Should You Invest In Foreclosures?

Periodically I hear from readers who want to make $1 million in real estate -- quickly and with no money down. Usually they want to know more about real estate foreclosures -- how to buy them and how to profit from such homes. I've participated in a couple of these deals, and I'm now working on my second million -- I gave up on the first.

Foreclosure properties can be a good place to invest for exponential growth (or loss). There are some deals out there for little or no money down, but potential investors should take precautions because foreclosed properties can involve significant risks.

There are various ways to invest in foreclosure properties. The first and probably most popular is to purchase a property, fix it up and then rent it out, hopefully creating a positive monthly cash flow. The investor then becomes a landlord, with all the responsibility of an investment property owner.

The second way to invest is to seek out foreclosures or "handyman" specials, buy them, invest more money to fix them up and then sell them, taking -- hopefully -- a profit once the house is sold.

A third approach is to purchase a foreclosure that is underpriced and selling it immediately at a higher value.

One way to sell homes for a higher value is to take back a mortgage. For example, let's say a house worth $100,000 is sold at a foreclosure to an investor for $50,000. The investor may put down 10 percent and assume or create a new mortgage for $45,000. The investor then advertises the property at a discount, say $80,000, offering 100-percent seller financing (remember, we're figuring that like houses are worth $100,000).

The owner hopes to create a sense of urgency by underpricing the house and pulling in buyers.
If successful, the investor takes a promissory note from the new purchaser for $80,000. He has now created a $35,000 note for himself (The difference between the $80,000 sale price and the original $45,000 mortgage). The new buyer makes payments to the investor for an $80,000 loan and the investor makes payments on the original loan for $45,000. In real numbers, here's what it would look like.

If the original loan is for $45,000 at 8 percent over 30 years, the principal and interest is $366.88. When the second buyer takes a note for $80,000, the investor may charge a bit higher interest since he's offering 100 percent financing.

Let's say he offers an $80,000 loan, 9.5 percent over 30 years. The monthly payment is $672.68, creating a positive cash flow of about $306 per month.

If the borrower stays in the house for 30 years, the investor will make $88,295 in interest and $30,000 in capital gains after he's paid his own interest on the first note for a total return of $118,295. Not a bad return on a $5,000 downpayment.

Keep in mind that not all mortgages allow an owner to "wrap" a second mortgage onto original loan. Most loans today contain a "due-on-sale" clause, meaning if the property is sold, the first trust must be paid off immediately. Wraparound financing is popular when investors purchase foreclosed Veterans Affairs (VA) properties as the VA allows wrap-around loans in such cases.
Before you go out, checkbook in hand and ready to bid away, take some advice first.
If you're deciding to invest in foreclosure properties with a spouse or with other investors, be sure that everyone understands this form of investing. You are about to enter a world of high finance, property management, calls in the night from tenants and other risks that regular homeowners never experience.

Second, get educated. Reading this column does not constitute preparing the first-time investor to start bidding on properties. There are plenty of real estate agents and auctioneers who do this on a daily basis and would be happy to educate you in the world of foreclosure properties. Also, visit the bookstore for guides by reputable authors who know investment intricacies.

• Third, be realistic.
• Not all foreclosures are good deals.
• Not all foreclosed properties are available at discount.
• If you take back a loan your buyer could default.
• Most loans today prohibit wraparound financing.
• Repairs might be far more than you expect.
• Not all tenants pay their rent on time -- or at all.
• Some renters damage property.
• Changing interest rates could impact your bottom line.
• It may not be possible to re-sell the property without extensive -- and costly -- repairs.
• Not every deal yields a profit.
• If you have a profit you may face taxes.
• If you only look at foreclosures you may miss other investment opportunities.

The list of potential downers goes on...and on and on.... Think of it this way: If making money with foreclosures was both easy and a sure bet every time, no one would bother with IPOs -- or jobs.

Fourth, get professional help from brokers, lenders, attorneys, accountants, home inspectors, and others.

Whew! The market's turning

We are ahead of last March at this time by about 10%. Foreclosures are the hot commodity right now, drawing multiple offers left and right. This week, we were involved with two foreclosures -- one had 10 offers; another 13.

Prices are stabilizing and moving upward in some areas in the DC market. I'm seeing the same thing happening around the eastern seaboard. See my piece on http://www.realtytimes.com/ (http://realtytimes.com/rtpages/20080305_condotrends.htm) about the bottoming out of many markets across the country.

Report: Best Time To Buy In 4 Years

By Tim McLaughlin

According to a report released by CNN this past week, it may be the best time to buy a house in more than four years.

Valuations on home prices (the difference between what a home should cost and its actual price) are the lowest they've been since 2004, according to the report.

The Cleveland-based bank National City Corp, together with financial analysis firm Global Insight, revealed Tuesday that more than 88% of the 330 housing markets surveyed showed improved affordability during the last three months of 2007.

"Housing valuations are almost back to long-term norms," said National City's chief economist, Richard DeKaser. He called current affordability "the best in the past four years."

The report compares actual median home prices with what the authors determine are proper home values based on population density, relative income levels and interest rates, as well as historically observed market premiums or discounts, to determine whether markets are over or under valued. The report also factors in market intangibles that make some areas more desirable places to live, and more expensive.

The survey covered home valuations during the last three months of 2007, but DeKaser pointed out there's reason to believe that valuations are even more favorable for buyers today Interest rates, although they have inched up lately, have been steady or lower compared to late last year, and are certainly lower than historical norms.. There have even been wage gains; personal income rose 0.5% in December.

Takeaways: With the spring market upon us, economists and industry experts appear to be in agreement regarding the current value proposition regarding residential real estate and the strength in buying opportunities vs. any point in the foreseeable past. The home of your dreams in well within reach and more obtainable today than ever before. Fair market prices, affordable interest rates, and the most knowledgeable team of financial consultants can make that dream a reality. At Weichert Financial, with an array of product options and the expertise to assist, we are here to help. What can we do for you? It pays to ask.

Tim McLaughlin is senior vice president of secondary marketing for Weichert Financial Services.

Whose Fence Is It Anyway?

By M. Anthony Carr
Property line issues have suddenly cropped up in the emails I've received in the past few weeks. It appears that homeowners are more aware of their property lines (specifically if a neighbor is violating it) during the spring and summer months than at other times. As we get out there and trim limbs (from the neighbor's big oak tree), mend the fence (which is actually the neighbor's), and try to clean up unsightly encroachments on the line, we become aware that the guy next door hasn't kept up with his property and now the problem is personal.

Keeping up with local fence laws, good neighbor regulations, even your local home owners' association rules can keep relations between you and your neighbors a lot more healthy.
One reader wrote that he spent "a weekend helping [my neighbor] take down and erect a new fence. After that he asked me to pay for half the fence, stating that all his other neighbors on the other sides of his property had pitched in to pay as well for their respective sides."

He was now worried that he had just signed up for some sort of legal liability if someone got hurt on the fence, the fence got knocked down by a tree, etc., now that he "owns half" of the fence.
Local jurisdictions have funny rules about fences, trees, etc., and who's responsible for them in case of damage or destruction. That's when I go to FindLaw.com to do some real estate research.
On this particular issue, they actually have a whole section on dealing with neighbors and the property lines under their real estate section. As far as the fence is concerned, "Unless the property owners agree otherwise, fences on a boundary line belong to both owners when both are using the fence. Both owners are responsible for keeping the fence in good repair, and neither may remove it without the other's permission," according to the site.

The part of this story that has the reader upset is that he wasn't asked to pay for the fencing until after the neighbor had already picked out the wood, style, etc., and paid for it, thus locking him into a certain price range and style of improvement to the property.

Keep in mind, your local laws may be different. Visit the local building code office to find out your responsibility before hammering away at your neighbor's fence or expecting your neighbor to help pay for a replacement fence.

Another reader has a problem with a backyard property that's nearly 100 years old and just looks really bad. "Our issue is that the neighbor that shares the other side of this wall has 2 different constructions that are not only viewable from our yard, but also have additional roofing or siding that attaches to our side of the wall."

In essence, the neighbor just kept tacking on to the existing aged structure that was already there. Both the residences had purchased these properties with these structures in tact -- so if it's that old, is it violating the law or not? Is there a statute of limitations on really ugly fencing?
Again, FindLaw points out a couple of laws you may have on your side to keep badly constructed or really ugly fences from continuing to plague your community.

"As long as a fence doesn't pose a threat of harm to neighbors or those passing by, it probably doesn't violate any law just because it's ugly. Occasionally, however, a town or subdivision allows only certain types of new fences -- such as board fences -- in an attempt to create a harmonious architectural look. Some towns also prohibit certain materials -- for example, electrically charged or barbed wire fences."

"Even without such a specific law, if a fence is so poorly constructed that it is an eyesore or a danger, it may be prohibited by another law, such as a blighted property ordinance. And if the fence was erected just for meanness -- it's high, ugly and has no reasonable use to the owner -- it may be a "spite fence," and you can sue the neighbor to get it torn down."

What's not talked about here is the fallout from one neighbor forcing another neighbor to rebuild, repair, or tear down an existing structure. In a subdivision environment with quarter-acre plots and less, we would like to think that all neighbors would keep up their properties to a certain standard. If they don't you have to make a decision on whether a clear view out your kitchen window is worth the relationship that may be damaged through the process.

However, it never hurts to ask, point out the law and see how they react.
_________________________
M. Anthony Carr
Weichert Realtors
Manager, Burke/Fairfax Station
9299 Old Keene Mill Road
Burke VA 22015
(703) 569-7870 ext. 160
Change Your Thoughts, Control Your Life.
Click for Anthony's Latest Blog Entry

Mortgage Limits Increase Provide Buyers Opportunity

By M. Anthony Carr

Congress has spoken on the economic stimulus package and that means most of us are going to get a nice little check in the bank – complements of yourself (it’s your money anyway, right?) Included in the package is a section that will increase the loan limits for conforming home mortgages. Without getting all financialezey on you, it means that higher loan amounts will come with lower interest rates. That will help more people to purchase in high-priced areas like here.

Where the loan limit used to be $417,000 for the Washington, D.C. metro area, it looks like it will move upwards to $562,500. (They will go into effect March 14, 2008.) Any mortgage below this amount is called a “conforming” loan – it conforms to established guidelines so that the mortgage can be sold on the secondary market (usually on Wall Street). Loan amounts above the $562,500 will now be considered “jumbo” loans, which are subject to more stringent underwriting guidelines and potentially higher interest rates. By raising this limit, loan amounts that were previously jumbo now come under the more affordable guidelines, making it easier for buyers purchasing in high-cost areas such as Northern Virginia.

When you’re talking interest rates of under 6%, you’re talking a lot of savings for many, many buyers. The catch is (and there’s always a catch!) you must apply for the new mortgage BEFORE December 31, 2008.

So what? What does that mean to you? Three things:

1) if you’re considering a move up or refinance, you MUST have your application signed, sealed and submitted before the end of the year.

2) If you need to sell your house first, before taking advantage of these new features in the market, now is the time to fix it up and prepare for the selling process. And,

3) government-backed programs (FHA and VA) are also following these new loan limits.

Blog: http://commonsenserealestate.blogspot.com/

BTW: MILITARY RESIDENTS: Are you or a colleague preparing for your next PCS? Weichert Financial can get you VA financing up to $700,000 for qualified buyers. Call me for help alleviate the stress of the pre-listing/pre-purchasing process.