11.20Flipping: Not Gymnastics, But Lots of Exercise

‘Flipping’, in real estate investing lingo, is nothing more than buying a property and selling it again quickly, hopefully for a healthy profit. It’s not illegal, it isn’t even unethical — it’s just business, and that can be done either way.

The belief that flipping is illegal, sometimes the result of media stories designed more to excite than illuminate, comes from the practice of attempting to deceptively inflate the market value of a property, falsify documents, and/or collude with others to defraud a buyer. That’s definitely unethical and rightly illegal. But that’s not flipping, that’s plain old fraud perpetrated by plain old con men.

To flip a property, you first have to find one that’s flippable. That usually involves finding either a ‘fixer-upper’ and ‘fixing-upping’ quickly for a rapid sale, or finding a buyer that’s eager to sell at a bargain price.

Talk to friends and relatives, business contacts, bankers, real estate professionals, or anyone else who can give you a lead to a bargain. Sometimes, simple driving around the right areas will allow you to spot one. Look for those ‘For Sale By Owner’ signs or knock on doors.

Alternatively, public records sometimes contain references to ‘fire sales’, and — if you dig deep enough — occasionally to property owners finding it difficult to make their mortgage payments. When you find one and they agree to sell, you’re getting something you want — a property that might turn a profit. They’re getting something they want — relief from an unsustainable debt burden. Nothing unethical about that.

Some deals are possible that don’t even require you to put your name on the title. You can ‘double-escrow’ a buyer who wants to remain living at the property. Double escrow involves taking a very long escrow — longer than say 90 days — and reselling the property during the escrow so that both deals close escrow on the same date. In a rapidly rising market, the buyer can then take advantage of the increase in the sale value of the property.

Always have your financing in place, if needed, and be prepared to move quickly.

You can ‘flip’ by entering an agreement to purchase a property, then selling the contract to another investor before close of escrow. You pocket anywhere from $500 to $5000 and don’t even need to find financing.

To be successful at flipping you need to master a steep learning curve and look honestly within.

You need to learn how to spot a salable property and to learn to judge buyers. You need to learn a little about property repair, which usually involves doing some yourself. That means finding out about plumbing, carpentry, and other skills that usually aren’t the first love of investors.

You need to have an active personality — flipping involves dealing with lots of details in a short span of time. It also means having or developing a high tolerance for risk. Stressed buyers aren’t usually the most calm, reasonable people to strike deals with. They often have poor credit and can back out on a deal at the last minute.

You need to hone negotiation skills and develop relationships with contractors and lenders, especially the kind that can be relied on to move quickly when you need them to. You should have a trustworthy accountant and a responsive attorney, unless you already have these skills.

You need to learn a fair amount about contract and real estate law, and study the tax consequences of buying and selling properties within a short time frame.

Whew! And you thought your business was a tough racket.

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11.19Creative Financing For Investors

For decades the way to finance a property purchase was 80-20, 20 percent down, 80 percent on loan. Certainly, there have been many who put more down, but 20 percent was considered the bare minimum. Happily, things have changed.

There are now a dozen or more ways to finance a property purchase, whether for pure investment or primary residence. One common method is to have more than one loan, usually in the form of a second mortgage. The buyer puts 5 percent in, and effectively borrows the other 15 percent on a separate loan, usually at a much higher interest rate.

While it’s nice to invest less for the same property, the downside is not limited to the higher interest rate on the second mortgage loan. Since the buyer doesn’t meet the standard 20 percent minimum, lenders almost always require PMI (private mortgage insurance). Fees are usually hefty.

Though it’s theoretically possible to have the lender remove the PMI requirement after enough payments have been made it rarely happens. In theory, once the loan(s) have been paid down so that the LTV (loan-to-value ratio) is at 80 percent — usually by a combination of paying down the second mortgage and appreciation of the value of the property — the lender will be willing to consider removing the PMI cost from monthly payments. Most often, before that happens, the loan is refinanced or the property sold.

The ambitious can find other sources of financing. When considering property in a new development, such as a planned community or new housing tract, manufacturers will often be willing to fund a home loan for early buyers. Such loans are frequently available at only 5 percent of the purchase price.

For the really daring it’s possible to ‘buy’ a property, then sell it, without ever owning it — at least not for long. It’s possible to buy a property, establish a contract, and then sell the contract for anywhere from $500-$5,000 without ever taking possession or even being on the title. Profits are usually smaller, but obtained quicker, though deals require excellent credit.

‘Sub2′ deals are another form of creative financing. The typical ’subject-to’ deal involves having a seller deed you the property while leaving the existing mortgage in place. You never legally assume the loan, but simply start making the payments. There are lots of variations on this new way of buying property. Not recommended for the beginner.

You can finance a property investment by forming a limited partnership. Arrangements cover the spectrum. In some, each partner puts up some percentage of the cost, usually half and half, but sometimes profit is apportioned according the original percent invested. In some cases, it’s possible for one partner to invest money, while the other(s) performs services —— such as repairs on a ‘fixer-upper’. The deals are as varied as people.

For those with low incomes, or military service, or other special circumstances various government loan programs are available — though they’re usually limited to individuals intending to occupy the property.

It’s even possible to fund a property purchase with credit cards, but there are several obvious downsides to this method. Apart from the substantially higher interest rates, lenders look at all outstanding debt when judging whether to grant a loan on the remaining balance. Taking out a cash advance to cover a shortfall between the needed 5-20 percent down will usually get you turned down.

Friends, family, and other sources of money are usually viewed the same way, unless you can prove to the bank that the money is a gift and not just a loan.

Mortgage lenders have seen it all! Don’t try to fool them.

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11.18From The Lender’s Point of View

It’s a hard fact but although lenders may be friendly, they are not your friend. This doesn’t make them bad, it just means that they — like you — are engaging in business, not social relations. Though they will often decide in your favor on a borderline case if you have a long-term working relationship, this is not charity, but an intelligent business judgment. They have good reason to believe you will be able to repay the loan at a profit to them.

That last sentence is key to understanding — and avoid much frustration with — lenders. They need assurance that the loan will be repaid and they need some reasonable expectation they will make a profit. A lender will try to fulfill those two criteria the same way anyone would — by looking at past history and current facts.

Past history means: Credit history, including number and size of loans taken out, repayment history and so forth. FICO scores and other hard data are available in abundance and will be looked at.

It also includes income history — how much profit have you made on other investments and over how long a period? They’ll examine income statements and at least three years of tax returns. They’ll want a full accounting of outstanding debt and any legal judgments gained or issues in progress.

Overall, this is summed up in one word — experience. Have you previously shown you can and will repay a loan, which requires not only good character but good business judgment? Real Estate is a tough market, there’s a lot of competition because there’s a lot of potential for making money. The lender will want to know you can make some, so they will too.

Current facts get examined with equal care. The lender will examine the appraised value of a property on which they’re considering loaning money. Banks as a rule do not lend based on collateral, they are looking for cash flow and positive income. They’ll usually finance no more than 75% of the appraised value of the property.

Most lenders will put a limit of 50% LTV (Loan-to-Value) on undeveloped land, for example. If the property contains commercial structures, they’ll want to know what income can be expected from those businesses — whether it’s in the form of rent from a multi-dwelling apartment complex or lease income from small business owners.

And, of course, profit is income retained AFTER expenses, so they’ll need to know how much it costs to maintain the land and commercial structures. Insurance, repairs, taxes and a host of other costs come along with any property ownership. The lender will want to know you can pay these AND pay their interest charges.

Most lenders will strive for shorter repayment periods, 20-year fixed is on the long side for many investment loans, and often a balloon payment after five or ten years is required. Longer terms benefit you because you can avoid paying for new appraisals, origination fees and other financing costs.

If your lender seeks a shorter period, you should try to arrange re-pricing at the end of five years, rather than having to come up with a large amount of cash. Something along the lines of “prevailing prime rate plus a 1% premium” is often an acceptable alternative.

Lenders may not be your friend, but neither do they have to be an enemy — they can be a kind of partner. Keep in mind, everything is negotiable.

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11.17Benefits of an Economic Recession

A lot of people think that an economic recession is bad. While that is partly true, there are certain benefits.

When the economy is in recession, it won’t be long that you will get a check from the Internal Revenue Service or IRS. This may amount from $300 to $1,200 which is the government’s way to help the economy.

If you are wondering how much you will get, compute for this using the economic stimulus tax calculator. This is considered to be a rebate so if you didn’t get it this year, you will in 2009. This was done when the economy was in recession in 2000 but most of the checks came in when the economy was recovering a year later.

During an economic recession, majority of bonds and stocks are undervalued. This means it is bargain to buy them right now so go for it! Before you go on a shopping spree, find out which company’s shares will do better once the economy recovers. With that in mind, it will be easy to decide which one you should invest in. It is also possible to buy new homes when the prices have gone to an all time low.

One solution to curb the economic recession is for the Federal Reserve to lower interest rates. This means that as long as you have good credit ratings, you will be able to borrow money from the bank.

As a consumer, an economic recession brings tax breaks. What happens is that you don’t have to pay the IRS that much this year because of a deduction for private mortgage insurance which happens to be an extension of the sales tax write off and also a boost in the alternative minimum tax exemption amount.

If you are still working, an economic recession may also increase retirement account limits. You can do this by using your rebate check to turbocharge your retirement savings and investing this in a Roth or Traditional IRA. Some people have decided to invest it in both.

Should your gross income is $100,000 and below, you can now roll over your 401(k) directly into a Roth IRA without having your funds go through a Rollover Traditional IRA first. But if your income is above $100,000, just wait until 2010 when the income limit disappears so that you too can invest this into your retirement account.

There are people who say that an economic recession is also good for the environment because the consumer will be forced to cut costs. People will more likely trade in their sports utility vehicles or SUV’s for more fuel efficient vehicles. This in turn will reduce the number of carbon gases that are released into the air. Unfortunately, industries won’t be able to do the same.

Instead of going to the store to buy something you like, more people will order and purchase the same items online thus increasing business over the web. The same goes for advertising because it is much cheaper to do this online that billboards or newspapers.

There are benefits to an economic recession even if many of us see that nothing good comes out of it. The only consolation is that it is only temporary and the economy will recover by late this year or early next.

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11.17Investment Strategies

According to one study 23 percent of all homes sold in 2004 were purchased as investments. Considering the historical returns, and the high percentage increase in prices over the last few years, this shouldn’t be surprising. But there are several ways to profit from an investment in property.

‘Flipping’ is the practice of buying property, then selling for — hopefully — quick profit. The flip side to flipping is keeping property for the long term to take advantage of tax incentives and capital appreciation. Calculate the total costs vs amount saved from tax write off. Don’t forget to include interest charges, property taxes, insurance, repairs, etc., along with the regular monthly payment.

Remember that property values have risen in most markets for several years. But with interest rates increasing no one can predict how much higher they’ll go nor for how much longer. No gain without risk!

Apart from gains from a tax write off and appreciation, some costs can be offset by renting the property. But, consider the amount of time and cash you have to find tenants, manage the property, and pay for or perform repairs.

Foreclosures are another investment avenue, but also not without risk and often requiring substantial cash outlay. A foreclosure occurs when a property owner is no longer able to make payments on a mortgage, usually over a period of several months. But seldom are foreclosed properties all gain and no pain.

Foreclosed properties tend to be in need of repair — someone about to lose their home isn’t usually incented to maintain it in pristine condition. Be prepared to spend time and effort bringing the home back to salable condition, if you have the skills, or laying out cash, time, and effort to find a reliable contractor.

Similar considerations apply to investing in abandoned property, with some possible additional legal hoops to jump through. Foreclosed properties usually have clear title. The lender (a bank, mortgage company, or other financier) reclaims title as a part of the foreclosure process. In the case of abandoned properties, it may not be clear who has title. Factor in the additional time and cost for title searches and possible legal action.

For those who want to take advantage of profit opportunities in real estate, but without actually laying out cash, signing dozens of documents, or worrying about the physical property, there are purely paper investments. As a result of computerization and the explosive expansion of investment options in the 1980s, several types of ‘monetization’ of real estate came into existence. REITs (Real Estate Investment Trusts) are one type. There are others — mortgage backed securities, property bonds, trusts, mutual funds, and stocks oriented specifically toward real estate. Before investing in any of these ‘non-property’ options, talk to a broker.

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11.16FSBO or Agent, Which Is Best For You?

With the growth of the Internet, the prospect of ‘going’ FSBO — For Sale By Owner — as a method for selling your home is more attractive than ever.

One of the largest expenses involved in selling a property is the payment of an agent’s commission — often in the 6% range. But agents do earn their money, by providing expertise on the market and sales process, by advertising widely and by assisting in the negotiation and closing phases of a sale.

Still, 6% of $200,000 is $12,000 and many find the prospect of keeping that money for themselves irresistible. Here are some things to consider when deciding whether to use an agent or ‘go’ FSBO.

In order to sell a property quickly and profitably, you have to know the market. If your listed price is even 1% off the average you will either sit on the property for a long time or fail to make as much as you could have on the sale.

Beyond the need to get an accurate, professional appraisal — required whether FSBO’ing or using an agent — agents can provide ‘comps’ listing the recent sale price of comparable properties. They also know the market and can often tell you whether your price is reasonable.

However, with the increasing availability of similar information on the Internet, FSBO is becoming a more realistic option. If you can access and analyze the data, FSBO may be for you.

Agents put your property in a database called an MLS, a Multiple Listing Service, to which other agents as well as potential buyers — through the agent — have access. MLS data is more difficult for the average person to gain access to and in some states you need a license to obtain the data. Almost in every case, one is required to be a member of the MLS service and pay a fee.

This is only the first step toward advertising your property far and wide to potential buyers. But, again, with the growth of Internet sites advertising homes for sale, along with other traditional options, you may find you no longer need the service once provided almost exclusively by agents.

Some individuals are natural negotiators and some have learned through long experience how to attract buyers and get the best deal. Some, though, will always be on the losing end of a proposition. Only you can decide how effective you can be in negotiating a fair, acceptable price and whether that process is enjoyable or torture.

Once you’ve listed the property, advertised it widely enough to attract buyers and negotiated a price one will accept, the most difficult part of the process begins. Every state and country has a long and complex list of laws about how a real estate transaction has to be carried out.

Deposits have to be made of the right amounts and at the right times in an escrow account, and insurance regulations have to be met. Title history is investigated and a hundred other details completed before ownership can be transferred and profits (if any) gained. If you don’t have the knowledge or temperament for this sort of thing, FSBO is not for you.

But, on the bright side, there are dozens of books, Internet sites, and low-cost ’seller assistance’ businesses that can guide you through the process, often at a much lower cost than agent commissions.

Investigate before you decide, and best of luck.

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11.15Maximizing Return

Buy low, sell high. Anyone in any market aims for that, but few succeed. The only reasonable conclusion is it’s easier said than done. So, to be part of that group of ‘we happy few’, consider some of these ways to maximize your return.

In any business deal there are essentially only two ways to achieve the highest profit — keep your costs as low as possible, and attract the highest bidders.

To keep costs low going in, do as much yourself as possible. Two areas to start on are inspections and repairs.

Acquire the skills, and even licensing, needed to perform professional level inspections. Professional inspectors get up to several hundred dollars for a thorough review and detailed report. And they earn it. A good inspection can save you thousands in the form of foregoing falsely attractive deals and providing negotiating bargaining chips.

After the purchase, carry out any repairs needed yourself — to the extent you can do professional level work. Be thrifty, but not foolish. Amateur repairs lead to larger costs down the line. Shop around for low-cost quality roofing materials and superior carpet deals. When you can’t do the work yourself, seek out skilled handymen from small outfits. Companies whose prices include overhead for bonding of employees eat into your profits.

Shop around for low-cost loans with lesser known lenders. Major banks and mortgage companies tend to have higher fees and less than competitive rates. Never pay anyone an ‘application fee’. Perform the same exercise with respect to title and insurance. You’re not required to use anyone the lender recommends.

Once you’ve selected them, don’t passively accept unnecessary fees with ridiculous prices. In today’s world it’s absurd to pay $50 to deliver a few dozen papers across town, but tacking on charges like that is common practice. Take your time looking for property, lenders, title companies, insurance brokers, agents, etc. Shop as carefully as you would for a new car — no more so, you’re investing much more.

Educate yourself about real estate law and basic accounting. Professionals in those areas charge large fees — and earn them. Good advice costs heavily for a good reason. These professionals can save you thousands by avoiding costly mistakes. But you can perform many of those services yourself if you’re willing to study. You don’t need a law or accounting degree, just an active mind and a lot of patience for detail.

When you’ve found an attractive property, negotiate firmly but in good faith. Be willing to state clearly what you want and prepare to compromise. Individuals who feel they’ve been burned often find ways to sabotage your profits in ways you discover only later.

When you’re on the selling side, perform the same thorough shopping process and negotiate agent percentages, closing costs, and other high-ticket items.

Prepare the property for sale at the maximum price by investing in a few flowers and having the property thoroughly cleaned. Leave the lights on even during the day. Put on some “mood music” at a low volume; put out some attractive flyers with photos and little snacks for visitors.

Market your property heavily to get a large pool of interested buyers. Competitive bidding always benefits the seller. Be willing to take your time during the process. He who is most eager, makes less.

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11.15Tough Career Choice

Set your own hours, spend a lot of time outdoors, make lots of money. Sound good? With a career in Real Estate it is possible to have those things. But free lunches are hard to come by and this is no exception. Being a Real Estate Broker or Agent is a tough career choice.

Realtors (Agents, Estate Agents, Brokers and other legal categories which vary by state, country and license or experience level) all face many of the same challenges every day. Since property transactions are complex, filled with legal requirements and human factors, and usually involve significant amounts of money, agents have to negotiate a labyrinth of often murky details when closing every deal.

Part businessperson, part psychologist, part friend and always far too busy, an agent participates in every phase of a transaction. He or she needs to know the local and larger market, have at hand an encyclopedic knowledge of related law and oversee dozens of details on several simultaneous deals. And all this while sometimes working from early morning until late at night, any day of the week.

Sales, of course, is central to any successful agent’s career. The ability to initiate, negotiate and close a deal that’s acceptable and fair to all parties is a skill with many facets. Enthusiasm and the desire and ability to work with people is a paramount.

But a sale starts before a property is listed and doesn’t end when the agreement is reached. Before properties are listed they’re discovered, appraised and compared. When agreement is reached, a new phase begins involving escrow accounts, title companies, insurance requirements, inspections and a host of other complex undertakings. In between, properties have to be prepared for sale and advertised and potential clients sought and brought for showings. And you thought brain surgery was complicated!

Since real estate transactions usually involve large sums, individuals involved can and often do get very upset when things don’t go exactly as planned. And things rarely go exactly as planned when so many things have to happen just right, many of which are interdependent. Keeping everyone satisfied, or mollifying them when they can’t be, and moving the process forward requires a very special set of skills.

There are also definite slow sales periods, sometimes a particular month, sometimes longer, where there may be lots of activity and a hundred things to do but few sales to show for the effort. This is especially true given the continuing amount of fierce competition from the large number of agents in the same geographical area. In 2004 in the U.S., brokers and agents numbered about 460,000, many of whom worked only part-time.

And all for a commission of a few percent. Although the potential for a high income is definitely present, particularly in the healthy market of the last few years, many agents make much less than many think. In the U.S. the middle 50 percent earned between $23,500 and $58,110 per year.

But on the upside, and there assuredly is one, there are those attractive features mentioned at the outset. For the entrepreneurial type, the freedom to set one’s hours, to take risks and reap rewards consequent with one’s own efforts and the varied locations and kinds of activity can be extremely gratifying. And sometimes the money isn’t bad, either.

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11.14Keeping a Close Eye on the Online Stock Market

For those who have not been able to find success, this may be because you have not been online consistently. You shouldn’t even take a break; because the computer should be online and hooked up to the Internet so that you can make quick decisions. You will also want to find a way to keep an Internet connection for a long period of time without having any technical glitches.

You will also want to keep a phone handy so that you can start trading. This will help you to make the most out of your time and you’ll also find that the updates are best online. You will be able to find out what’s in and what’s losing before you make any decisions. You will want to make sure that you consider the stock market and compare it to the country’s economy. This will help you to turn online stock trading into a successful business.

You will also find that when it comes to the pros of online trading, you will want to keep in mind that you are able to do all of your business in the comfort of your own home and while sitting at the computer with a nice cup of coffee. You’ll also find that because it is down purely through the net you don’t have to spend a lot of money on your work wardrobe. These are just a few of the pros to doing some online stock trading.

You’ll want to take some time and learn some basic knowledge about things like GDP or gross domestic product, foreign investment, and also the politics of the stock market. This information will help you to understand what is necessary to make this adventure a successful one.

You’ll find that there are many necessary business decisions that you’ll have to make. It is important that you take the opportunity to make the most out of your money.

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11.13Timing Buying and Selling

Buying and selling real estate is similar to timing other investments —  stocks, bonds, mutual funds. But there are two important differences.

Most investments can be bought or sold within minutes at the market price. Buying or selling real estate takes months. That difference introduces interesting wrinkles in timing when to buy or sell.

Like other investments, selling at a high point, with the intention of buying back in at a lower price, is one way to make a profit. Here again, the difference in time required to complete a transaction makes life more interesting.

It’s usually easy to sell a stock, wait a day or a month and buy that same stock at a lower price. When that stock continues to rise, there are often others that have declined but can now be predicted to rise again. The real estate market rarely offers those kinds of opportunities.

The other difference is that companies differ but most stocks are alike. Real property is always unique.

Selling requires one to either acquire a new residence, wait for a new opportunity to enter view, or buy back in at a higher price, hoping for yet greater increases. Along the way the costs of getting in and out are substantially higher than a few dollars for a stock trade.

So, what to do?

One clue is provided by the historical fact that many have and continue to make good money in real estate — even though the market has gone through several cycles over the last few decades. That last piece of information gives another clue — think long term.

There are several strategies for improving your timing options. One is to acquire property at bargain prices, either through seeking out foreclosures, or looking at property requiring substantial repair.

If you have patience, it’s possible to find foreclosures that sell for anywhere from 25% to 35% under current market for that area. Read local newspapers and websites for Notice of Default listings and upcoming auctions.

It’s also possible to find areas where sellers tend to be leaving, but there is some likelihood of a turnaround. The latter is possible — previously depressed neighborhoods in Manhattan, such as the Lower East Side, now sell at a premium. Areas in other major urban centers have experienced similar turnarounds. Again, you will need to research and think long term. Look for political activity of urban renewal efforts.

If you’re good with tools or know someone who works inexpensively it’s possible to acquire property needing substantial repair. Fixing a leaking roof, and repairing water damage through installing new drywall and painting, can increase the sale price of a home by 10% or more.

One key to making any of these strategies, and many others, feasible is to have as much working capital available as possible. That doesn’t necessarily mean having a huge savings account. You need to be liquid and have access to money, not necessarily in your own account. Keep liquid, keep your credit rating high, and establish a good working relationship with a lender in order to have rapid access to financing.

Opportunities for profit, even in a market that’s leveling off from historically high rates of increase, are still around. But only for those who are willing to exercise patience, do tons of research, and have the ability to walk away from any deal when illusions meet reality.

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