leaving a comment.

To Your Success,

J. Lamar Ferren
New Breed Investor

Tax foreclosures - Higher Profits with Pre Foreclosure Listings

You may bid as often as you dare. Low-ball offers are easy, but seldom produce the highest profit over a year. You would miss too many great deals chasing a few once in a lifetime dreams.

Hector Milla Editor of the "Best Free Foreclosure Listings" website -- http://www.BestFreeForeclosureListings.com -- pointed out;

“…The easiest way to maximize profits buying homes at foreclosure auctions is to use top quality foreclosure listings. The best lists provide sufficient information to form a reasonable opinion about each prospect. They allow you to evaluate thousands of home using basic data, sort by extended supplement information, and even provide proprietary valuations and index ratings. When searching through a list of over a million properties, all help is welcome…”

If profits are your goal rather than a one-time purchase, you cannot afford to rely on simple lists. Look for a list that includes photographs, comparable sales, and all taxes owed. Some lists include court data, including bankruptcy stays, injunctions, disputed titles and many more litigation traps. You will save days spent chasing records, making unproductive calls, and perhaps worst of all, driving to a location only to find a home in battered condition.

Targeting pre-foreclosure auctions eliminates the greatest delay in all real estate deals. You do not need a willing seller. Once the auction is set, it will occur. Occasionally, you may be the only bidder. More often, a few bidders actually compete toward the end. If you are better prepared and properly investigate each property, you can precisely bid up to, but not over your minimum profit requirement. You are not required to be perfect, but you must know when to raise your bid, and when to stop bidding.

“…The best companies provide a full ra

nge of data, features and functionality for about $30 to $50 a month. You could pay more, but be sure to evaluate all extended features and products carefully to insure you are not overpaying. Be sure to take advantage of free trial offers. You will have an opportunity to compare multiple services, free of charge, before selecting your favorite…” added H. Milla.

Further information and resources to get free home foreclosure listings by visiting http://www.BestFreeForeclosureListings.com

Hector Milla runs his corporate website at http://www.OpsRegs.com where you can see all his articles and press releases.

Investing � Five Factors to Consider Before Investing in Residential Real Estate

During the past decade, many people have jumped into residential real estate investing. This was never so true as during the recent real estate boom. People read all the “get rich quick” schemes that litter the book shelves of libraries and book stores — use other people’s money, use no money of your own, and make millions! A lot of people did make great sums of money during the most recent boom; but now those, who did not get out before the market cooled, are seeing those investments in foreclosure due to their inability to make the mortgage payments.

Just because the real estate market isn’t over the top, as in the past few years, does not mean you no longer can make money in residential real estate. The difference between now (post-boom) and during the market boom is that the “get rich quick” schemes will not work.

Do You Have What It Takes?

Investing in real estate is not for the faint hearted, the non-risk takers. It is for investors who are in it for the long haul, who can easily sit on their investment (if need be) until the market shifts in their favor. It also is for those who truly enjoy this type of investment. They are the ones who are the most successful in real estate investing.

You must be willing to invest time — upfront and before each potential investment. If you do not take the time to research the properties and your target market, you probably will not be very successful. You also must gather knowledge on how to make a real estate deal that works in your favor. That requires educating yourself to understand the jargon and game rules. Today, it takes a careful, methodical approach to residential real estate investing, especially when acquiring your first property.

Besides needing time and money, being a risk taker, and being willing to commit to a long-term investment, if needed, there are five additional factors you must consider each time before you make an investment in residential real estate.

Supply and Demand — Where Is the Current Market?

The economics of supply and demand is what makes the long-term investors successful in residential real estate. They are willing to weather the ups and downs of the real estate market, waiting for an advantageous market to sell their property.

Supply and demand is influenced by many economic factors, which in turn affects the residential real estate market. Well-located residential real estate will endure fluctuations in the market and continue to appreciate in value. Knowing your market means knowing when to buy or not to buy, which deals will work when, and when to sit on an investment or sell it.

Your Creativity

Another factor to consider is your own creativity in managing your investments. Residential real estate is one type of investment that allows for a lot of creativity:

• You may invest for the long term, renting the property to continue making a profit while waiting to sell at a more advantageous time. You can purchase a home to fix up and resell immediately for a profit.

• There are many financing options available for residential real estate, allowing for even more creativity. You also can invest on your own, with a group of partners, with a corporation, or even with a Real Estate Investment Trust (REIT — a mutual fund with real property assets or mortgage securities).

• There is an abundant variety of residential real estate types in which to invest — single-family homes, townhouses, condominiums, and duplexes.

The more creative you are in creating and managing your real estate investments, the more profitable and successful you will be.

Other People’s Money

A third factor is knowing how you can use other people’s money to your advantage without landing in foreclosure, as so many people now are who subscribed to the “get rich quick” schemes during the boom.

You can begin with only a few thousand dollars, using other people’s money to underwrite the remaining mortgage. You must know all the different ways available to finance your investment. This goes back to taking the time to educate yourself, before you begin investing, and creatively making the best use of financing.

Other People’s Time

Whether you are fixing up real estate to sell or renting it, it will take time, effort and management. If you already have a full-time job and a family, you probably cannot do it all yourself, and I doubt you wish to be woke up at 2 a.m. by a renter with a plugged toilet.

Using contractors to fix up the property or experienced property managers to handle your rental real estate makes for less profit in your pocket on your individual investment properties. However, it frees up your time to invest in more properties, making your overall profits much higher.

Your Tax Advantage

Residential real estate investing is quite unique. It offers you tax write-offs not available in other types of investments. There are many deductions available to you — deducting the mortgage interest or refinancing without being taxed are just two examples. There are many benefits to real estate investing that reduce your tax liability and increase your profits.

If you believe residential real estate investing is for you, begin by learning more about it. There are thousands of books and resources on the topic. Stay away from anything that sounds too good to be true. It probably is, especially in today’s real estate market.

Advantages of Private Money Over Bank Loans | Understanding Real Estate

Since the credit bubble first burst, traditional sources of investment property loans have all but dried up, forcing real estate investors to find alternative sources of capital. Seasoned investors have been using private money for years, so it’s not an uncommon method of real estate financing, but when money was easy to come by at conventional banks, most investors took the familiar route. But now many people are realizing that finding the real estate deals is the easier part of the business these days, but getting a loan to buy the property is the hard part! So what do you do?

A great many real estate investors are turning to private lenders to fund their purchases. Private lenders can be anyone. They could be friends you already know, either very well or just casually. They could be relatives. Or they could be business owners, doctors, attorneys, and other professionals you do business with everyday. Private lenders in general don’t promote, and may not even realize they have the potential to make great money until they meet an investor— like you— who educates them. Since no one is getting a very good rate of return on their money these days, whether it be in a CD, mutual fund, IRA, or in the stock market, many everyday individuals you never thought of before as lenders could have money to lend to you for your real estate deals. It’s a win-win situation: they make a much higher interest rate than they could make elsewhere, and you set the terms you know you can afford.

Imagine how many great deals you could do if you had access to lots of quick cash—other people’s—not out of your own pocket. Imagine never again letting deals pass you by due to the rules and limitations of banks! And also image going to closing and only signing two or three documents instead of two inches worth!  Private real estate money deals are incredible simple and the total paperwork is normally less than 10 pages. In addition, investment property loans from private real estate money sources usually have no points and little upfront or back-end fees. You won’t find that at a conventional bank!

Establish your credibility with those who have “deep pockets” and you’ll have access to all the money you need for any estate deal. If private lending is new to you, first educate yourself about this type of real estate financing. Knowing the advantages can mean the difference between making a good deal work, or losing yet another to your competitors.

Making Real Estate Money-Great Ideas for Finding Pre-Foreclosures and REOs

These are the tools and techniques I've used successfully when looking for pre-foreclosure and REO properties. I hope other investors find them as useful as I have.

Pre-foreclosures

The availability of pre-foreclosures depends largely upon the type of debt instrument recorded against property titles in each state, mortgages or deeds of trust (also called trust deeds or TDs).

TDs contain a "power of sale" clause that basically allows lenders to exercise their right to repossess collateral (in this case, real estate) for a loan in default WITHOUT having to file a lawsuit; mortgages do not.

Generally speaking, we prefer mortgages because TD foreclosures move too quickly (whereas lawsuits are slow and cumbersome) and provide limited visibility (mortgages have more public records associated with them, therefore they're easier for us to find).

To make it confusing, some states require lawsuits for ANY foreclosure, regardless of the debt instrument recorded; that's okay- -it's the suit itself that gives us time to be able to work with the property owner, so those statutes actually work in our favor.

You'll probably want to do some due diligence just to make sure you're not wasting your time trying to go down an avenue that turns out to be a dead end.

To find out if pre-foreclosure is an option for you, call the County Recorder (or Recorder of Deeds) and ask them what type of debt instrument is recorded against a property's title when someone takes out a loan to make a real estate purchase.

If the answer is "a mortgage," you're on your way; if the answer is "a deed of trust" or if you don't get a clear answer, you'll need to do some additional research into state laws to find out what the foreclosure process is.

Try looking for statute, code, administrative law, etc. in Primary Materials under the "U.S. State Resources" section ofwww.findlaw.com. (Excellent material, and all FREE).

Finding properties in pre-foreclosure

Here are three ways to find properties in pre-foreclosure:

1. Try contacting your local county court. Ask if Notices of Default (NODs) have to be recorded as court documents. If the answer is "yes," find out how you can search the new filings; if the answer is "no," try one of the other options below.

2. Find out if the County Recorder has data available online.An easy resource to use is www.netronline.com. Simply click on "Property Data Online," select the state you want, then click on the county, and voila! You'll be able to see what (if any) info is available over the Internet through the various real estate-related offices in that county.

This is my preferred method because the county I live in makes title abstract data available on the web. Plus I can do what's called a KOI (Kind of Instrument) Search and look specifically for NODs that were filed on or after a certain date.

I do most of my research this way because it's easy and convenient, it's FREE (I love that word!), and I can also see any other liens or judgments that are be recorded against the property that could adversely affect the deal. If this option isn't available in your county, try option #3.

3. Look in the "legal notice" section of the newspaper. Look for properties that are coming up for sale at public auction (sheriff's sale, trustee sale, whatever), jot down the addresses, the property owners' names, and the tax ID, or at least as much info as you can get from the ad.

Then go to the County Recorder's office to look up those properties, find the NOD on the title, and see who recorded it; you're looking for a title or abstract company that you can work with. They provide you with a list of the NODs they've recorded, and when you close on any of those deals, you use their services for closing ("you scratch my back, I'll scratch yours"). I've also used this approach in the past with great success as well.

Finding REOs

First of all, keep in mind that most lenders list with realtors for a specific reason (cost-effectiveness, driven by several different factors), so we should respect that business decision and not try to work directly with the bank on REO properties until the realtor becomes more of a hindrance than a help (happens more often than not, unfortunately). But try these steps, not in any particular order:

1. Most lenders these days have web sites. They may have a list of their REOs posted along with contact info for the realtor listing the property for them.

Every lender's web site is different, of course, so you'll just need to nose around a bit; sometimes those listings are buried in some obscure corner of the web site. If I'm poking around on some lender's site and can't find what I'm looking for in less than an hour, I try a different approach.

2. Call lenders and ask to speak to someone who handles their foreclosures. (or REOs, or repos, or their real estate portfolio, or whatever they call them). Ask that person for the names of the realtors they use to list foreclosed properties. If he says anything like "Sorry, we don't have any foreclosures," I find it very hard to believe that in this economy they haven't had to foreclose on any of their mortgages.

So it's more likely that I've reached a branch office and those repossessed properties aren't handled locally; they're all sent back to their corporate office to be managed at a central location, or they've been farmed out to an asset management company. Again, ask for the name and phone number of the person at Corporate who handles foreclosures.

3. Pay attention to business signs! Believe it or not, there's a realtor's office on one of the main streets in my town whose marquee says: "FREE FORECLOSURE LISTING, NO OBLIGATION, CALL TODAY" I did, and got another list to start working on and a good contact to boot.

4. Check newspapers Check not only the local dailies, but also the "cheapie papers" like the Thrifty Nickel, Penny Saver, Green Sheets, etc. for ads posted by realtors with REOs they're trying to sell:

• 
  
  Lists of properties that the realtor has: The ad will mention "bank owned," "foreclosure," "free list," etc. and will have a person's name or the name of a realty company and a regular phone number.
  
  NOTE: I do NOT like ads that are only for government foreclosures (i.e., nothing but FHA, HUD, VA, FNMA-owned properties); I don't know who I'm calling, there's a "free 24/7 recorded message" or a toll-free number with an extension. These are usually subscription services, and more often than not, I find that their data is very limited, out-of-date, and over-priced.
• 
  
  Individual foreclosure properties: Look for listings with key words like "bank owned," "foreclosed," "REO," "repo," etc. If that realtor has one foreclosed property, most likely he's got others.

5. Attend the next public auction. Not to buy property, but to make note of what DOESN'T sell. Jot down the addresses, then a couple of weeks later, drive by to see if there's a sign in the yard. That's probably the realtor who's selling the property for the lender. And again, if he's got the one foreclosure, he's most likely got others.

Regarding option #3 for finding pre-foreclosures and ALL of the research options for REOs, these aren't necessarily ongoing processes; they're just groundwork. Once you have those foundations laid and those relationships built, you probably won't have any need to continue to do these things. Always remember: Be polite, but firm, and be persistent. Hope this helps…Best of luck! 

Making Real Estate Money-Subprime Meltdown Creates Opportunity for Investors

The so-called day after "hangover" from the fast and loose lending spree that helped fuel the real estate boom during the first half of this decade keeps getting worse, with a continued fall out among lenders who catered to high-risk (or "subprime") borrowers. Several dozen lenders have closed their doors because the Wall Street firms who have provided their funding will no longer do so.

What is a subprime mortgage?

Generally speaking, it's a home loan made to borrowers who have low or no down payments and/or poor credit ratings. Although most home loans do not fall into this category, subprime mortgage programs have proliferated in recent times as the "rising tide that lifts all boats" propped up home values across the country and emboldened lenders to take on more risk.

As real estate values moved higher after 2000, lenders expanded the use of subprime loans, adding enticing features that made home ownership possible for people who could not qualify for traditional mortgage loans.

What went wrong?

Increasingly, lenders approved subprime loans to shaky credit borrowers with little or no proof of income, little or no down payment funds, and with low "teaser" starting interest rates and payments. Some of these "stated-income" loans became referred to as "liar loans."

Wall Street encouraged this behavior by bundling the loans into securities that were sold to pension funds and other institutional investors who were seeking higher rates of return.

Seasoned real estate industry professionals watched the trend toward "easy money" loans with concern. As risky home loans soared in popularity, federal banking regulators were repeatedly warned that more borrowers were getting trapped in mortgages they simply could not afford.

As long as home values rose, borrowers gained equity and could continue to refinance. However as interest rates rose and home values declined or flattened many borrowers could no longer get new loans and could no longer make their payments when their initial teaser rates expired.

Rising defaults and delinquencies have caused more stringent underwriting standards and in some cases the outright elimination of certain loan programs.

The "Piggyback 2nd Lien" Here is an example:

Property Sales Price: $300,000
Buyer's Down Payment: $15,000
Balance Due: $285,000
1st Lien Loan 80% LTV: $240,000
2nd Lien Loan: $45,000

A prospective buyer with shaky credit purchases a home for $300,000 and can put down 5% of the purchase price or $15,000. The lender agrees to lend the buyer/borrower a 1st mortgage loan for 80% of the sales price or $240,000.

In addition to that mortgage, the lender also agrees to lend the remaining $45,000 to the buyer by allowing for a 2nd lien mortgage to be placed against the property, often known as a "piggyback" 2nd lien mortgage.

So the buyer borrows a combined total of $285,000, and along with the $15,000 down payment is able to cash out the seller completely for the $300,000 purchase price.

Typically the interest rates on the 1st lien mortgage are lower than that of the piggyback 2nd lien mortgage, which in some cases is called a Home Equity Line of Credit (HELOC) loan that is then drawn on.

As long as the lenders were able to continue to originate these piggyback 2nd lien mortgages and Wall Street continued to have an appetite for them, this was wonderful for the sellers because they were getting ALL CASH for the sale of their property.

Prudent lending or not?

Let's take a look at that very tenuous $45,000 piggyback 2nd lien and see how unsafe it really can be. With a buyer/borrower who has little or no money of their own into a property, there is little or no true equity. If times get tough for such a borrower, the incentive to work things out becomes precarious.

Add to this the sloppy credit history of the borrower, and that 2nd lien mortgage carries with it a tremendous amount of riskbecause it sits behind or "junior" to a much larger (and superior) $240,000 underlying 1st mortgage lien. Its no wonder Wall Street will no longer purchase such high risk "throw away" 2nd lien mortgages.

Cause and effect

Now buyers, their Realtors, and the buyers' mortgage brokers are trying to convince sellers to carry back the $45,000 piggyback 2nd lien mortgage. Yet most sellers can clearly see how uncertain and perilous holding such a smaller 2nd lien mortgage can be to their financial well being and refuse to do so except underextreme circumstances.

An alternative way using seller financing

What if you could structure the sale of a property to a prospective subprime candidate and not have to take back any high risk dangerous piggyback 2nd lien mortgage while still achieving a respectable all-cash sum when your property sells? Might this make more sense to a property seller?

Using some of the creative and alternative methods involving the seller providing the financing (owner financing), this is very achievable. Let's take a look how:

Property Sales Price: $300,000
Buyers Down Payment: $15,000
Balance Due: $285,000
1st lien Loan 95% LTV: $285,000 (seller financed)

Step one:

Let's the same $300,000 sales price and same $15,000 cash down payment from the buyer. However . . .

Instead of the buyer being limited to only 80% loan to value (or $240,000 loan from a lender), the seller agrees to finance the buyer under the terms of the sale and agrees to take back a purchase money mortgage in the amount of $285,000 (the $300,000 sales price minus the $15,000 cash down payment).

Step two:

Now I know what a lot of you are saying: "If I provide seller financing to the buyer, how does that equal me getting cash?" The second step is the answer, and it involves the pre-sale or conversion of this $285,000 seller financed mortgage into a cash lump sum.

Assuming that

1. 
   
   Some time was spent checking out the prospective borrower's employment, stability, overall credit profile, and credit scores, and
2. 
   
   The negotiated repayment terms of the seller financed instrument were commensurate with how strong (or not) these borrowers stacked up,

. . . then (using the services of a cash flow professional), the $285,000 seller-financed mortgage can typically be sold immediately to generate somewhere between $256,000 to $262,000 or more as a lump cash sum.

The seller receives the $262,000 cash sum from the sale of their seller-financed mortgage plus the $15,000 down payment--or a total of $277,000 in cash proceeds and it negates their having to hold a very, high-risk $45,000 piggyback 2nd lien mortgage as in the example above.

Many sellers--especially investors, holding unsold homes in "inventory" will agree that $277,000 cash in hand today is far better than $255,000 cash (the $240,000 1st lien mortgage proceeds plus the $15,000 down payment) and a high-risk $45,000 piggyback 2nd lien mortgage they may have trouble later collecting on in the future. 

Making Real Estate Money-Priced to Own--Probabilities Producing Profits

There is an old expression that comes to mind: "You can fool some of the people some of the time, but you can't fool ALL of the people ALL of the time!"

Regardless of what the National Association of Realtors (NAR), the government, the lending industry (or even economists who should know better) are saying, the current housing market is still artificially high.

If people could truly afford current home prices--on the basis of their actual incomes--the word "crisis" wouldn't appear in conjunction with the present housing market.

The reality is that in most parts of the country, households earning the median household income for their area cannotlegitimately afford to buy a median priced home where they live and work.

And there is no chance of rents or incomes increasing at a rapid pace in the near future--which means home pricesmust fall before the nation's affordability crisis can be solved. Home prices are way too high--and NEED to come down drastically!

If you believe the Wall Street Robber Barons, politicians, and others who argue otherwise, the time has come to step away from the Kool-Aid. As creative real estate investors, we need to come up with a healthier concoction, and it ain't Red Bull--nor any other "bull," for that matter!

How far down?

Why must housing prices plunge deeply from here? House prices have been propped up for at least the past seven years, through a combination of low interest rates, unsound loan programs, and now, by nonsensical government bail out programs--which has led to a serious disconnect from the basic fundamentals of affordability.

Because the cost of buying has more than doubled in the last ten years, there is now a huge gap between rents and residential real estate prices. The Center for Responsible Lending projects that 2.2 million MORE homes are facing foreclosure by mid-2009--which works out to be about one in every 45 homes), further adding to supply.

And many people have lost the desire to buy until prices are lower. "A down market is getting baked into expectations," says Chris Flanagan, head of research in JP Morgan Chase's (JPM) asset-backed securities group. Flanagan predicts prices will fall about 25%, bottoming in 2010. Merrill Lynch forecasts U.S. home prices could decline 25% to 30% nationwide over the next three years.

Shocking though it might seem, a decline of 25% would merely reverse only partof the market's spectacular 130% appreciation during the boom. Interestingly, it would also put the national price level right back on its historical long-term growth trend line, a surprisingly modest 0.4% a year after inflation.

Show me the money?

The historical ratio of median house pricing vs. median household income was consistently between 2.6 and 3.0 over the past 40 years. But, as homebuyers scrambled to avoid being left out of the "housing-mania," national median home prices jumped 130% (45% when adjusted for inflation) from 2000 to 2006.

By contrast, according to reports out of the World Economic Forum on Jan 23-25, 2008, weekly earnings for full-time American workers last year were unchanged from their 2000 levels, even though productivity grew by 18% in the same period!

According to the Economic Policy Institute, the news is even bleaker. Their research indicates that the median income for working-age households actually declined 4% since 2000.

The Census Bureau indicates that the median U.S. household income is $48,201. Multiplied by 3.0 = $144,600. This is what the maximum U.S. median home price should be right now, given historically low interest rates. But the actual median home price ($218,900) is about 34% higher than that (or approximately 4.5 times the price-to-income ratio).at

Though prices have always been slightly elevated in the Golden State, California's median home price ($402,000), at 7.10 times California's median household income of $56,645--is 58% higher than it should be ($169,935). In parts of the state, median home prices have inflated to more than 11 times the median household income.

But forget "local bubbles." Median home prices are inflated in every region of the U.S. In the overall West, where the median household income is $52,249, the median home price of $309,800 is nearly double what it should be, using a maximum price-to-income ratio of 3.0 ($156,747).

The situation is similar in the Northeast, where the median home price of $258,600 is approximately 5 times the median household income of $52,057--or 40% higher than what it should be when compared to a 3.0 price-to-income ratio ($156,171).

Median home prices are not quite as high in the South ($173,400 vs. median household income of $43,884) and the Midwest ($159,800 vs. median household income of $47,836), respectively. Even so, prices are still 24% higher than what they should be in the South ($131,652), and least 10% higher than what they should be in the Midwest ($143,508).

Surprisingly, a number of folks question the validity of the price-to-income metric, including several of my successful students. But the 40 years' history behind it holds up well when evaluated in sync with several other important fundamental metrics, including back-end DTI, interest rates, and rent vs. own costs.

Other metrics

Back-End DTI (housing cost as percentage of monthly income). Traditionally restricted to 25% of gross monthly income, increased to a "soft" 28% by FNMA/FHLMA over past 15 years; FHA allows 31%; and as high as 41% allowed by subprime lenders.

Interest Rates Though presently at 5.47% (2/8/08) the FHLMA average for 30-year fixed mortgages over the past 440 months (4/01/71--12/31/07) was 9.18%. Eliminating the 72 months (11/01/79-10/31/85) of rates 12% and higher, drops the historical average to 8.17%.

If you also eliminate the 65 months (06/01/02-12/31/07) of rates 6.65% and lower, the overall average increases to 8.57%. I'll leave discussion as to why interest rates are sure to rise in the near future (2 to 5 years) for another time. But consider how it plays into the DTI scenario below.

Using the "soft" 28% FNMA/FHLMA DTI metric and applying that to median income (28% housing expense x $48,200 U.S. median income / 12) leaves $1,124.66; less Taxes/Insurance $167 leaves $957.66 available for monthly Principal & Interest payments. How much 30-year fixed rate loan will $957.66 per month pay for?

$957.66 @ 5.50% = $168,665
$957.66 @ 6.00% = $159,730
$957.66 @ 6.50% = $151,512
$957.66 @ 7.00% = $143,944
$957.66 @ 7.50% = $136,962
$957.66 @ 7.50% = $130,513

Many families will have to drastically change their spending habits to reach this 28% ratio in their budgets.

Numerous studies indicate the average American familyACTUALLY only has 23% to 25% of gross monthly income available for housing expense--and generally tend to run at negative cash flow in their household budget as a result of overborrowing!

What about interest rates? As creative real estate investors, we have to account for reasonable probabilities.

At today's low rates, a median buyer would need to have $50,235 down (23%), plus approx. $4,400 for closing costs, to purchase the $218,900 median priced home. If rates rise to 7%, they'll need to have $75,300 (34%) down.

Americans have averaged between 5%-12% down payments for the past 25 years. Now, in the face of declining incomes, their down payments will have to somehow increase drastically, unless home prices drop significantly. Forget lending requirements. Forget tax rebates too! These are the numbers.

Rental Rates Historically, monthly rental costs over the past 10 years have run approximately 92% of monthly costs to own, or about 5.5% of the house value, annually. Now, in many communities, rental costs are as low as 40% of ownership costs--and below 3% of house "value."

Here's an example of how disconnected the housing market is in relation to local affordability factors, that brings to life the data I shared in my December 2007 article: Beware The Blue Sky

As in many housing markets, a number of homes listed for sale in Bend, OR are also available for rent, as the sellers try to hang on to their property "until the market recovers."

To own this sample home, you would have to pay $544,900, 6.5% for a jumbo mortgage, plus tax and insurance (2.0% annual), plus maintenance (at least another 1%) for a total of at least 9%--more than three times the cost of the $15,000 yearly rent sought (which is only 2.75% of the asking price).

It would be financially insane to buy this house, given that the rent is so cheap by comparison.

The rental rate implies the property is worth about $235,600 (assuming $188,500 30-year fixed mortgage at 5.67% with 20% down). If you apply the current Global Insight valuation "metric" for Bend, the market value is $163,500 in today's current marketplace, based on true affordability for that area.

Admittedly, Bend is currently ranked as the most "overvalued" metro area housing market in the U.S... but many communities are in the same quandary, albeit to a lesser degree. There are millions of renters and potential homebuyers (including CREIs) who would benefit from lower, more reasonable home prices.

Most real estate investors want to turn a monthly profit from real estate ownership. Since we do not want to merely break even, the price must be low enough for the prevailing rental rate to exceed the cost of ownership by enough to provide a return on our invested capital.

Historically, GRMs from 100-120 are required to create the conditions necessary to attract a CREIs capital. Using the national median income housing expense figure from above ($1,124.66 rounded up to $1,200 to include maintenance reserves), we could pay a maximum of $144,000 for the national median property (rather than $218,900).

For those sellers (homeowners, builders, or REO holders) believing they can hang on "until the market recovers," be aware that the recovery is happening already--and its name is "correction." Unfortunately, it is going in the opposite direction, and it still has a very long way to go.

Real estate investors form a durable bottom. If prices drop low enough for this group to get into the market, the influx of investment capital can be extraordinary. 

Making Real Estate Money-Top Ten Mistakes

Real estate investment is perhaps one of the most lucrative forms of investment today. But it is also equally risk bound especially when one is not well versed with the trends and nuances of the real estate market. So if you are contemplating on investing in real estate, it is best to avoid costly mistakes in real estate investment especially when you invest your hard earned money into it. Knowing the most common mistakes made by real estate investors helps one steer away from making such mistakes in the future and ensures good return on investment.

Here are the top ten mistakes made by real estate investors, according to bankrate.com. Bankrate has put together the top ten mistakes after speaking to established, full-time real estate investors and other professionals involved in real estate investment such as bankers. Read on to know them and avoid them.

1. Not planning up ahead. Lack of a proper plan is the biggest mistake made by novice investors. Finding a house after forming a proper investment strategy is the right way instead of looking for a house to fit the plan. Many make the mistake of buying a house because it seems to be a good deal and then trying to see how they can fit it into their plan. Instead of buying a house and thinking one can plan in due course, investors should rather concentrate on the numbers and try to make offers on multiple properties. This will ensure a good property that not only matches their investment model but also works out well with the numbers they had planned for.

2. To believe you can make money quickly. The second major mistake that real estate investors make is to think it is very easy to get rich in real estate. This is only a myth and the reality is that investing in real estate is a long term project.

3. Doing it single-handedly. For becoming a successful real estate investor one needs to build a team of professionals who would assist the investor in his deals. This would ideally include a real estate agent, an appraiser, a home inspector, a closing attorney and a lender.

4. Making excess payment. One another reason that investors in real estate goof up in their investment is by paying too much for the properties they buy. Paying too much and locking up all the funds in the erred property deal will leave you with no money to redeem yourself.

5. Leaving out the groundwork. Not doing your homework could be a costly mistake if you were a real estate investor. Every field of business needs sufficient amount of homework to be done, and real estate investment is no exception. Learn the fundamentals and then venture into investing in properties.

6. Throwing caution to the winds. Investors have to exercise a certain degree of caution and take earnest efforts while making a deal. New investors often fail in this regard and sign a deal without doing adequate research on the property.

7. Miscalculating money flow. Investors whose strategy is to buy, hold and rent out properties need to ensure sufficient cash flow for maintenance. Property managers could be expensive and the owner has to incur more expenses such as mortgage, taxes, insurance, advertising costs etc. Investors have to allocate their budget such that all these expenses are taken care of, or end up having their asset turn into a liability.

8. Lowering the volume. A larger volume of deals or transactions helps in increasing the profits by reducing the impacts of marginal deals.

9. Getting trapped in your own deal. Having more number of options at hand for the property you buy is a wise strategy. This helps one to be prepared for fluctuations in the real estate market. Plans to rent out the house could go awry when the rental market slumps. Having alternative plans helps you cut down losses and tackle unexpected situations.

10. Making incorrect estimates. People who plan to rehab their house need to check if they will still reap the benefits at double the time that they had estimated. This ensures they do not miscalculate and lose money on the deal.