The worst bet in real estate today: Construction loans - USATODAY.com

By Paul Wiseman, USA TODAY

The biggest bank killer around isn't some exotic derivative investment concocted byWall Street's financial alchemists. It's the plain old construction loan, Main Street banks' bread and butter for decades.

Deutsche Bank has called them "without doubt, the riskiest commercial real estate loan product." The Congressional Oversight Panel, a financial watchdog, has warned that construction loans have deteriorated faster and inflicted bigger losses on banks than any other real estate loans.

And the worst may be yet to come. Banks, adopting a desperation strategy known as "extend and pretend" or "delay and pray," have been reluctant to admit defeat, repossess half-completed housing developments and strip malls — and dump them on a depressed market at a big loss. "There probably are many loans out there that are in worse shape than reflected on lenders' books," says Chicago construction lawyer Joshua Glazov.

Even so, the numbers are already grim:

•Across the banking system, nearly 17% of construction loans were non-current — at least 90 days past due or otherwise in trouble — at the end of March, a record level and a stark contrast to less than 5.5% for all loans, according to the latest numbers available from the Federal Deposit Insurance Corp. For construction loans on one- to four-family residences, the percentage of bad loans is even worse: nearly 23%.

"Construction loans are experiencing the biggest problems with vacancy or cash-flow issues, have the highest likelihood of default, and have higher loss severity rates than other commercial real estate loans," the Congressional Oversight Panel, tasked with overseeing the federal bailout fund, reported earlier this year.

•The 10% of banks that had the highest concentration of construction loans at the end of 2007 account for more than half of the 274 banks that have failed between then and Aug. 6, according to an analysis for USA TODAY by SNL Financial in Charlottesville, Va.

•Even the banks that have survived despite holding high concentrations of construction loans remain vulnerable. Their average "Texas ratio" — which measures their bad loans as a percentage of their capital and reserves against loan losses — stood at 101% on June 30, up from 90% three months earlier, SNL found. Anything over 100% signals that a bank is in danger of failing. For construction-loan-heavy banks, the median Texas ratio — which weeds out the worst cases — was still high, at 62%.

"It's been a bloodbath out here," says bank consultant Tod Little of BNK Advisors in Las Vegas.

Developers typically take out short-term, adjustable-rate loans to buy and develop property. The bank releases money in increments — as the developer needs it — and puts some of the proceeds in a reserve from which the builder makes interest payments before the project starts generating revenue. After the project is completed — and tenants have moved in and started paying rent — the developer takes out a longer-term mortgage to pay off the construction loan.

'Cocaine' for banks

Many small and midsize banks, eager for growth, grew addicted to construction loans during the housing boom. "Construction lending is really the cocaine of the banking industry," says veteran banker Rollo Ingram. "They're easy to do. They're big-dollar loans that can bulk up a balance sheet. And there are always developers who want loans."

Construction loans — officially labeled "acquisition, development and construction" loans — surged more than 150% between the first quarters of 2003 and 2008, when they peaked at $631.8 billion. (Overall loans rose just 55% during the same period.) If a bank said no to a construction loan, "The developer could just go down the street," says Brandon, Fla., bank consultant Jon Campbell.

And some of the people getting loans during the real estate frenzy of the mid-2000s were amateurs, says Boston bank consultant David Brown: "They were contractors who got the bug and felt they could make a living at being a developer."

It did not end well. Construction loans started blowing up when the real estate market collapsed and the economy tumbled into recession. The 10 biggest banks, facing problems of their own with subprime mortgages, were largely immune to the deterioration in construction loans, which accounted for just 2% of their assets in 2007, according to the Federal Reserve. By contrast, construction loans accounted for more than 10% of assets at banks that didn't rank in the top 1,000. "What's causing the problem is Main Street America, the construction loan made by the bank down the street," says Bill Bartmann, who owns a debt advisory firm. "They built, and nobody came."

Making matters worse: Community banks never sold the construction loans to investors the way banks unload auto loans and residential mortgages. "Most construction loans are so unique, so different, so non-homogenous, that you can't securitize them," Bartmann says. "They were kept on the books of the banks that originated them." And there, many of them started to turn rotten.

A failure's postmortem

Rollo Ingram witnessed one spectacular flameout up close. He was chief financial officer at Atlanta's RockBridge Commercial Bank, which opened in 2006, backed by other members of the city's business elite.

RockBridge told banking regulators it planned to specialize in business lending. It didn't, plunging instead into real estate and construction loans. The bank told regulators in 2006 that construction loans would account for 5% of its portfolio. By the end of 2007, they accounted for 42%. Business loans, which were supposed to make up 50% of RockBridge's lending, came to just 28%, according to an after-the-fact autopsy by Federal Deposit Insurance Corp.'s inspector general.

Nor did RockBridge recruit veteran loan officers with enough experience to safely assemble its risky portfolio, the inspector general concluded. "They hired younger, less-experienced ones, and didn't hire enough of them," Ingram says. He says he was forced out in 2008 when he complained about the risky direction the bank was taking.

By the time RockBridge failed last December, more than 60% of its construction loans had gone sour.

Other banks on SNL Financial's list of failed construction-focused banks fared even worse: At Chicago's Ravenswood Bank, more than 69% of construction loans went bad before regulators pulled the plug Aug. 6. By the time Wheatland Bank in Naperville, Ill., failed in April, more than 80% of its construction loans had gone belly-up. Security Bank of Gwinnett County, Ga., failed a year ago with three-quarters of its construction loans underwater. Georgia saw more construction-focused bank failures (34) than any other state between the end of 2007 and August, according to SNL.

Brown of RMPI Consulting in Boston blames the banks themselves. He says many banks, trying to cut costs and boost profits, dropped training programs that would have taught loan officers how to assess risks on construction projects and other loans: "I could see it coming for five years," he says. "Banks got sloppy; banks got greedy; banks got lazy."

But Little says many construction loans were prudent when banks made them. Some banks demanded that developers make 50% down payments only to see the value of the projects drop 80%: "That's really killing the community banks."

He says regulators are unreasonably forcing banks to take losses on real estate loans and pushing them out of business when they would rebound if given enough time to work with borrowers and await a recovery in real estate. "They're bayoneting the wounded," he says.

Then again, a council of federal bank regulators issued a statement last October encouraging banks to work with commercial real estate borrowers struggling with empty office space and storefronts, evaporating rental income and collapsing property prices. "Prudent loan workouts are often in the best interest of both financial institutions and borrowers, particularly during difficult economic conditions," the council said, adding that regulators wouldn't force banks to write down otherwise good loans "solely because the value of the underlying collateral declined."

"The regulators have probably held back in places," lawyer Glazov says.

Troubled construction projects are a nightmare for banks. "If a bank forecloses on a house, it's a house. Everybody knows what to do with it," Bartmann says. "But if you're dealing with a half-constructed hotel or a half-constructed strip mall, not only does no one want it, you now have to maintain it" — trim the hedges, pay the property taxes, write checks to the power company. So, many bankers have chosen to wait it out, extending the terms of loans to troubled developers to keep from having to foreclose and take possession of a half-built headache. Which leaves bad loans and troubled property in limbo.

"The loans aren't coming to market," says Sam Chandan, president of Real Estate Econometrics in New York. "The distress is sitting on bank balance sheets."

Concludes Wayne Heicklen, co-chair of the real estate practice at the New York law firm Pryor Cashman: "They're hoping the existing borrowers or someone else will come along and put more money in the project and make it right."

Trends In Real Estate Investing | World Finance News

Timing may be everything, but is now the right time to invest in real estate, given the steep declines seen in the housing marketing in recent months?  Some real estate investment professionals seem to think so.  In fact, the smart investors are buying, buying, buying properties right now.  Why? 

“First, let’s define what we mean by “investing,” says real estate mentor and author Minh Pham, whose popular real estate seminars pack convention rooms with novice real estate investors eager to learn how to make money with real estate.  “Are you intending to be a knowledgeable, well-educated buyer of under-priced properties and stay in the real estate market for the long term in order to see excellent returns?  Or are you looking for a ‘get-rich-quick’ scheme?  If so, my real estate seminars are not for you.” 

Pham explains that buying a cheap property in the hopes of immediately reselling for a lot more than you paid is speculating, not investing.   And speculating is as risky as buying a lottery ticket.  No credible real estate investment coach will teach you how to speculate, because there is no way to guarantee profits. 

But that doesn’t mean you can’t start seeing profits in a fairly short space of time – you just need to know what you are doing.  

Becoming a successful real estate investor involves getting educated, doing excellent research, and putting together a well-thought-out strategy.   This may seem like homework to some, but for those who have done it the financial rewards are more than making up for the time spent learning.   

“Can you make money in real estate in a down economy?  Absolutely.  Can you do it without knowing what you are doing?  Absolutely not,” says Pham. “Worst case scenario, you could lose thousands of dollars and end up being very disillusioned, as many people are right now as a result of not really understanding what they were doing.  There are rules to any game, and if you don’t take the time the learn them you could lose your money.” 

According to Pham and other real estate investing experts, in order to be successful it’s important to learn how to make money in both ‘up’ and ‘down’ markets. You need survival strategies for when the economy is bad, and know how to win in a competitive market when the economy is booming.   “Don’t fear the competition – embrace it,” advises Pham.  “If you see a lot of investors competing for deals, then know you’re not the only one that sees the potential for profit.  There are more than enough good deals to go around. At any given time there are hundreds of properties for sale in local market niches, enough for every savvy investor to make the profits they’re looking for.  

Even in today’s uncertain climate, novice real-estate investors are making money, especially in smaller properties that are easy to acquire and manage.  Owning property that pays for itself is what it’s all about.  But how do you find those kinds of properties, and how do you recognize them when you do?  “Ah, you’ll have to come to one of my seminars,” grins Pham.   

Minh Pham’s next real estate investing seminar will be held in Alexandria, VA on March 14th, 2009.  He will be giving away his real estate investing handbook, “Turnkey Profits Using Lease Purchase, Subject To’s and Other Creative Real Estate Investing Techniques” to seminar attendees.  To reserve a seat go towww.realestatementoring.eventbrite.com.

MAKE A BLAST IN MAKING THE BEST REAL ESTATE DEALS - Rehab-Real-Estate

As consumers, we always want to buy stuff that is worth the money.  Most often than not, we engage ourselves to something that is worth our time. Right? So, let me tell you about a product that is not only worth your money but also worth your time. Well, I’m going to talk about Jason Medley’s training in looking for a private money lender.

As someone who is into real estate industry, to take part on that event will shed not just knowledge and skills but definitely enhance your profit in the long run. Why? Given that you have the knowledge and skills gain from this one-of-a-kind product, then it follows that you make the right move and decisions and eventually reap remarkable profits.

Let me give at least two products of Jason Medley which I personally used. Well, until now I refer to it as a guide. Here are the two effective and worth the dime products which I would like to recommend:

Find Private Lenders NOW Home Study Course

This product has given me the unlimited access to trained staff to help answer to all of my questions regarding the Find Private Lenders NOW System. Well, this product, if you have this a bit of tight schedule, is the one for you. If you feel like to continue learning everything at home still, this product is a good buy.

 

4 Week Live Training Calls with Jason Medley 

This product, as it was described by us who have availed it, is a “kick in the pants” that many of the real investors need to assure that we get the adequate guidance for us to execute the learning immediately.

This training will provide real estate investors the know-how to find private lenders so that they can use their funds for their real estate deals.  Have you ever thought that if you had private money (and not hard money), funding your deals would be much easier, and you could close many more deals than ever before? Jason Medley will show exactly how to find private lenders who have already funded real estate deals and want to fund yours.

However, you may find the following products focusing on the same stuff when it comes to the content as all of them are pretty much engaged on learning the ways to locate private lenders and the do’s and don’ts if you are to close a deal, which you may ask yourself of this question: What’s the point of availing those products that will just talk about the same thing? Or Isn’t that a waste of money?  Well, I for a time, have asked myself that question BUT then took the risk to avail both the products and found the answer. 

The products may seem to be containing the same information but indeed, they are interrelated that both will give you the boost in closing the deals with your chosen private lenders.

I can really guarantee you that this training will serve as your primary tool in making a big leap in your career in real estate. Become one of us who transcend in making the best real estate deals!

Avail this product/training at its affordable price! I can attest that it’s indeed worth the money and surely worth the time.   

Aug 12, 2010 1:06:33 AM

Sound Real Estate Investing Advice

Real estate prices are governed by a huge number of factors. Therefore, real estate investing advice is not like a sure shot prescription about how you should invest. Rather, it is a broad set of guidelines that will help form your own thumb-rules. The most important real estate investing advice is that investment in real estate should never be confused with speculation. Here are a few aspects that you might want to consider before you put your money into real estate.

Real estate investment is like any other investment. It is more like investing in Treasury Bonds or Mutual Funds. You get returns on it even when you continue to hold on to your investment. In property/real estate investing, the gain could be two-fold. If the property you hold is in a sought-after neighborhood, it would most likely fetch you a good rent. While you keep getting the rent, the prices could rise and give you the added return.

A typical property estate investor has the financial muscle and staying power. Such an investor does not get carried away by small, short term gains and instead concentrates on the big picture. An annual return of 6 to 8 percent of the invested amount is considered decent. Anything above 10 percent is a big bonus.

In the case of speculation, you enter when the price is low and exit at a higher price. The assumption is that prices will continue to rise, and that is not always the case. In fact, the last decade has seen a big slump of over 70 percent in many of the otherwise booming economies. The best bet in the case of speculation is being able to spot developing neighborhoods, especially residential, and to invest early.

In addition to the property estate investment and speculation discussed above, there is an interesting alternative. The real estate investor buys property that is not in the best of conditions, does it up in line with the current trends and then sells it for a substantially higher price. The unique selling point in this case is that the new buyer does not have to spend time, effort and money in getting it done. In one sense, this is an investment because you will still command a good rent till you get a buyer.

In the case of commercial property estate, the returns are naturally much higher. However, there are two points that need to be considered. Number one, the investment required is huge, depending of course on the size of the property and its location. The other important factor is that movement can be pretty slow. Do not expect businesses to relocate every other year. So, while the income in the form of rent is likely to be fairly high, the prospect of earning money through price appreciation can easily be years away.

In a nutshell, the best real estate investing advice is to look around, study the marketplace, and weigh the two channels of earning money - through rent and through price appreciation.

Join Forces with Our 7 Nationally Recognized Real Estate & Finance Experts to Wisely Navigate the Current Real Estate & Mortgage Markets to Earn Record Profits at RealEstateAdvicePros.com

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.

Evaluating your property investment | Reuters

By iTrust Financial Advisors (www.iTrust.in)

Investing requires discipline - one can’t blindly invest money without knowing what one is getting into. Investing into Real Estate is no different. Here is a checklist that you should use when evaluating your property investment.

1. Desirability of the location: This is the single most important criterion to value real estate.

2. Reputation of the builder and quality of construction: Properties by some developers are worth a lot more than others because of quality. Don’t always go for the lower price because there could be huge execution risk with less reputed builders

3. Payment terms: Time-linked or construction linked payment plan, and cash vs. cheque component. This will affect your cashflow in other aspects of your personal finances.

4. Project approvals and licenses: This might affect your ability to get a home loan if project approvals have not come through yet.

5. Contractual guarantees: For assured return schemes get a written guarantee from the builder and post-dated cheques in your name. Understand the delivery date of your project

6. Demand and supply: Over or under-supply will affect both the capital appreciation potential and the rental yield you might expect.

7. Floor space index and carpet area: Local rules on the built up area and the available square footage (carpet area) might reduce the usable area. Recognize that what you pay for might not be what you get

Tips on the process of Real Estate Investing

When it comes to the process of making a property investment and exiting from it, there are a few things that you must keep in mind.

1. Transaction costs: When you buy or sell property, there are many transaction costs associated with these activities. You might have to pay a brokerage fee to the intermediary. If you have made a gain on the sale, there will also likely be a resulting capital gains tax liability.

You will also face some expenses related to the stamp duty at the time of the transfer and registration costs of the property. All these costs can add a material amount to the purchase or sale price of your investment.

2. Liquidity: Unlike stocks that you can sell readily and convert into money in the hand within a couple of days, buying and selling property takes time. Your ability to convert your investment into cash in hand is quite restricted.

Its not uncommon for deals to take up to one year, and still fall through at the last minute. So if you feel that you can sell your property to pay for your child’s education abroad once he/she gets admission, you might be in for a shock. To have easy access to this money, you might be better off putting it into a financial asset that you can access at a short notice (e.g., fixed deposit, or liquid fund).

3. Cash: Property investments are not always the cleanest when it comes to cash versus cheque component of paying for deals. Unlike mutual funds where KYC norms require that the investment be made in cheque and the PAN card details be shared, real estate investments can have a huge cash component to them. This might not suit everyone.

Copyright 2010 iTrust Financial Advisors Private Limited. All rights reserved.

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-Ten Simple Steps to Buying Bank Notes

As the real estate market slow down continues, and with foreclosures on the rise in most of the country, lenders are finding themselves overwhelmed with many sub-performing and non-performing loans.

Many lenders are willing to consider a "short sale" where the lender will accept something far less than what is actually owed to them. However, actually owning the debt instrument itself (the promissory note) may be more useful for the savvy investor.

So, what are "sub-performing" and "non-performing" loans?

Sub-performing loans

Often called a "high maintenance" account--that is an account that requires a tremendous amount collection effort in order to reason, cajole, harangue, and beseech the tardy borrowers to make their payments month in and month out.

In some cases there may be rolling late payments, back payments already added to the outstanding principal, or an existing forbearance agreement between the lender and the borrowers to stave off a foreclosure.

Non-performing loans

These are accounts where attempts to collect have been unsuccessful and the account is simply not paying at all. It is in arrears with back payments and other expenses due.

Often, lenders in need of cash liquidity are willing to steeply discount the amount they will accept for the sale of their sub-performing or non-performing loan accounts (the promissory notes). These problematic accounts are a drain for the lender both monetarily and from a human resources standpoint.

For astute real estate investors, opportunities can be created by acquiring these secured loans, which can then be "scrubbed" up and become performing again or simply foreclose and repossess the collateral securing the loan. Lenders sell these notes to create liquidity and get these loans off their books.

Ten simple steps involved in buying bank notes

The mechanics surrounding the purchase of ANY real estate secured debt instrument (the note) are essentially the same whether you are purchasing from a private note holder or from a bank-type lender.

The Unity of Real Estate & "Paper" home study course contains the forms and useful documents you need. It also contains several pre-closing, closing, and post closing documentation checklists for handling such transactions.

Here are ten steps to follow: 

1. 
   
   Verify the outstanding balance due on the note and theactual repayment terms of the note. I cannot stress enough that you MUST review the actual documents that were executed!
2. 
   
   Verify with the seller of the note (the Assignor) the interest paid through date (or last paid date)
3. 
   
   Verify the next payment due date.
4. 
   
   Ascertain that the mortgage (or trust deed) is an insurable FIRST lien position loan (assuming you are buying a 1st lien). This is where a review of the existing mortgagee/lenders title insurance policy comes into play. Such a loan title insurance policy was probably issued when the loan was originated.
   
   You also want to establish the status of the property taxes, whether they are current or delinquent, and any impound escrow funds that might be held and be transferred to you for such payment as taxes and fire hazard insurance premiums.
5. 
   
   Confirm the value of the collateral property that secures the note (that is today's fair market value). You can do your own evaluation, or have a BPO (broker price opinion) report done, or a formal drive-by, exterior only appraisal, etc.
6. 
   
   Get the actual mortgage (or trust deed) security instrumentassigned over to you or your entity. The assignment, once executed and recorded, will accomplish this and transfer all rights, title, and interest in the instrument to you; the assignee.
7. 
   
   Have the original promissory note instrument endorsed over to your or your entity (making sure the assignment of the security instrument and endorsement of the note match one another). The endorsement can take place right on the actual original promissory note instrument or via a separate note allonge (an attached endorsement).
8. 
   
   Have physical possession of the original promissory note instrument given to you. This is the negotiable instrument you are purchasing and whose rights you will be able to enforce for non-payment of the debt.
9. 
   
   You may want to obtain an estoppel affidavit from the Assignor. They will affirm for you the actual balance and terms of the note and might be useful in a later dispute with the debtor.
10. 
    
    Obtain notification letters to both the note payor and fire hazard insurance agent notifying them of the transfer of the note account. (These are often referred to as so called "goodbye," "welcome," and change of loss payee letters).

It would be wise to further consult with your own attorney to make sure that what you are purchasing is what you bargained for. Once you own the actual debt instrument (the note) there are a number of options available for you to pursue in an attempt to collect or get the note instrument performing.