What is a “Flip” anyway?

As the real estate market heats up again, people seeking quick profits by “flipping” properties are coming out of the woodwork. Experts worry that they are going to hurt the California market, but what is a flip? As it turns out, there are good ones and bad ones. A Good Flip, is one where a junker property is purchased, improved, and resold. The improvements can range from upgrading kitchens, bathrooms, and paint, to complete home renovation, including all major systems, landscaping, and possibly adding substantial square footage. In these situations neighborhoods are improved, as eye-sores, or even abandoned homes are replaced by desirable homes, with new owners that ultimately reshape the community for the better.

What is a Bad Flip then?

Bad Flips were common in the last real estate run up before the bubble popped. These were represented by scenarios where people purchased property, and then resold it quickly thereafter for a profit. The distinguishing factor is that no inherent value was being added by the “flipper.” No work was being done, and nothing was improved. This only works when market conditions are such that appreciation is occurring so rapidly that people are encouraged, and able to take advantage of it.

Another bad scenario is when competition for fixer upper property gets so stiff that people (often newcomers to the flipping world) buy properties for far more than they can buy them for, and reasonably expect to make a profit. In other words, the less experienced, or the careless investor comes to rely on appreciation to make deals work. Without substantial rapid appreciation, fueled by buyer frenzy, these flippers would lose money.

The bright spot on the real estate horizon this time around is that in order to obtain property to flip, substantial amounts of money are needed in the form of down payment and rehab budget. Gone are the days when banks freely doled out money to overpay for a property, and overspend to fix it up. In today’s world of tightened lending guidelines, people have to prove that they qualify to borrow money. They also have to demonstrate that they are likely to be able to rehab a property in a timely, and profitable fashion.

Flipping is sexy. The prospect of making large profits over a relatively short amount of time will always bring people into the fray. And when rapid appreciation makes it seems easy, everyone wants to get in on the action. With today’s more responsible lending standards, one can be hopeful that flippers won’t push the market out of balance too quickly. But one thing is certain: When Flipping has the attention of the nation again, as it does today, the market is in for a wild ride.

How Does 12% Sound?

Over the last few years it seems like there isn’t much to be excited about when it comes to finances in the Good Ol’ US of A. Every time you turn on the television, click on yahoo, or read a magazine cover (possibly while standing in line to buy groceries) you’re hit with something negative:

  • Unemployment Up
  • Unemployment Down (But not far enough)
  • Foreclosures are Rising
  • Gas Prices Rising
  • Rents are Rising

You get the picture…

How is your retirement doing? Last I checked, my wife’s 401k at work was earning about 3%. Lousy. My friend’s actually lost money last year.

But one smart investor I know just averaged about 12% annual interest by lending me the money to buy the Highland Park Bungalow I posted last month. He made a simple loan secured by real estate. We found the property, fixed it up, and resold it in a matter of months. He got the full amount he invested back, plus interest. He earned more in a few months than my wife’s 401k did all year.

Wanna learn how? Call me for more details.

This month’s mailer was filled with strategies to help you maximize your efforts whether you needed to buy OR sell a home.

Here is a link that pertains to one particular point for sellers: Price Reductions.

Although due to strong demand it might seem absurd in some areas, in others, price reductions are still very real. And if your realtor didn’t help you to price the home correctly out of the gate, then there can be even more trouble. Click on this link for important facts about “How to Get Your Home Sold.”

Case: Highland Park Bungalow

This cooler than cool Bungalow will have Whole-House Sound, a Giant Back Yard, Super Sweet Kitchen with Island Bar, and a Master Suite that opens onto a 300 sqft deck!  How’s that for summer parties?

Highland Park

Is it a Good Time to Buy? Yeah, I think so.

Rents are going up! – I got a referral a few weeks ago to someone who probably had the ability to buy a home, but instead was looking to rent. There weren’t any extenuating variables such as an upcoming relocation, or jeopardy of job loss. This guy was the perfect candidate to buy something, but he thought that by renting he was making a better “financial choice.” I scratched my head and said “OK.” A good personal choice for him and his life? Who knows. A good financial choice? Nope. Doubt it. You can take your chances in a rising rent environment, or lock in a mortgage payment based on a combination of record low interest rates, and some of the most affordable real estate in decades. Take a look at the following L.A. Times article to see what’s going on out there. (Click Here)

This month’s mailer was all about home repair, the value of doing it, vs. not doing it. I’ve included a link here that gives a bit more detail about hiring professionals for regular maintenance. Check out this little follow up to the mailer. Avoid the High Cost of Wear and Tear. And Oh, By the Way… If you need a referral to a great contractor, plumber, electrician, chimney repair service etc. give me a call. I know everybody!

Sweet Bungalow in Highland Park – Just to illustrate further, what deferring maintenance does to you when you want to sell, I present this bungalow in Highland Park. I picked it up for only $215,000. I put in about $100,000 to bring it back to new, and I’ll be selling it in July for somewhere in the neighborhood of $400,000. How much more could the sellers have made had they only done regular maintenance on the property? $40,000? $50,000? You get the picture.

Countdown to Higher Taxes on Short Sales and Foreclosures

The Mortgage Debt Relief Act of 2007 is set to expire in December. What does this mean?  Basically this: For those those of you who are facing a potential foreclosure, or short sale situation, the government has been offering a holiday on the capital gains taxes that could potentially be incurred as a result of the event. This will be ending soon.

This is how this all works in plain English. If you short sell a home or lose it in foreclosure, and that home is worth $500k, but it only gets $400k, then the $100k difference has traditionally been considered a taxable event. This means that if you are in, let’s say the 28% tax bracket, you could owe somewhere in the neighborhood of $28,000 in federal taxes! Although the government has not been enforcing this practice since 2007, it is scheduled to recommence taxing the heck out people at the end of this year.

So here’s the take away – If you are facing a foreclosure, or you might have to short sell a home, start working with a great real estate agent now to list those homes and get them sold before the end of the year dead line. The savings difference to you could literally be tens of thousands of dollars.

… I know a great agent you can use.

Sell Your UGLY Run Down House for Full Price!

Do you own a home that has seen better days? Can you see daylight through the ceiling, but never even installed a skylight? Have you been thinking you would like to sell that junker, but you just know you wouldn’t get anything but a bunch of low-ball offers?

How would you like to sell that thing for full pop, top dollar, full market value or above?

Ever hear of an Equity Split?

An equity split is a unique transaction wherein an investor (like me) literally becomes your partner to help you sell your home. He brings brings in enough cash to help you move out, cure any legal issues (like an impending foreclosure), and renovate your property to the exact specifications that make the home buyers in your area to go absolutely nuts.

Gorgeous rehabs create excitement. Both during and after the rehab, your investor partner uses unconventional marketing techniques to help create a frenzy of hungry buyers. When the time comes to sell, there is already a waiting list of people hoping to get an early in with your old (and formerly ugly) place.

So what does this look like to you?

Here is an example of how this could work. Let’s say you have an old 2 bedroom 2 bath Highland Park Bungalow that needs tons of work. If you put that property on the market today it would have a value of about $215,000. After all the costs of selling – we’ll use 8% – you would net about $197,000.

An Equity Split would look something like this:

The new all fixed-up sale price of your sweet new pad would be about $405,000. We’ll use the same 8% for cost of sale, leaving us with $372,600. The costs to fix up the property, help you move, cure foreclosure, etc. might be $110,000, leaving $262,000. You and the investor would split the difference between that number and the original $197,000 you would have gotten from selling the property before it was all fixed up.

In other words you would net over $230,000. That’s $30,000 more than you would have originally! So there you have it.  Top dollar for a bottom of the line house.

Call me for more details

Capitulation II

In my last post I mentioned the trend of homeowners finally giving up on their properties, and just resigning themselves to letting their homes get foreclosed on. This has been happening even when homeowners have a great deal to lose – tens of thousands of dollars for example. I also mentioned a couple in Alhambra who were about to let their home go into foreclosure, but who by working with us instead, earned about $40,000. A happy ending, as it were.

Today I am going to talk about another man who gave up on his property. I will call him Clarence. I knocked on his door on 3 separate occasions. Each time I saw him, he was polite, but told me that he had the situation under control. He told me that he was going to refinance to cure the foreclosure. To get to the point, he did not refinance. He did not qualify for a refinance, as I had told him on two occasions. The last time I saw him was about 8 days before the auction date.

On that occasion he looked sad, but was still polite. He told me that he had given up. He said that the house was going to be foreclosed on, and that was that. I knew that this man had about $140,000 in equity. Immediately I told him that I could help. But to my dismay, he declined. He was just too tired of disappointment, and frustration. He could not bring himself to do one more thing regarding the house.

Eight days later the house was foreclosed on. He moved in the middle of the night, and did not leave a forwarding address. He did not earn one penny to help move forward with his life.

I mention this as a cautionary tale. When in foreclosure, it is best to get the help of a professional early. And even though everyone hopes to get a modification and save their home, it is important to realize that most people will not qualify for this. When in foreclosure you need to know about ALL of your options, including liquidation for the most money possible. If and when the time comes that your first choice does not work, knowing your next best option in advance can give you the strength to move forward, and not give up on the very strategy that can put money back in your pocket.

In the world of foreclosure, the endings are not always happy. But you can almost always set the limits on damage control.

Capitulation – Fight Foreclosure!

To capitulate means to give up, or to stop resisting. More and more I see people who are giving up on their homes, giving up on their options, and have stopped resisting the tide that leads to foreclosure. I hate to see this, especially when having your home foreclosed on, and sold at auction, is almost ALWAYS avoidable. Take my clients in Alhambra for example. I will call them Bill, and Mary.

I met Mary by knocking on her door – a habit I practice when looking for likely candidates in need of the assistance of a real estate professional like yours truly. Like many people, when she opened the door, she immediately dismissed me. There was something very different about Mary however.

Most people tell me (erroneously) that they have already taken care of their situation. Mary did not say that at all. In fact, what she did say seems to me to be becoming more common among distressed homeowners these days. She said that there was nothing that anyone could do to help her, that she had given up, and that she planned on just letting the house get foreclosed on. She motioned to the long deferred maintenance that the house so badly needed, as she said so.

This was distressing to me, especially considering that I knew that there was a way that the foreclosure could be avoided. Even more importantly, we practice a strategy that would allow her to walk away with some money in her hand. In this case it would be somewhere between $20,000 and $40,000.

We recently signed a contract with the family to do just that. But I loathe the thought that although we were able to help this family, there are thousands of others just like them that will end up doing just what Mary and Bill were planning on doing – just giving up.

I use this example to illustrate the stark difference in the alternatives that were available to this family. Scenario #1: The house gets foreclosed on. The family has to move very quickly, or get thrown out by the sheriff. They walk away with nothing. Scenario 2# We step in and stop the foreclosure, give them time to find a place to move to, and hand them a check as they leave.

Not everyone will have the same success that this family did. There are many ways these things can happen. But if you give up, you will not know what could available to you.

Moral of the story: Do not capitulate…and call me if you know someone who needs help!

How to Write a Hardship Letter

If ever a homeowner is trying to obtain either a loan modification or a short sale from a bank, he, or she will be asked to prove that there is a hardship, which makes paying the existing loan at its existing terms impossible. One of the primary pieces of information the bank will need to ascertain this is the Hardship Letter.

Although it might seem self explanatory, I have seen some pretty wild letters come by my desk, as well as countless questions about how to write one of these. Indeed, there are some things that really need to be in there. So, here is a little guide to helping you write a Hardship Letter if ever you need one.

First, you must really have a hardship. Don’t laugh. I don’t want to pay my mortgage anymore, is not considered a Hardship. There must be something concrete that is problematic for you; something in your life that has changed for the worse, since the time you originally obtained the mortgage. Some examples:

  • Job Loss
  • Divorce
  • Death (Yours or someone else’s who used to help pay the mortgage)
  • Salary Reduction
  • Reduced Hours at Work
  • Injury or Disability

Second, you must ask for whatever it is that you want in the letter. Specifically, if you want a modification, state that you would like a modification, and for how much. If at some point you are turned down for the modification, and realize that you will have to sell a house that is upside down, then you will need to state that you no longer want a modification, and that you now want the bank to accept a short sale.

Third, conclude by stating that if the bank does not allow whatever it is that you are asking, then you will surely go into foreclosure. This makes it clear that you are not going sell your children, rob a bank, or go to any other extreme means to pay the loan. You are done paying, come what may.

The format should pretty much be:

  1. I used to make X amount of money, making it easy to pay for my loan.
  2. I had Y happen in my life, which now causes me to make a lot less money, making it impossible to continue paying my loan.
  3. It is for this reason that I would like you to accept a (Loan Modification/Short Sale).
  4. If you do not do this, the house will surely go into foreclosure.

Sweet. Short. To the point. Hope this helps.

Foreclosure Timeline

As I speak with people in foreclosure, I have come to realize that almost no one I talk to understands what “foreclosure” really means, and that it is a process with rules that must be adhered to. I am going to lay out the most important steps in that process in hopes that you will gain confidence in working your situation out, by knowing exactly what you are dealing with.

Step 1 – You have missed at least 3 payments.Even though this technically isn’t a part of the foreclosure process, this must happen before the process can begin. It is standard practice for a bank to begin the foreclosure proceedings after you are 90 days late on your mortgage. *Note – In today’s crazy environment it is not uncommon for banks to wait substantially longer before initiating foreclosure.

Step 2 – Notice of Default Filed. This is the official gun that sounds the beginning of the process. The NOD is public record, and announces to the world that you are taking the first step towards foreclosure. This is a legal step. It gives legal notice to other creditors, and lienholders for example, that your home – which may serve as collateral on a lien they hold – is in jeopardy of being sold at auction. You are supposed to be notified of this step by mail, but if you aren’t, it doesn’t change anything.

Step 3 – Notice of Trustee’s Sale Filed. This typically occurs 90 days after the NOD is filed. This is when the actual sale date is set. It is a notice to you and the world that the property is scheduled to be sold on a particular date. That date will typically be 14-20 days from the date the NTS is filed depending on your state. If you add the time up there are basically 111 days from the time a property enters foreclosure (NOD status), until the day it is sold. Usually. an announcement is posted on the property.

Step 4 – Expiration of Right to Reinstate Loan – All the way up until this point, you have the legal right to reinstate your loan, and continue to abide by its original terms. More simply put, this means that you can pay off all of your back payments, and penalties, and then go back to paying your old monthly payments. 5 business days before the sale date however, your Right to Reinstate will expire. At that point, you could walk up to your bank’s accountant with a cashier’s check, and they don’t have to accept your money. Now, these days, banks have been known to accept money and reinstate the loan even the day of the sale, but it’s important to know that they don’t have to.

Step 5 – Trustee’s Sale. As early as the 111th day after the Notice of Default was filed, the home can be sold at public auction to the highest bidder. In Trust Deed states like California, there is no redemption period in which you can reclaim the property. In other words, once it’s gone it’s gone. There are a whole slew of attorneys who would have you believe that they can get the house back for you after the fact by “unwinding” the foreclosure. The fact is that this is extremely rare, and usually a waste of time, possibly a waste of money, and almost always a set up for falsely raising your hopes, and following up with big disappointment.

There are more subtle parts of the process, but these are the most relevant ones for homeowners. If you have a grasp of these steps, it helps put things in perspective, and allows you to make educated choices when planning your way out of the foreclosure mess.