In this market, there are a high number of investors who are buying real estate for cash in this extremely opportunistic market. Many people are buying homes in extremely bad condition, fixing them up and then selling them again. There is one aspect to this process that I would like to suggest. Become the bank! Let’s say you decide to buy a house for cash and then fix it up. You have three options, live in it, rent it, or sell it. It’s likely that you want to rent it or sell it. One of the biggest impediments to selling is a loan for the prospective buyer. It will most likely be an FHA or conventional loan but something could go wrong.

What if you offered seller financing?

Suddenly you open up your buyer pool substantially. I know what your thinking! What if they default??? OK let’s back up. First, you find a buyer, then you do your due diligence. Do they have a job? How many years? What’s their income how much do they have in savings, check their credit. So the point is you won’t be as conservative as the bank but you’re still going to be smart. I would recommend at least a 5% down payment. You use a title and escrow company to complete the transaction. Everything is recorded, legal and on the books. The buyer then starts sending you his payment. Here’s an example. Let’s say you buy a house for $100k cash and you fix it up and it’s now worth $200k. You decide to sell it to a buyer with seller financing.  After your due diligence, the buyer puts $10,000 down and you finance $190,000. The monthly payment is as follows (assumes a 6% interest rate):  Principal and Interest $1,133.48. This is your income. You may say this is less than I would receive in rent, but remember you just received $10,000 up front. Your income for the first year is $23,601.76.

Even if the buyer defaults after the first year, you will still be positive in income and you can sell it again. Most attorney’s will give you a flat rate for a basic foreclosure. Additionally, the legal fees are tax deductible. Even if you have to re-carpet, paint and put in new appliances, it’s still a great deal. I think the benefits out-way the deficits.

Benefits

1. Increase your buyer pool.
2. More flexible than a bank.
3. Use short or long term financing.
4. Be in first position.
5. Charge higher than market rate interest rate.
6. No appraisal required.
7. Someone else is responsible for taxes, insurance, and maintenance.
8. If they default, you get the property back.
9. Legal fees are tax deductible.

Deficits

1. Buyer could default.
2. Buyer may not maintain the property.
3. Potential legal fees for a foreclosure.
4. Possible tax consequences for income.

We are in an interesting situation in the bay area. There is now a lack of inventory on the market and there are a number of buyers waiting for homes to come on the market that want to buy desperately. There is currently a moratorium on foreclosures that has been enacted since June 15 which requires the banks to show that they have worked diligently with home owners and offered them an extensive workout package before they proceed to foreclosure. This law along with previous laws and encouragement from state and federal government have slowed the number of homes coming on the market to a dribble. The low prices that are unprecedented along with low interest rates has encouraged buyers to enter the market. We now are in a sellers’ market.  Now obviously this does not mean that you can price your house at an above market amount and expect to get that price, but it does mean that if you meet certain criteria, you are in a position to capitalize on the current market conditions and meet or exceed the national average of home appreciation over a 10 year period.

1. The first criteria you need to meet is that you’ve owned the home for at least 10 years. On average, a home will double in value over a 10 year period. This means that if you bought your home for $100,000 in 1999, it will be worth approximately $200,000 today. Of course this is a national average and does not account for flexibility in local assets so of course you will need to talk with a local real estate agent to determine the current value of the home.

2. Additionally you cannot have over mortgaged your home. Many home owners took advantage of the high appreciation over the last 10 years and have mortgaged their homes up to the unrealistic values of 5 years ago. In many cases, home owners took out additional mortgages up to 100% of the value of the home. Additionally, the money was not used to maintain the home and instead was used for personal consumption. If you bought your home for $100,000 ten years ago, you should not have used more that 30% of that value. If that is the case, you will be in a good position to sell.

3. The third requirement is that you must have maintained your home. If you have let your home fall into disrepair and there is a lot of deferred maintenance required, you will have to price your home extremely low to attract a buyer. There are a couple of reasons for this. Your home rather than standing alone, is now competing with foreclosure homes. These homes are for the most part in terrible condition. Many must be purchased with cash or financed with a heavy cash down payment. If your home, due to it’s condition will not qualify for all types of financing available, it will not demand top pricing.

4. The forth condition you must meet is that your home must have some sort of attractive asset other than it’s condition. If you live in a great school district, have an amazing view or live on a cul de sac in an area known for home ownership or safety or something similar to these qualifications, you are in a great position to sell your home.

5. The last and most important criteria is that you must be willing to show your home in the most stunning way possible. This means it must look model perfect or as close to it as possible. Staging is a must and can be done relatively inexpensively. You must be willing to paint and repair everything down to the smallest detail. This includes replacing light switch covers, changing those out-dated light fixtures, and keeping the home spotless.

These five requirements will ensure that you will sell your home for the maximum price possible in this current market. I’ve heard a lot of people say, “I’m waiting until the market turns around.” In my neighborhood, home values are approximately $400,000. About 4-5 years ago, they were $600-$700,000. $400,000 is a fair price for the age of the homes. So if you want to “wait for the market to turn around,” you will be waiting about 5-10 more years to realize the “fake” values of 5 years ago.  If you are not ready to sell now then of course this makes sense. But if you need to sell now, if you can meet the above criteria; you will be pleased with the result.

We all remember the way property prices shot through the roof. Those times of skyrocketing appreciation are over. Prices have now dropped precipitously around the country.

Because of the drastic price drop in all areas of real estate, owning rental property makes even more sense now. Most rental property can be purchased with cash or with 25% down under $200,000. Cash flow and rates of return close to 10% are easy to come by in this current buyers’s market especially if you are willing to purchase a property that needs a little improvement before you can install a renter. In the same way property values went up the past 10 years, RENTS will be increasing over the next few years!

Now is the time to own income-producing properties. Home ownership is difficult for many at this time. Due to the tight mortgage market and record numbers of foreclosures, our markets are starting to see a large amount of renters. Just as the housing market cycles, so does the rental market. We are currently in the beginning of the upswing in rental rates. Especially if you are willing to offer a home for rent to someone who has gone through a recent foreclosure, someone whose credit is not good, or someone on section 8, you have the ability to ask for slightly higher than market rates as these renters have a reduced pool of homes to choose from and will look for those code phrases when searching for a rental home.

Have you found yourself wishing you had bought more properties 10 years ago? Imagine how your life would be different if you had taken advantage of the low prices, and purchased more properties. Don’t make that mistake of inaction again by missing this next rise in the rental market!

1. Decide exactly what you want.

2. Determine what you will give in return for that which you desire.

3. What is your definite date by which you will possess this desire?

4. Create a plan to carry out your desire and begin at once.

5. Write it out. Describe your desire, the length of time it will take to possess it, the plan of action and what    you intenet to give in return.

6. Read it aloud twice daily, once in the morning in the morning and again before bedtime.

7. Creat a visual and post it where you will see it often.

Being thankful is especially valuable in challenging times. Gratitude is actually medically proven to lift our spirits and improve our health. Discover how a little gratitude can create a lot of happiness in our lives by following these eight simple steps. They are not difficult and they yield amazing results.
1. Find What You’re Grateful For
The real uncertainty we face about our economic future can make us quite fearful and sad. Locating those things for which we can still be grateful, brings joy even in the face of those challenges without pretending they are not real.
2. Articulate It
Tell a friend or loved one a story about something for which you are grateful. Don’t be surprised to find yourself smiling by the end of that story.
3. There ‘s Always More to Be Grateful For
Consider the difference between wealth and value. While material wealth is important, it is not the only source of real value in our lives. We can all celebrate value, even when the material wealth in our lives is taking a beating.
4. Wealth Begins Within
An ancient teaching reminds us that we are wealthy when we are happy with what we possess.
5. Happiness and Satisfaction Are Different
We can want more than we currently have and still be happy with what we’ve got. Wanting more does not have to get in the way of enjoying what we already have. If it does, we will never have enough.
6. It’s All Relative
A person who lives in a $100,000 house in a neighborhood of $75,000 homes experiences living in a mansion. The same house in a neighborhood of $500,000 homes may feel like a hovel.
7. Help Yourself by Helping Others
Helping others address their needs is one of the best ways to relieve the anxiety we may feel about our own.
8. We All Have Something to Give
No matter how difficult our circumstances may be, we can all offer support to those around us. Whether it’s a penny, a dollar, or much more, the act of giving always makes us feel as if we have more than we thought.

If you have equity in your home, now may be the time for you to buy investment property. Although home values have decrease precipitiously in the past few years, if you have owned your home for more than ten years, chances are you have  solid appreciation right now. Since home values are the lowest they’ve been in recent years, you can use some of that appreciation you’ve built up and be fairly certain that the value of your home is not going to drop much more. Also, if you stick to borrowing only up to 50% of the total value of your home, you will still have a lot of wiggle room if values do drop a little more.

Did you know that you can actually gain wealth faster by investing your home’s equity even if you are only receiving the same return on your money as you are paying in interest on your mortgage due to tax write-offs on mortgages?

Lets assume an investment of 20% on a property (20% down payment), and that the property increases in value at an average rate of 4% annually, that translates into a 20% annual rate of return for the amount invested. With property value increases in the double digits as we have seen in recent years, it is not uncommon to see annual rate of return on investments above 50%.

As with any other investment strategies, there are risks associated with cashing out home equity. However, one can minimize some of the risks. By making certain that he can afford the new, increased mortgage payments without depending on the income from the investment, the homeowner would not be in a financial tight spot regardless how his investment performs in the short term.

Property values are such that if you purchase a rental property with 20% down, the potential cash flow is extremely attractive. For many years, cash flow was almost non existent with rental property unless the investor put about 40-50% down. Now, unless you can document your cash flow, don’t buy the property.

Are you confused about the tax credit available to you for buying a home this year?

The following is a cheat sheet on the criteria for using the federal tax credit. Please be sure to consult you tax preparer for more details.

1. The amount of the credit is 10% of the cost of the home to a maximum of $8,000. That pretty much covers most people in the Bay Area.
2. Any home purchased is eligible for the credit.
3. The credit is refundable. This means that you will receive a refund for any unused portion of the credit. For example, if your total tax liability is $5,000, then you will get the remainder of the credit as a refund.
4. There are income limits that apply to the credit. Individuals must have an adjusted gross income of less that $75,000. Couples must have and AGI of less than $150,000.
5. Buyers must not have owned a home within 36 months or the last three years of tax return information.
6. Buyers will not have to repay the credit as long as they own the home for at least three years.
7. The credit will be available until November 30, 2009.
8. This credit was effective on January 1, 2009.

1. Huge profits while demand and prices are low!

The lack of competition in the market right now allows investors to negotiate great terms, get lower prices, and find more deals. 

2. The right properties WILL Sell!

There has never been a larger demand for entry-level housing. By finding the Highest and Best Use of a property, investors can create large amounts of affordable housing. 

When we maximize the potential of a property, the future value of the property skyrockets. The secret is to acquire a property at the low “current value”, and THEN expose the Highest and Best Use or higher “future value”. Doing this creates affordable Entry-Level housing by adding density in areas with that potential.

 3. Rents are rising, Rising, RISING!

Smart investors will own cash-flowing rentals in the near future. Jjust as property prices soared over past 5 years, RENTS will be increasing over the next few years! 

The national market is creating a LOT of renters. With low purchase prices, and rising rents, cash flow has never been better.

 4. Sellers are very flexible right now

Right now, sellers have more urgent needs, and are more willing to agree to things like Seller Financing, longer closings, and other negotiated terms.

 Remember, Seller Financing is often even better for the seller than it is for the buyer. Don’t forget to educate sellers you work with on this point!

 5. Know how to see the “vision” of foreclosures

The vast majority of foreclosed properties are single family residences with bad financing. For most of these properties the only options are traditional foreclosure techniques. These are not the type of properties we are looking for.

 However, there is another large segment (15-20%) that have upsides most investors don’t see. When a foreclosed property has an unexposed Highest and Best Use, THAT is the kind of foreclosure we want! An example is a single home on half acre of land. Another is a home on a lot actually zoned for a much higher density. Foreclosures can be a great way to find deals with this kind of potential.

Sellers are looking for the deal and psychologically believe they are getting a deal by buying an REO. Whether they are or not, remains to be seen. I’ve seen a property with obvious foundation problems be listed at $240,000 close for $310,000. Another property listed at $325,000 closed for $360,000 and the buyer redid the entire foundation after purchase. The house is on a busy street and a corner and the other houses on this street are listing and closing closer to $300k. 

Many times, the bank owned homes need a lot of work and can be a worse deal than slightly more expensive ready to move into homes. Many people don’t realize that the difference between a $300,000 home and a $350,000 home is less than $300 a month difference in payment, including taxes and insurance. There are tax incentives to owning a home that can make that difference up in more take home pay. 

Many people looking for the deals think, they’ll buy it cheap and do all the work themselves over time. Well, my experience tells me that the work will never be done. For the entire time you live in the home, you will be working on the home. For a small group of people that might be a great idea but for the majority of people out there, they want to spend their weekends with family having fun not constantly working on their home.

Additionally, constantly having to fix your home is a costly decision. Many times doing repair items piece meal is much more expensive than doing the work in one fell swoop with a licensed contractor. You will probably spend that extra $300 a month payment on all the repairs you will be doing. 

So don’t be afraid of the slightly more expensive well maintained home. It’s probably a better deal than that cheaper REO next door.

If you are trying to sell your house and you are in the rare situation of having bought your property long enough ago that you have plenty of equity, you may be in the difficult situation of having to compete with the REO’s and shortsales out there that are listed well below market value. This means that even if a property is listed at $250k, it will mostly close above asking.  If you price your property at the market price, then you run the risk of no one looking at it.  Recently a client was listing his condo that he purchased 17 years ago.  The condo was priced well for the current market, but after three months, no offers came in and the home owner was unwilling to price the property any lower. 

The original plan was to rent the condo.  This client purchased a house and was going to keep the condo and rent it out.  He was going to rent it to a family member but unfortunately that plan fell through and the HOA rules precluded him renting it out to a non family member.  I continued to encourage him to be the squeaky wheel with the homeowners association and try to obtain special dispensation to rent the condo.  The client was the longest resident of this condo and I was certain he could get them to change their minds if he was persistent.  As it turned out, there is a financial hardship clause in the HOA rules and if nothing else, we are certainly in current financial hardship.  He was able to obtain temporary approval to rent the condo. 

If you are in a situation where you want or need to move and you have equity and would prefer not to sell your house right now, consider renting it out for the next few years until the market takes a turn towards more of a sellers’ market.