By Stacey L. Bradford,
Associate Editor, SmartMoney.com

RIGHT NOW, IT’S anyone’s guess when the housing downturn will finally hit bottom. But if you’re looking to buy a home now – and plan to stay in it for a while – there are plenty of bargains to be had on a foreclosed property.

Banks are often willing to sell foreclosed homes for up to 20% below market value just to get these troubled properties off their books, says Rick Sharga, vice president of marketing for RealtyTrac, a web site that lists foreclosed properties. With foreclosures at an all-time high in the past year, there’s no shortage of these opportunities to pursue. However, prospective buyers should know that closing on that super-cheap distressed home is often a lot more complicated and risky than buying a home that doesn’t have all of that financial baggage.

Here are five things you should know before you buy a foreclosed home.

1. Finding Properties in Foreclosure

Thanks to the Internet, it’s easier than ever to find homes in foreclosure. For a monthly fee of up to $50 you can surf web sites like Foreclosure.com and RealtyTrac, which list thousands of properties.

The biggest bargains can be found in areas where there’s a large concentration of distressed properties. The banks with the most exposure to these areas are typically the most motivated to cut a deal since they don’t want to get stuck with a glut of real estate they can’t unload, says RealtyTrac’s Sharga. But before you snap up the cheapest home you can find, make sure to do some research. Find out if the property is located in a decent neighborhood with good schools and healthy employment rates. (Local real estate web sites are a great place to start your research.) If you buy in an area that’s losing jobs and is riddled with crime, home values are likely to take a lot longer to recover.

2. Avoid Auctions

While there are a number of safe ways to buy a foreclosed property, bidding on one at a court auction isn’t one of them. That’s because you’re buying a home sight unseen and without an inspection, warns Sharga. You’ll have no idea whether the home needs repairs and how much they might cost. Some of these properties also owe back taxes, a headache that’s transferred to the new owner. And finally, in most cases, you’ll need to pay cash for the home.

The least risky way to buy a foreclosed home is to wait until the bank has put it back onto the real estate market. These properties are called bank-owned or real estate-owned (REO). Before a bank hangs a “For Sale” sign, it pays off all the existing debts and taxes, and in many cases, repairs the home to bring it up to the standards of the neighborhood. Best of all, you should be able to buy a bank-owned property with a traditional mortgage.

Read our story for more on buying a home at auction.

3. Research Home Values

Just because a home is being sold by the bank, doesn’t necessarily mean it’s a bargain. Home prices have fallen dramatically from their peaks in 2006, a time when loose-lending practices allowed people of all credit ranks to easily obtain mortgages. Now, many homeowners going through the foreclosure process owe more on the mortgage than their property is actually worth. To make sure you aren’t assuming an overpriced loan, research home values in the area. That way, you’ll be better able to identify potential deals.

If you fall in love with a home in preforeclosure that’s overpriced, then you can see if the bank will allow a short sale. This is when the bank accepts less for the home than the amount owed on the mortgage. While not an ideal scenario, accepting a lower price is often in the bank’s best interest. Banks typically spend $25,000 to $50,000 during the foreclosure process. On top of that, they typically end up reducing a home’s asking price to match current market values, says Sharga.

4. Line Up Financing First

While it’s always a good idea to get preapproved for a mortgage before you start shopping for a home, it’s even more critical when you’re shopping for foreclosed properties. Even if you have stellar credit, some lenders won’t make a loan on a distressed property, says Andy Tolbert, a Sanford, Fla.-based real estate investor who specializes in foreclosed properties. Other lenders will only offer a mortgage if the house is in decent condition.

If your loan officer is willing to make a loan on a foreclosed property, find out what criteria the home needs to meet in order to qualify for a mortgage. You can expect the lender to allow cosmetic repairs, but be unforgiving of termites and other serious fixes, says Tolbert.

5. Get It Inspected

Even if a home is brand new you want to get it inspected. But inspections are especially important when you’re dealing with homes in foreclosure. When people have trouble paying their bills, they typically put off the regular maintenance on their homes, says Glen Daniels, a director with Foreclosure.com. Once a home is seized by a bank, it then sits vacant and falls even further into disrepair. In a worst-case scenario, a homeowner could be so angry he lost his home that he actively destroys a property before he moves out. Without an inspection, you won’t be able to estimate the cost for repairs or be able to report the home’s true condition to your lender.

On December 20th, Bush signed into law a measure that will change the tax effects for a homeowner in foreclosure. These are critical changes that may change your client’s outlook on a deal (in fact…maybe you lost a deal last year because of this tax burden…it may not be too late to call that client back and revive the deal!)

In a nutshell: If a homeowner who was in foreclosure worked out a short sale agreement with their lender, the amount of debt that the lender “wrote off” is considered as ordinary income to the seller. That means if you negotiated a $50,000 reduction in the payoff to help get the property sold, that seller would have to claim that $50,000 as taxable income on their tax returns (resulting in a potential tax bill between $7,500 and $17,500). Some sellers decided NOT to sell on a short sale for this very reason…but that’s where this new law comes in!

It makes that “income” from written off debt NOT TAXABLE to the seller! Here’s some key points:

– Only applies to their principal residence, not 2nd home/vacation/rentals/speculation

– Effective for debts discharged between Jan 1, 2007 and Dec. 31, 2009

– It applies to debt for acquisition, construction, or substantial improvement to the property. This means that if someone had refinanced and taken cash out or paid debts off, then the forgiven debt WILL be taxable.

– Forgiveness is limited to $2,000,000 (I think we’re OK there!)

– The amount of forgiven debt will be reduced from the sellers basis in the house. Most sellers will still be able to sell with no capital gains bill as long as they’ve lived in the house for at least 2 years, but people in their homes less than 2 years may still have a surprise!

Cool Part of the Law #2: Another thing that was in this new law that you will probably like…an extension of the tax deductibility of Private Mortgage Insurance (you know, that monthly bill your clients pay when they don’t put down 20% on a home mortgage!). This extension is good through Dec 31, 2010, and again is only applied to acquisition mortgages on a “qualified residence”

Cool Part of the Law #3: And one last part that might apply to your clients…if a client’s spouse dies, they now have 2 years from the date of the death to sell that home and take the full $500,000 exclusion for a couple in a primary residence. After that time, they will only be entitled to the single person’s $250,000 exclusion on the gain they received from the sale. It used to be only in the year of the death, which would be difficult if they passed away towards the end of the year.

Please remember, I am NOT an accountant, and I am not giving you or your clients legal or accounting advice, and neither should you! Anytime you have a client that asks you about the tax ramifications of ANY deal, refer them back to their CPA or attorney for advice.

There’s been a lot of talk and rumors about this one, so I figured I’d clear up a few things…this bill addresses the fact that when homeowners who are in pre-foreclosure sell their property and it is a short sale situation with the lender (the sales price is lower than the mortgage balance) then the amount of debt that the lender agrees to “forgive” is taxable income. This bill would make that “income” non taxable under certain circumstances, the 2 notable ones being: the debt was for purchase or improvement to the property (NOT credit card consolidation, if I’m reading it right) and it was your primary residence.

On October 4th, 2007, the House overwhelmingly passed this by a vote of 386-27 (surprisingly, Georgia was the only state predominately voting NO! Just FYI!)

U.S. Senator George V. Voinovich (R-OH), introduced the bill on May 15th along with Sen. Debbie Stabenow (D-MI) to change current law that forces individuals to pay income tax when they have part of their mortgage forgiven or are forced to foreclose because of inability to pay their mortgage.

Sen. Voinovich said: “Homeowners need relief and they cannot wait any longer. If we don’t get this to the president’s desk soon, the turmoil in the housing market may get even worse. We don’t want people filling out their 2007 tax returns and discovering a very frightening and expensive surprise.”

Currently, as an example, if a homeowner has a $250,000 mortgage on their house and through a short sale negotiation the lender agrees to take only $200,000 to allow the house to sell, the homeowner may be liable to pay income taxes on the $50,000 of forgiven debt. This translates into a $7,500-$17,500 tax owed (depending on their tax bracket). Come On! If they had that much cash laying around, they probably wouldn’t have been in foreclosure to start with! So the tax code actually punished sellers who made an effort to fix the problem instead of ignoring it.

There is actually a loop-hole in the IRS tax code that says if the taxpayer is insolvent at the time they incur this debt (the day the short sale is closed and the debt is forgiven) then they will not be required to pay the tax (here’s the link to the IRS article about this topic: http://www.irs.gov/newsroom/article/0,,id=174034,00.html ) If you or one of your clients are facing this issue, please read this article and get guidance from a tax professional about your situation.

Please note…if the amount has been written off in bankruptcy (according to the IRS site) then no income tax will be due, so again, check with your tax professional.

What Still Needs to Happen?

This bill still needs to go before the Senate for approval, and then to President Bush for approval. If Bush vetoes it, the House and Senate can override his veto, and many people seem to think he would do just that…the question doesn’t seem to be if THIS part of the bill is good or not, everyone seems to agree with it, however we all know how politics can mess up a good thing. We are all waiting eagerly for this one, we’ll keep you updated…

Backstory of This Situation:

When a lender loses money in a transaction, they have 3 different ways that they can go after the borrower:

1. They can ask the borrower to sign an unsecured note promising to pay back the money.
2. They can go after the borrower for the amount of the loss in what is called a “deficiency judgment”
3. They can “write off” the loss and send the borrower and the IRS a 1099 reporting the amount as income to the borrower.

Today we have addressed #3…watch for future articles about #1 & #2.

If you’re really interested in the exact text of this bill, you can read it here: http://www.govtrack.us/congress/billtext.xpd?bill=h110-1876

See you next time!

For the last several years, there’s been a lot of talk about how it is a bad time to invest in real estate, but I feel that real estate is always a safe bet if you’re buying them right. There is an acronym that’s been around for many years about why real estate is the IDEAL investment, however in today’s market, I’ve adjusted it a little, I like to say that real estate is absolutely still the MIDEAL investment.

The “M” stands for Motivated Sellers. Motivated sellers NEED to sell, not just WANT to sell. Somebody that really NEEDS to sell is less likely to hold out for top dollar on their property. There are several methods to find motivated sellers, but right now we have a HUGE one: Foreclosures! Both pre-foreclosures AND bank-owned properties

The “I” stands for Income. In real estate, there are 2 types of income you can earn

1st type of Income: Quick Cash. You get checks when you buy them, fix them up, and sell them and collect $10,000, $15,000, $20,000, or more. In fact, there’s one method called “wholesaling” where you make $5-10,000 and you never even own the property or make any repairs!

2nd type of Income: Long Term Income. This is where you buy a property, stick a tenant in it and collect $200 a month positive cash flow for the rest of your life. Obviously the trick is to have several of those! Many parts of the country would argue right now that if you go out and buy a house today, you can’t rent it for enough to cover the payment, and that’s true…but remember, we don’t pay full retail for properties when we buy from motivated sellers. So if you pay 150k for a 150k house, you may have a hard time renting it for enough to cover your payment, but if you only paid 100k for it, can you see how you would have a higher cash flow? The rental market doesn’t care what you paid for it, they only care what it’s worth!

The “D” stands for Depreciation. In a business, when you buy equipment such as a copier, the tax code let’s you write off the amount that equipment goes down in value as it ages (a 4 year old copier is worth much less than a new one!). If your business is owning rental properties, what is the equipment you purchase to use in your business? Exactly! Your houses! So we get to claim the amount it goes down in value as a loss on our taxes, and this “loss” can offset other income you made this year. But did your house really go down in value? Probably not, so this is what is called a “paper loss” which means we lose it on paper, but not in “real” life. I like to say it’s where we get to legally lie to the IRS, they even encourage you to do it, and you can even download a form where they’ll tell you how to do it the right way!

Here’s one key difference though, you can write off the copier 100% in a matter of just a few years, but on a house or other real estate holding, you can only write off the “improvements”, not the land itself, and it will take 27.5 years!

This means if you buy a $100,000 house and you determine that $20,000 of that is land value, then you can depreciate the improvements, or $80,000 over 27.5 years which would be $2,909 per year that you “lost” on paper above and beyond what you actually experienced on that property. And since this offsets your ordinary income, what if you owned 10? That would be a $29,090 write-off per year! As always, check with your CPA, some people have limits on how much depreciation they can take, but even then it’s most likely still $25,000 per year, which is pretty good at saving you some taxes!

The “E” stands for Equity. Equity is the difference between what you owe and what it’s worth, so if you owe $80,000 on a house that is worth $100,000, you have $20,000 in equity, and every year as you make payments and pay your mortgage balance down and as the market appreciates and your house goes up in value, your equity grows. But with motivated sellers, they might need to get rid of a house worth $150,000 that you can buy for only $100,000, so you instantly get handed 50k equity on a silver platter, and THEN it starts to grow from there! That’s your net worth! You just added $50,000 to your bottom line. So how about if you got 10 of those! Your net worth will go up a half million dollars instantly! Then it starts to grow from there!

The “A” stands for Appreciation. Appreciation means the amount of value your house goes up every year, so if it is worth $100,000 today in a market with 3% appreciation, it is worth $103,000 next year. First of all, take the last 3 years history and crumble it up into a ball and throw them away (go ahead and do it, it’s fun!). Many parts of the country were experiencing higher than normal appreciation rates. As an example, Florida historically runs about 5% appreciation per year, so a $100,000 house this year is worth $105,000 next year. The following year is is NOT $110,000, because appreciation is based on current value, so next year it’s 5% over the $105,000, so it would be worth $110,250. But that’s not even the coolest part! Let’s go back to depreciation…the IRS doesn’t care what it’s worth, just what you paid for it, so if you’ve found a motivated seller and you buy a house worth $150,000 and only pay $100,000 for it, you will only be able to depreciate the same $80,000 in our example above…but in Appreciation, the market doesn’t care what you paid for it, they only care what it’s worth, so in our example, our $150,000 house will be worth $7,500 more next year, or $157,500…how about if you had 10 of those? Your net worth will go up 75k in one year!

So we’ve gone over M for motivated sellers, I for income, D for depreciation, E for equity, and A for appreciation…with those 5 factors can you see why real estate is such a powerful investment strategy? But when we throw in the L, it makes the whole thing a no-brainer…

Let me ask you a question…if I want to buy $100,000 of Disney stock and actually hold the stock certificates in my hand, how much cash do I need? You guessed it! $100,000!

However, if I want to buy $100,000 worth of real estate, how much cash do I need? $30,000? $20,000? Well it actually depends on my credit and what kind of loan I can qualify for, but you realize I don’t need the whole $100,000

That’s what the “L” stands for…Leverage! Leverage means that we can use Other People’s Money (OPM) to buy real estate that WE fully own and control! (here’s a quick secret…a lot of the houses we buy don’t look too good, so the banks won’t make a loan on them, so a lot of investors use something called “private money” or “hard money” to fund our deals, and sometimes they even loan us MORE than our purchase price so we get the money to do the repairs too!) By the way, Fannie Mae has a 10% down investor program, and there are loan programs that will let you put as little as 5% or even 0% down!

So picture this…if $100,000 just dropped out of the sky into your lap, are you ready? THUMP! What could you do with it? Well, you could buy ONE, $100,000 house and pay cash for it, and that would be great because you would collect that rent as income for the rest of your life, but do you see why putting 20% down on each of five $150,000 houses that you can buy for only $100,000 would be even better? You just added $250,000 to your net worth (5X $50,000), 5 tenants paying you rent every month instead of one (yes, you have a mortgage on each property, but if you’re clearing $200 per month per property, that’s still $1,000 per month), 5 depreciation write-offs, 5 houses growing equity each year as your tenant pays YOUR mortgage off for you (another example of OPM), 5 houses appreciating instead of one, and best of all, it took the same $100,000 to buy all 5! What if you put 10% down on each of ten of those same $150,000 properties that you were able to negotiate down to just $100,000 properties? Imagine the possibilities!

I hope you now have a deeper understanding of the powerful benefits of owning and investing in real estate. Throughout American history, many powerful millionaires have been made through real estate, and right now in our society, 96% of all millionaires made their money in real estate…I hope the information in this article is the beginning of YOUR successful investing experience.

It’s almost 1 a.m., I’m sitting in Steak & Shake in Lakeland waiting for AAA to come look at the truck. I’m half asleep already since my flight arrived 2 hours late to Tampa. I think it’s just a bad battery, but at 1a.m., how do I fix that? While I’m waiting, I have a Berry Berry Cobbler ala mode and ponder what got me here. When we have assets, be it belongings (like the truck), skills, or knowledge that don’t get used regularly, they tend to “break down” and leave us in a lurch when we need them most. As an example, I played the flute all through school.

Hours upon hours of practice, but now, 15 years later, I probably can’t put 2 notes together. This applies to skills used in the business world also. If you only “negotiate” once a year, you’ll never be very good. However, if you educate yourself through a seminar or books & tapes and practice regularly, you’ll become a pro (probably time better spent anyway – how many professional flautists are there? Maybe our education system should teach Contract Negotiation 101.) Don’t think these skills are important? How about asking for a raise? Getting your kids to clean their room or your husband to fix the gate? Do you think you’d be more successful in these situations if you knew a little about the psychology behind their behavior & decisions?

I guess the point of my midnight musing is simple – USE IT or LOSE IT! All the “get out of jail free” cards in the world won’t do you a bit of good if someone else wins the game while you’re stockpiling. So my challenge to you is this: Pick one skill that’s gotten a little rusty and make the first step towards regaining it – whether it is a sewing club, dance lessons, or Toastmasters. Put this article down and make the call. You’ll be glad you did. Oh, by the way, if you’re reading this, I made it home okay, and the truck probably has had the once over and a new battery and oh yeah, my negotiating tapes have been pulled down off the shelf and listened to again.

Have you made the decision to further your education at an out of town seminar? I have been traveling to various seminars and events for many years now, and have realized that I am much happier when I have all of my supplies, necessities, and travel arrangements lined up ahead of time. Here are some of my tips to get you there and back without losing your sanity, luggage, money, or time.

1. Keep a separate file for each trip you have coming up. On the tab, write the date, city, and event name. This will look like “ Nov 11-13 2005/Orlando/John Smith Marketing Seminar.” Inside the folder, put the flyer or internet printout for the seminar itself, your registration/confirmation if you have one, the agenda for the event, your hotel confirmation, your flight information and e-ticket confirmation, your shuttle confirmation, and any other information you may need for the actual trip itself. When you get ready to leave for the event, grab the file and put it in your carry on luggage. When I get to the long-term parking lot (more on that later!) I write my space number on the inside of the file or tape my parking ticket to the inside of the file (the lady at the lot I park at remembers me for this). For a free copy of the checklist I use in my files, click here.

2. Use the power of Points. Many different companies offer some type of customer loyalty program, including credit cards, airlines, and hotels. But you may not know the power that these programs hold, for example, did you know that certain levels of credit cards (check out amex.com) not only give you points for spending, but offer insurance that covers your luggage if it is lost or delayed. American Express also offers a higher level of coverage that they will automatically add to each ticket you charge (I learned about these programs the hard way, by NOT having them when my luggage was stolen!). Visit the website of your current credit cards to see what travel benefits they offer. You also may not know that while most hotels have frequent customer benefits, some of them also give you points on your frequent flyer accounts! That’s a double bonus! Here’s another tip: some off airport parking lots offer free parking stays after a certain amount of paid days. All of these programs can be a very powerful tool to use to get the most out of your travel, and once you’re in the habit, they won’t add any time to your planning routine.

3. Use some of the travel websites to plan your airfare, even if you don’t book it there. This is a great way to see all possible flight combinations and get an idea of times and prices, and then you can go straight to the airline’s website to book it direct if you want. Most of the time the cost will be about the same, but some airlines will give you bonus miles if you book direct with them. One feature I like is Orbitz.com’s flight alert. It calls you on the phone number of your choice at a set time before your flight to remind you, and also calls you if there are any changes such as flight delays or gate changes. You can also give it a second number to call, such as your family so they know you’re running late!

4. Pack with your day’s activities in mind. I have started traveling with a backpack as my carry on and not carrying a purse at all, just putting my wallet in the pack. If I am traveling with my laptop, I have a rolling bag that has a separate side pocket for the computer itself, since you need to pull it out and run it through the x-rays out of the bag. This bag is big enough to also serve as my carry on, yet small enough to fit in the overhead compartment. I also make sure that my essentials (medicines, tickets, travel file, and spare underwear, because you never know) are in my carry on, that way if your luggage is lost or delayed, you can make it through at least one day.

5. Clothes make the trip! What you wear can effect your enjoyment and effectiveness of your trip, so here’s some things I’ve learned:

a. On the plane ride, wear comfy pants, running shoes (you never know!), no belt (the buckle sets off the x-rays), and carry a sweater or blazer.

b. In the seminar itself, most people opt for comfortable over stylish, but this may depend on the type of seminar you are attending. You will dress differently if you are at an event for football coaches rather than for investment bankers. Don’t wear uncomfortable shoes, you may need to walk a long way to get to the meeting room, and always have a sweater or blazer with you in case it gets cold. In a pinch, you can carry your spare shoes in your bag and change in the meeting room!

6. Network and get to know people at the event itself. You may find that you travel to a lot of the same events and can share rides and maybe even share a room at a future event. This not only saves you money, but your experience at the seminar will be much more powerful if you have someone to de-brief with at the end of the day.

I hope that these tips will help you be a more efficient traveler. You will get the most out of your learning experience if you are not stressing about your travel arrangements.

Wow! Am I glad that’s over. That’s the only thing that comes to mind off hand.

I noticed both in the days leading up to the storms and in the days after, that trying times bring out the true character in people. Both Good: people helping to deliver plywood from Home Depot for those without trucks, and people with power bagging up ice for those without. AND Bad: my husband driving an hour for a generator that wasn’t what was promised on the phone, stabbings at a local lumberyard over a cart of plywood, and the cops being called because people are cutting in line at the few gas stations that are open.

I’ve lived in Florida all of my life, and I’ve lived through thousands of storms, but never when I’ve been a business owner and housing provider and have had others depending on me for their life to be normal.

It really makes you think differently as you’re holed up in your boarded up house, listening to branches slamming against your roof (or in my case, watching my porch blow away section by section), and thinking about how your tenants are faring. How many roofs will I have to replace this week? How many units will be unlivable, and how many months of vacancy until I can get them back up to rentable condition? Will my office be damaged? How many days will we be without electric and phones? How will this effect my business and income? How will this effect my employees?

Then comes the moment of truth…breaking the “no driving” curfew to go make the rounds of your properties. Holding your breath as you turn onto your street, and letting out the sigh of relief when you see it still standing. Talk about stress! Doing this over and over until you’ve seen them all. We were very fortunate…the worst we had was fencing down, some small tree limbs, and our patio (which we were going to redo anyway). But then you start thinking…what if it had been worse? Are we covered enough on our insurance? So that leads to Tip #1:

1. Check your insurance coverage every year to make sure you are covered if you need to rebuild completely.

Then you start hearing reports from your friends, family, and fellow investors: Roofs torn off, 6 units flattened (literally), flooded living rooms, damaged cars, and everything else. Then, once the storm has passed, TV brings you pictures of those areas hardest hit, and you realize just how fortunate you were. Which brings me to a wise saying that one of my friends has been know to say (it loosely translates to: Whatever you are living through, it could always be worse)

2. It’s not Cancer!

I’ve heard people saying that maybe they over prepared, since the storm didn’t hit us as hard as predicted. And that scares me that next time they won’t take things as seriously. It’s like the old fable of the boy that cried wolf. The people in the hardest hit areas will argue that any preparation you did was not enough, and you can always drink the waters and eat the soup later. Which brings us to…

3. Whether it’s a hurricane, floods, blizzards, or wild-fires, prepare as if it’s the “big one”

And of course the next thing that comes to mind of any self-respecting real estate investor: How can I buy some of these houses without taking advantage of people that have been dealt a bad hand? Well for starters, you’re only taking advantage of them if you are taking advantage of them. If you are honest with yourself and your sellers, you are helping them out of a bind that they don’t know how to fix, and you are getting a fee for using your expertise. This is one case where you need to decide: do I want to be the early bird into a devastated area and look like a shark, or am I better to wait a few weeks until the media coverage dies down and people have started hearing back from their insurance companies. I think your chances are better a few weeks later when people start to realize what it will take to repair their house. By the way:

4. If you’re OK with taking advantage of people, please stay away from my business, you’re giving us all a bad name!

Oops, I guess I’m up on my soapbox again! Oh well, if my ranting makes you think a little deeper on this thing we call life, or if nothing else, check your insurance coverage this year, then we haven’t wasted our time, have we? To end this on a high note, I have a quick pointer to those of you that are driving neighborhoods looking for suspect houses:

5. After a natural disaster, boarded up houses, tarps on the roofs, and unmowed lawns are NOT necessarily indicators of vacant distressed houses!

Andrea “Andy” Tolbert has been actively investing in the crazy Florida market for over eight years. Her passion is teaching other investors some of the secrets she’s learned in both her investing and her other life as a mortgage broker. She can be contacted at Andy@AndyTolbert.com or 407-328-0970. © 2004 Compass Publishing, LLC

By Andrea “Andy” Tolbert

Lately we have heard more and more new (and experienced) investors saying that they would never pay 10, 14, or even 18% to borrow money on deals when they can get loans from their bank or mortgage broker at 6-8%. Now being that we are mortgage brokers ourselves, we love the fact that you’d rather use us, and you probably assume that we would never use hard money since we have access to every loan program in the world, right? WRONG! We love hard money! In fact we have several private loans on properties right now! My purpose in sharing this article with you is to show you the strengths of private money and why you should be using this versatile tool in your real estate investing plan.

Let’s start by outlining what Hard Money is and what it is not:
Hard Money Is: Also called equity based lending, equity loans, private loans, etc., it is a type of loan where the property is the basis of the loan approval. Most private lenders will loan a percentage of what the house is worth, usually 50-70%, regardless of what your purchase price is. Example: If you are buying a house for $60,000 that is actually worth $100,000, you could borrow the entire $60k purchase price, maybe even a little more to cover repairs and closing costs.

Hard Money Is Not: going to a bank, having your credit pulled, giving them 2 years’ tax returns and a blood sample and hope you’ll get approved (although some private lenders do have credit and income requirements). If an Institutional lender approves you for a 70% loan, it will be based on your purchase price, so in the above example, you would have to put down 30% of the $60k purchase price ($18k) and they will give you a loan of $42k. They don’t care if it is worth $100k or $1 million!

Here are some situations where Hard Money is an option you should consider:

1. House is in very bad repair. Regular lenders will not loan on fixer-upper houses (unless you go with some type of a construction loan, and you don’t want to go there!). Regular lenders always look at one key thing: if I get the house back, is it something I can re-sell quickly?
2. House is being “flipped” to you or contract assigned to you by another investor. Some of the regular lenders will not do a loan on a property that has had a title transfer in the last 12 months. Let’s not argue about the stupidity of this, just know it’s true.
3. You don’t have enough money to get a regular loan, put a down payment, and do all of the repairs. Hard Money will usually give you all of the funds to purchase the property and sometimes some repair money too!
4. You don’t have the credit score to get a regular loan. Private lenders realize that you may have some mistakes in your past, but a good house deal is a good house deal, and you are now on your way to being a real estate mogul!

There are also numerous other benefits to using hard money. Don’t get hung-up on the higher interest rate; if the deal is strong enough, it’s the availability of money that’s important, not the cost of money. (If somebody said they would give you $1million return if you loaned them $100k now, does that sound silly? Not if they can turn your $100k into $10million, then that $900k they gave you is really insignificant, isn’t it?)
You’re only using the money for a short time, and remember, interest rates are expressed as an annual rate, so 12% annual only costs you 6% if you pay it back in 6 months. Besides, if you decide to keep the house, you can always refinance it into a regular loan later. Anyways, here are some of the unseen benefits:

1. Private Lenders do not report to the credit bureaus. This is important for 2 reasons: 1st: Your credit score is affected by things such as number of inquiries, number of loans on your credit, number of outstanding loans, etc., so the less that show up, the less it affects your score (this can be a bad thing though if you have bad credit and want this good mortgage payment to show up as a positive). 2nd: If you do for some reason have a late payment or two, this will also not show up on your credit and will not lower your score. Note: if you have a private mortgage that forecloses, that most likely will show up on your credit since it is a matter of public record which may report.
2. Private lenders usually don’t make you jump through hoops of fire to get a loan approval, in fact, once you have a relationship with them, it’s usually just a matter of giving them the address and they’ll ask you when you want to close!
3. Private lenders can close very quickly, sometimes even in a day or two. If you have negotiated a great deal but only have a few days to close it, regular lenders probably can’t help you.
4. Private Lenders can sometimes be negotiated with on their terms. Maybe you’d rather pay your points at the end of the deal when you sell it instead of at the beginning of the deal when it’s out of your pocket: offer it to them, maybe they’ll go for it! I once negotiated with one of my private lenders in the middle of the deal. I had a property that was taking longer to sell than I had expected, and my cash was running out quickly since I had two other rehabs going at the same time, so I contacted my lender and asked if he would let me defer my payments until the end of the loan (that means stop making payments every month and instead tack them on to the total payoff at the end). To make it more appealing, I also told him I would pay an extra $50 per month for each payment I deferred. He jumped at the offer, and my cash flow problems were solved. No regular lender ever would have gone for that.
5. Private loans can also be in second position. There are several instances where this is helpful, but two that come to mind are: 1. you have a seller that will let you take over their mortgage, but you need some fix-up money, or 2. you can borrow the purchase price from one lender, but need money for the fix-up. Another method is to place a second on a property you already own to get the down payment or fix-up money for a different property.

Hopefully this will show you the power behind private and hard equity lenders. Now do you see why we like them so much? Well, I’ve gotta run…I’ve got to fax a proposal to one of my private lenders on a deal I’m putting together!

Andrea “Andy” Tolbert has been actively investing in the crazy Florida market for over eight years. Her passion is teaching other investors some of the secrets she’s learned in both her investing and her other life as a mortgage broker. She can be contacted at Andy@AndyTolbert.com or 407-328-0970. © 2004 rei123.com

Quick Quiz:

Which of the following could be mortgage fraud?

A. “You’ll get a better interest rate if you say you’re going to live in it.”
B. “Just get a friend to sign a lease for $900 to show more income.”
C. “I’ll hold a forgivable second mortgage that we’ll rip up after closing.”
D. “I’ll slip the appraiser a little extra if he brings it to $10k more.”
E. “We’ll just give you a $2,000 check for carpet outside of closing.”

Answer: ALL OF THEM!!

Do any of these sound familiar to you? They probably do if you’ve been investing for a long time…like more than 2 months! Mortgage fraud is running rampant in our country, and the result is it’s getting harder for legitimate investors to get financed and real estate fraud in general is the reason behind the recent push for legislation which would severely restrict investors, but that’s a whole other topic! The FBI notes that between 2001-2004, the number of mortgage finance violations increased 305%, from 4,225 to 17,127!

Maybe I should step back and tell you what fraud is. Fraud is legally defined as “the misrepresentation of a material fact which is made with knowledge of its falsity and with intent to deceive a party who in fact relies on the misrepresentation to his or her detriment and injury.” From a mortgage perspective to be considered fraudulent, the misstated or undisclosed information must be “material”, meaning that if the lender had known the information, it may have affected the approval for a loan. Fraud can result from written or spoken words, acts, or nondisclosure of information. The range of loan fraud is wide and includes everything from fibs about income and little white lies about assets to elaborate schemes and intricate scams that cost lenders millions of dollars.

The FBI investigates mortgage fraud in 2 distinct areas: Fraud for Profit and Fraud for Housing. Fraud for Profit is where the guilty party stands to make a profit or commission from the transaction and Fraud for Housing is where the buyer acts for the sole purpose of obtaining the property. Current investigations indicate that 80% of all fraud cases involve industry insiders such as brokers, appraisers & title companies.

“It’s not Fraud if I’m gonna make all my payments on time”

Many investors try to justify their actions by telling themselves they’ll never get caught as long as they never make a late payment, and there may have been a time when that was true, but not anymore! In a time where lenders are losing money on every fraud case, they have to safeguard themselves even after the loan closes and one way of doing that is to have agreements with their loan sources to “buy back” any bad loans. So the lenders actually get paid if they catch you!

Let’s jump right to the part where I tell you what not to do. This is not a complete list, but rather some of the more popular ones I’ve heard lately, and I’m skipping the obvious ones like giving a fake employer name, falsifying tax returns, white-out on your bank statements, get the picture? The items loosely follow the quiz questions at the start of this article.

A. Claiming you’re going to live in the property to get a better rate and lower down payment. Do you really think the lender would give you 100% financing at a 5% fixed rate if they knew it was a rental? The lingo they use here is o/o (owner occupied) vs. n/o/o (non-owner occupied) – don’t “accidentally” get them mixed up!

B. Inflating your income on stated and low documentation loans. It is estimated that 50% or more of ‘low doc’ loans have misrepresentation with regard to income. Let’s think this through – a lot of people do low doc loans because they cannot show, or do not make, enough money to qualify for the house. Therefore, they do a stated loan and inflate their income enough to qualify. Stated income, “just tell me how much you make, we don’t verify it” loans are an invitation to lie. I prefer a No Doc or No Ratio loan – this means you leave the box blank where it asks for income. Great Solution! No lying! Typically your interest rate will only be about .25% higher, a small price to pay to avoid possible prison time and a large amount of fines!

C. Having a “Side Deal” or another contract with different terms than the one the lender sees. This usually is thinks like Phantom 2nd mortgages, refunds of down payments, remodeling allowances, personal property in the deal, or just about anything else creative investors can come up with. These things are only fraud if you hide them from the lender, if you fully disclose them on your contract (the same one you give the lender) and they sign off on it, you are okay.

D. In many fraud cases, the appraiser is one of the pivotal players in getting the file accepted. This has led to many lenders being very critical of appraisals. But don’t think just because the appraisal is finished that you are stuck with the value given. Appraisals can be appealed and in many cases changed. Appeals are usually based on a mistake you find in the report (such as square footage), a new sale that has popped up, a sale they missed, or a mathematical error.

E. Every penny involved with your transaction must show up on the settlement statement, also called a HUD or HUD1. If you have already paid for an item, such as a pest inspection or survey, it will still show up, but will be coded as “POC” or Paid Outside of Closing. A better way to get the “carpet allowance” would be to have the seller pay $2k of your closing costs but ask your lender first, not all loan programs allow this.

Article presented by: Andrea “Andy” Tolbert. Read more of her articles at www.RealEstateInvesting123.com

By Andrea “Andy” Tolbert

You’ve found the house and fixed it up. Now what? Without a buyer, you may be stuck paying huge carrying costs for months! So much for profit! So you start your marketing program (yard signs, classified ads, flyers, etc.) and the calls start coming in. Now what? Personally, I don’t want to sit around waiting for the phone to ring. And, when it does ring, I don’t want to waste a lot of time on “Dreamers” with no cash and even less credit. One or two trips across town to show a property to someone with no job, no down payment, and 400 credit scores will teach you really quickly to do some screening on the phone before setting an appointment. Remember: Time is Money!

How can you speed up this process? Well, it is very important to develop a working relationship with a bank or mortgage company. The advantage of an independent mortgage company is that they usually represent multiple leaders and can submit the borrowers’ application to several to obtain the best program. Most will offer a pre-qualification for no charge, but this is a benefit that can quickly be used up. Many mortgage brokers and loan originators are paid based on commissions only, so if you are sending them prospects that are totally un-workable, they will soon start dodging your calls and emails. On the other hand, if you are consistently sending them people that are viable clients, they will love to work with you, and they will not only take your calls, but they will start referring both buyers AND sellers to you!

A few key questions when you first talk to the prospect could save you many hours of waiting anxiously for an answer on someone who was never a real prospect to begin with. A few suggestions are:

1. How much money do you have available for a down payment? (In real life, very few people qualify for the $0-$500 down loans.) Keep in mind this can be more than just cash on hand, it can include gifts or loans from family members, upcoming bonuses, tax returns, loan against a 401k, seller-held second mortgages, etc. I usually ask something along the lines of “is there any other money that you may be able to use for the down payment, like tax refunds, a gift from a family member, or a loan on your 401k?”

2. Establish their credit history. Don’t ask, “How’s your credit?” because their automatic response will be “Good.” Ask specific questions to get to the truth.

a. Have you had a bankruptcy in the last 24 months? If yes, have you established any new credit since?
b. Have you had any cars repossessed? If yes, has it been paid or satisfied yet? How long ago? (Less than 12 or 24 months may be a problem)
c. Have you ever had a property foreclosed? (This is a red flag!)
d. Have you had any payments more than 30 days late on any credit cards or loans in the last 12 months? 24 months?
e. Have you broken a lease with a previous landlord or apartment?

3. Have you been on the same job (or at least same line of work) for two years? Frequent job-hopping and gaps in employment make financing difficult.

4. Are they self-employed? If so, they need to be self-employed for more than two years. Also, many self-employed people tend to write a lot of expenses off their income tax returns, leaving a very low reported income. If they show strong cash flow through their bank account, or have great credit, there are still programs that may work for them.

These tips are not intended to make you a mortgage expert. However, with the answers to these questions in hand, you can quickly find out from your lender whether the prospect is worth pursuing or not, possibly saving you both a lot of wasted time.

One more tip: tell the prospect that you may have a mortgage professional call them for additional information and be sure to find out the best way to contact them. If your lender does have additional questions it will speed up the process if they don’t have to go through you.

GOOD LUCK!

Andrea “Andy” Tolbert has been actively investing in the crazy Florida market for over eight years. Her passion is teaching other investors some of the secrets she’s learned in both her investing and her ‘other life’ as a mortgage broker. She can be contacted at Andy@AndyTolbert.com or 407-328-0970. © 2006 rei123.com