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 Money With Wells Fargo Foreclosures

Because of some mitigating circumstances, many homeowners were forced to renege on their obligation to pay their mortgages. This resulted to thousands of Wells Fargo foreclosures offered for sale on the market daily. 

This opened a floodgate of smart investors and first-time homebuyers who want to buy bank foreclosure properties either to live in, rent out or re-sell. Wells Fargo foreclosures are very cheap, selling as low as half their current market value. The explanation for the low prices is very simpleWells Fargo does not want to be saddled with unprofitable properties so it would prefer to sell them at low costs. 

Where to Find Cheap Bank Owned Properties:

Any smart investor can tell you that you can profit from a real estate if you buy a property at a very low price and sell it for a substantial profit. So start by looking for bank foreclosures that are cheap yet in good condition. To save you time and effort, subscribe to foreclosure listings. A foreclosure list is the secret weapon of many smart investors. This is the tool that enables them to get ahead of their competitors.

Subscribing to foreclosure listings gives you a chance to know about new foreclosures as soon as they are placed on the market for sale. And you will know every new foreclosure home in all major cities and towns in the country even without leaving the comfort of your home or office just by subscribing to foreclosure listings.

Buying Bank Foreclosures:

You can buy bank foreclosed homes at auctions. Buying at auctions gives you an assurance that the properties are really at their lowest market price. However, because buying means bidding on the property, there is a great possibility that you will get carried away by the excitement of the process and end up overbidding on the property. You can avoid this mistake by setting the amount that you can afford to pay the property.

Learn everything you can about the foreclosure investing market and give yourself an edge over other buyers who are hunting for cheap Wells Fargo foreclosures.

Which Foreclosed Homes For Sale Are Right For You?

Buying foreclosed homes for sale is a trade that you should master if you want to acquire only the best properties. Sometimes, a foreclosure may come very cheaply but is not necessarily the right property for you. When choosing home foreclosures, you should take into account both your personal and business goals in order to make the right decision.

Limitless Choices

The subprime mortgage crisis did not hit only the lower middle class but rather, it also managed to affect a large portion of the well-off sectors in the society including the upper middle class. As a result, you can find a lot of good properties in posh, decent neighborhoods that are for sale at rock bottom prices. Finding them is easy but whether one is the best for your investment takes more than a customary glance.

There are many types of foreclosed homes for sale that you will find in the market. There are single family units, multi-unit foreclosures, mobile homes, distressed houses, VA homes, government foreclosures, condos, apartment units and many others. Sifting through thousands of foreclosures every day can be overwhelming and is always a gargantuan task. This is why it is important that you set certain parameters in choosing the right property for you even before you start your search.

For this, you would need to determine what your goals are in purchasing foreclosures. Are you buying for investment purposes, rentals, or for private use? When you ask yourself this question, a lot of other factors will also arise from your answer. For example, if you are buying for investment purposes, what type of market are you going to cater to? If you want to try the rentals business, what type of building can give you the most profit? On the other hand, if you are purchasing for your own use, how big a house do you want to own? All these must be taken in account when you purchase your foreclosure.

The key to finding the right foreclosed homes for sale will greatly depend on your purpose and setting it well ahead of your search can give you direction and focus. In doing so, you will not only save time and money, but will also enable you to grab the best property deals quickly.

Buy Foreclosed Houses With The Help Of A Good Real Estate Agent

Most investors and home buyers know that to be able to buy foreclosed houses that suit their requirements, they should have the help of a dependable and market-savvy real estate agent. Choosing a real estate agent can be as important as choosing the property that a buyer would purchase. To make sure that a buyer is only hiring the best, there are certain details that he should find out about the agent first.

Experience and Reliability

The first question that a home buyer should ask a prospective agent is how long he has been in the business. It is also advisable to choose specialist agents, which means that if a buyer is leaning towards purchasing a government foreclosure, he should find himself an agent who specializes in government foreclosures, while those looking for REO or bank foreclosures should look for agents who are associated with banks and lenders.

A buyer should also find out the agent's records, particularly the number of properties he has been able to acquire in behalf of his clients who buy foreclosed houses. Buyers should also ask what the average difference is between his purchase price and the list price of these properties. Requesting for references and taking the time to talk with the people who provided the references will also help.

Agent's Strategy

Home buyers should also ask real estate agents about their strategies or how they usually get a client's offer accepted by the seller. The process and resources used by the agent to find the suitable property for his clients is also important. 

How he deals with multiple competitors and make sure that his client has at least a good chance of being considered is also another question that a good real estate agent should be able to answer. A home buyer should always listen carefully to an agent's answers and deduce from his tone whether he is just putting on airs or whether he really is capable of delivering on his promise.

People who wish to buy foreclosed houses should get the help of a real estate agent who has a good track record in the field of buying foreclosed properties. Asking friends, family members and other people who have tried the services of certain real estate agents is also a good way to find a reliable professional.

Flip and fix: Important Tasks to Accomplish When Rehabbing Homes

Rehabbing, no-doubt, is one of the most popular ways to invest in real estate. With the growing number of television shows that feature this particular real estate investing niche, many investors, particularly beginners, are keen on renovating old and undervalued homes for profit.

Being a rehabber of real estate, however, is not as easy as certain flip and fix shows portray it to be. A real estate investor who rehabs properties for a living doesn't just enter an ugly house and snap his fingers to transform the property into a work of art. He has numerous responsibilities and tasks that should be accomplished to ensure that his project will be a huge success.

Among these tasks is ensuring that the fixer upper home to be rehabbed is capable of attracting a good deal once it has been repaired and renovated. A rehabber has to make sure that he is investing his time and money in the right property as it can help him determine the success rate of his rehab project. This is the reason why those who concentrate on this particular real estate investing niche spend most of their time looking for the perfect handyman special or fixer upper home to rehab.

Another important task to consider when fixing and flipping properties is creating a rehabbing team. We are all aware that giving an old property a make-over is a mentally and physically challenging task. Even if a rehabber has ample experience in doing construction and home improvement projects, it would still be difficult for him to complete a flip and fix on his own. Therefore, to ensure that a home rehab would be finished on time, it would be wise to hire contractors or build a team.

Aside from finding the right property to rehab and building a team, creating good marketing strategies is also one of the essentials of doing a rehab project. Having good marketing pitches enables a real estate investor to easily find an end buyer for the property that he has rehabbed. It can also help a rehabber find motivated home sellers, who can provide him or her with nice fixer upper homes and handyman specials.

By accomplishing these tasks and having a good real estate investing strategy in place, it would be easier for an investor to generate positive cash flow by rehabbing homes. 

Short Sales, Foreclosures and Bank-Owned Properties

There are many properties in some stage of foreclosure or taken back by lenders at this time and a lot of buyers ask about these because they've heard that this is where you can get an incredible deal. After more experience with these types of properties I've found that there is a lot of false information and hype out there and want to provide you with some more information that can help you understand this whole subject a little better.

During the boom years there were tons of seminars and books on how to make a fortune in real estate by buying and flipping houses. Though some people were able to make good money quickly that way during the period of about 2003 to mid-2005, many others are now part of the foreclosure statistics.

Similarly, there are now lots of websites, seminars, books, etc. on how to make your fortune buying foreclosure properties. They present stories of exceptionally good situations that make it sound like this is how every foreclosure situation goes even though it is really more of a rare occurrence for the average person. Maybe these are the same people who promoted the seminars and books on "flipping" (and maybe they are also the ones who email you about winning the UK lottery or about the $50Million they want to send you from Nigeria:).

That's not to say that there aren't good deals available in properties that are in some stage of foreclosure, there are. BUT - there are some things you'll need to understand because the process can be quite different from the normal.

First of all there are some different types of 'foreclosure' properties and I want to start off by clearing this up for you.

There is a 'pre-foreclosure'. This is a property where the owner has fallen behind on their payments to a point where the bank has begun the foreclosure proceedings (usually by filing a notice of pending legal action).

There is a 'short sale'. This generally means a pre-foreclosure property where the property is being listed at a price that is less than what is owed on the outstanding loans. You can recognize these in listings as it will either say "short sale" or "3rd party approval needed" or "list price may not be sufficient to cover all encumbrances" (meaning that the bank will have to approve it in addition to the seller accepting the offer).

One word of caution though, some realtors will list a property as a short sale or "possible" short sale without even having their client complete a "short sale package" (the paperwork that will have to be submitted to the bank with any contract) - avoid these as in most cases they end up going nowhere or take months to hear anything back.

There are also "bank-owned" properties. Bank-owned means the bank has completed the foreclosure proceedings and now owns the property fully. These are usually the easiest and quickest of the different types of foreclosure properties to deal with although they are often (not always) in pretty bad condition.

That gives you a basic overview of the types of "foreclosure" properties you may run into.  Now let's look at what you need to know about them if you're thinking about venturing into this area.

The most difficult type of these to deal with at this point in time (in most cases) is a short sale. With a short sale, you will have to be prepared to wait weeks or even months to hear anything back on an offer. If your offer is at the asking price and 100% cash, then that may shorten the time period. But even in that situation there is no guarantee that it won't take weeks or months.

As an example, I spoke with another realtor a few months ago whose client not only put in a full list price offer but also offered to pay for the title insurance that would normally be paid by the seller. It still took 3 weeks to get an answer and what came back from the bank was that they wouldn't consider the offer until they had a special disclosure signed by the buyer that is required on houses built before 1978. Only problem is that the house was built in the last 5 years and this disclosure isn't required. But the bank doesn't care and wants the disclosure before considering the offer. And it took 3 weeks to get even this ridiculous reply back!

One other case is a realtor that listed a short sale and got a very low offer which she submitted to the bank in November (this was even after the house was listed for $200,000 less than the current owner paid for it 2 years ago). As of February she still hadn't gotten a reply back from the bank. So that was 3 months with no reply.

Recently I had a client put in an offer on a short sale that just came back on the market after the lender rejected the offer that had been submitted to them nearly 6 months ago.  The offer was lower than they wanted but they rejected even doing a short sale because the owner had been continuing to pay their monthly loan payment – and it took them 6 months to let the owner's realtor know this.

So with short sale properties, you first need to find out if it is actually a good deal. I had one client recently looking at a townhouse that is a short sale and based on recent sales in the complex and comparing the condition of the properties this townhouse was priced at least $15,000 too high for even its market value.

If you do determine it is a good deal (especially when it is below market value) then it is best to offer a price that the bank will consider. This is especially true when the lender has already dropped the list price once or more. If you go too low, you may never hear back. And keep in mind that in some cases during the waiting period for a reply, other buyers can submit an offer and if the bank feels the other offer is better than yours - they can then accept it and reject yours. You can also miss out on a really good deal by playing the negotiating game – trying to get the price down even more when it is already priced really well.

I saw an example of this with a client who put in an offer on a townhouse directly on Tampa Bay.  We found out they already had another offer in and I told my client to offer full list price (which was still a great deal).  We found out after the deal closed that the other offer was $15,000 less – suggested to the buyer by his realtor.  My client's offer was the one submitted to the bank with the other offer held as a backup.  As we got closer to the closing we ran into some problems with my client's lender and the other buyer offered $30,000 more than my client and then $70,000 more than my client, both full cash offers.  Fortunately we got the problems worked out quickly enough and closed the deal but the other buyer definitely regretted missing out on a great deal by trying to get the price down a little further.

It is also fairly well known that short sale deals are often more difficult. An April 18, 2008 article said "The success rate for short-sale offers is low...20 percent of short-sale offers in the area [Las Vegas] lead to completed sales, compared with 85 percent for more traditional sales. Redfin, an online real-estate brokerage based in Seattle, says it represented buyers on 65 short sale offers in the first quarter but expects only two or three to result in a completed sale."

And the final insult with short sales is that even if the bank accepts your offer and things are proceeding along well, they can decide in the 11th hour to cancel the deal. This info was given to me by an attorney who works for our state Realtor association.

I've found that the best short sales to work with are the ones that have already gone through the approval process and have just come back on the market.  Usually this happens when the buyer just doesn't want to wait any longer and cancel their offer right before the lender comes back with an answer.  The advantage here is that the lender has already done all of their work in processing the short sale and has approved it as a short sale and has normally stated what they will accept for a price.  In addition, they often give a time period of about 30 days that this approval is good for so if you jump in at that point you will usually get a fast reply and can have the whole process take a much shorter time.

Other than recently approved short sales, the easiest of all foreclosure properties to work with are bank-owned properties. This is where the bank has completed the foreclosure proceedings and now owns the property. In these cases the time frame for getting an answer back on an offer will be much quicker. However, in a high percentage of cases the property can be in very bad condition.

One of my clients put in an offer on a foreclosed property after checking it out pretty thoroughly and providing a list of the problems they found (including mold and termite damage).  The bank rejected the offer.  Months later they came down in price and we looked at it again.  The hole in the ceiling over the dining room where my client found some of the mold and termite damage was repaired and with no attic there would be no way for anyone to know what we had seen up there and I have found that some banks do not disclose these things (even when provided the information) and try to get away with that by stating they "never occupied the property".  By the way, even if they did not occupy the property, if they are made aware of any problems or their realtor is they do need to disclose it.

Another client put in an offer on a foreclosed house but after we had an inspection done and found the house needed a new roof, new A/C system, new ducting, new appliances and there were settlement issues (possible sinkhole) she cancelled the contract.  This was with Fannie Mae and it took 2 months to get them to send her deposit back.  We checked the listing after she cancelled and noticed that nothing about the settlement issues was noted.  So with foreclosed properties you must have a thorough inspection done because that is your only way to find out the true condition of the property.

Bank-owned properties can be a good deal for you if they are in decent condition or if you are willing to do the work necessary to bring it up to the standard you want. But keep in mind that you will get very little or no information about the property from the bank so the risk of hidden problems is higher.

A very important point with any of these type of properties - you must have your financial arrangements taken care of before even bothering to look at any. In all cases that I have seen so far, an offer won't even be accepted in a short sale or bank-owned situation unless you submit a preapproval letter for financing or proof that you have the cash to buy it.

I only recommend short sales at this time for investors who are cash buyers and will have no problem with waiting an average of 60-90 days for the whole process, or if they have been recently been approved by the lender.

In most cases, your best bet is finding a property that suits your needs and is a good value where the owner can sell for a good price without being in a short sale situation. Many of my clients have found this to be the best thing for them (and the least stressful and frustrating).

So there's a brief rundown of some information on foreclosure properties and how buying them differs from buying other properties. Please make sure you understand this if you plan to try to purchase any as if you aren't properly prepared or try to ignore the way these go, you'll just be wasting everyone's time and may end up getting unnecessarily frustrated.