Sunday, April 24, 2005

Landlords Finally Get Support From Feds

In the world of real estate investing, the worst nightmare is the reptilian tenant who slithers into your investment and starts abusing your rights as a landowner, by using tenant law to support their own lack of a backbone. What I am referring to, is the tenant who never intends to pay for rent and, furthermore, doesn't care about the property and continues to damage it throughout their stay.

Most court systems and tenant laws favor the tenant over the landlord in their dealings with cases between the two. If you ever find yourself involved in this scenario (as a landlord) you need to be prepared for a rough financial ride. For those with mortgages on their property -- you need to be ready to make those payments without the support of the renters' money. And until your case is settled, there's generally nothing you can do about it.

Thankfully, the U.S. Congress has passed a bankruptcy law this week that creates more balance between the rights of tenants and investors in apartment dwellings. In addition, it creates safeguards for those homeowners who face bankruptcy.

Several national associations in the building and real estate arena are excited that S. 256 (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) passed -- one of those is the National Association of Home Builders.

Now, I can here the consumer advocates now, bemoaning the fact that this gives more control to landlords over their tenants and less compassion toward a set of people who are in financial distress. On the other hand, I would point out that it creates a better line of accountability for those who have gone down a path of financial suicide -- so that they don't take land owners with them to their demise.

Noting that the Senate approved the same measure last month, NAHB President David Wilson, a custom home builder from Ketchum, Idaho, said, the bill contains two beneficial provisions for apartment owners and homeowners.

"First, it would stop an abusive practice under current law in which delinquent tenants facing eviction can file for bankruptcy, triggering an automatic stay that requires the property owner to stop all eviction proceedings -- even if the tenant is damaging property or involved in illegal activity," he said. "And second, it recognizes that states should have the ability to set homestead exemptions at levels they deem appropriate."

NAHB reports, that under current law, a tenant is able to exploit the protection of the U.S. Bankruptcy Code's "automatic stay" provision to forestall an eviction, and could remain in a rental property for months without paying rent until a bankruptcy judge lifts the stay."

"These tenants drive up housing costs for the vast majority of residents who pay their rents on time," said Mr. Wilson. "At the same time, they are also threatening the economic viability of rental properties, particularly subsidized housing properties that have thin operating margins."

One of the best provisions of the bill is that it establishes clear procedures for speeding up cases in federal bankruptcy court, in which a tenant has defaulted on the lease agreement for failure to pay and then files for bankruptcy.

Under the new law, in future bankruptcy proceedings, homeowners who file bankruptcy within 40 months of buying would find that their equity is no longer afforded unlimited protection from creditors. Now, no more than $125,000 of home equity can be protected from creditors, and after 40 months, existing state homestead limits would apply ("Homestead exemption" is a state statutory exemption that protects homestead property, usually to a set amount, against the attachment rights of creditors. Property tax exemptions for all or part of the tax are also available in some states).

"This provision represents a balanced approach," said Mr. Wilson. "It gives each state sufficient leeway to set their own threshold and prevents a debtor from shielding assets by purchasing a home in a state with an unlimited homestead exemption."

Published: April 22, 2005

Making, Saving Money Key Points In Real Estate Ownership

For the first time home buyer, the question will come up at some point -- should I wait to purchase at another time? Will the home prices drop? Will they escalate more? Will interest rates drop/increase?

These are all very valid concerns and I'm not going to waive them off, point to historic appreciation of real estate overall and tell such a buyer to just dive in. For those in an escalating market, buyers are always afraid of buying now and then having the market turn, leaving them caught with a mortgage worth more than the house. It's happened in the past to some buyers and it will happen in the future -- it's just a natural ebb and flow of the real estate cycle.

Unfortunately, someone's going to get caught between an out of control market and it's demise to a buyers market. It's bound to happen. Nevertheless, you must look at the basic structures of a sellers market to determine if it will continue -- job growth and supply of houses. If the job growth is on the upswing, but the supply is not matching this growth, then that's a good sign that the escalation of prices will continue. When you start hearing about rebates, free upgrades, and cash back from new home builders, the market is discontinuing its upward swing and turning to a buyers market.

Nevertheless, there are several other reasons why the ownership of real estate, despite the market, is a wise move.

Regardless of the direction of the marketplace, homeowners will always be able to build equity through the paying down of their mortgage. As you move closer to the end of your mortgage, you actually have something to show for it (unlike the renter counterpart). For those who own property for a prolonged period of time, the equity grows in two ways: through debt reduction and through inflation. While homeowners may not stay in the same house and pay off the mortgage in that home, the equity build up provides them with the funds for an even larger down payment for that final home where the mortgage will be paid off. At some point, you will owe less than the value of the home and eventually, it could be completely paid off.

If consumers get caught in a declining market, historically, it's usually for the short-term and it will recover, continuing its traditional inflationary move upward. This equity is probably the largest part of most Americans' financial make up -- thus the American dream of homeownership.

That appreciation is the second reason why homeownership is a great place to put your monthly income. Most people have to pay some sort of amount of money for living somewhere -- it may be a mortgage payment or a rental payment. If you're renting, then you're not letting your income work for you. Instead, you're providing income for someone else through that rental payment.

As your home appreciates, the return on your down payment and the cash you're paying into that home each month, continues to increase.

For instance, if you purchase a home for $200,000 with 10 percent down, your $20,000 down payment is now going to increase in value according to the leveraged amount of $200,000. Thus, if it grows at 3 percent per year (which is half of the national average) the cash return the first year is $6,000 -- that's a 30 percent return on your $20,000 down payment. As each year passes -- the return on investment grows and grows.

A third part of the wealth-building power of real estate is through the tax savings/deductions you'll receive for purchasing a home. For most tax payers, the interest and taxes paid on a home is completely deductible from your income -- thus creating a huge reduction in your tax bill. You'll never get that benefit from renting.

Finally, if you're investing in real estate, another benefit of owning real estate over other investments, is that with a renter -- someone else's money is growing the above three benefits. The rental payment is increasing the equity, allowing the benefit of appreciation, and paying the taxes and interest on the mortgage.

Published: April 15, 2005

Wednesday, April 13, 2005

Mortgage Fraud Creating Multiple Fixes: Be Aware Of Their Tactics

One of every five loans in today's market are sub-prime -- meaning these are loans to consumers whose credit is substandard. A sub-prime mortgage means it has tougher terms for the borrower, such as higher points, higher interest rates, and high private mortgage insurance premiums as part of the mortgage payment. It is in this arena that you will find a practice called "predatory lending."

Before moving forward, let me emphasize that many of the sub-prime mortgage programs in the field are legitimate. Consumers with bad credit have the opportunity to purchase a home under these programs albeit, with less than stellar terms. However, when you've missed payments, filed bankruptcy, taken on too much debt, etc., you are not going to receive the best of terms. When everyone else is paying a 5.75 percent rate, you could be paying 8, 9 or 10.

The U.S. Department of Housing and Urban Development lays out how to recognize predatory lending practices. These "mortgage professionals" may try to:

Sell properties for much more than they are worth using false appraisals.

Encourage borrowers to lie about their income, expenses, or cash available for downpayments in order to get a loan.

Knowingly lend more money than a borrower can afford to repay.

Charge high interest rates to borrowers based on their race or national origin, and not on their credit history.

Charge fees for unnecessary or nonexistent products and services.

Pressure borrowers to accept higher-risk loans such as balloon loans, interest only payments, and steep prepayment penalties.

Target vulnerable borrowers to cash-out refinance offers when they know borrowers are in need of cash due to medical, unemployment, or debt problems.

"Strip" homeowners' equity from their homes by convincing them to refinance again, and again, when there is no benefit to the borrower.

Use high pressure sales tactics to sell home improvements and then finance them at high interest rates. They may use strong-armed and alarmist techniques, such as telling you they are your only chance of getting a loan or owning a home. If you find that the house you are buying costs a lot more than other homes in the neighborhood, but isn't any bigger or better, this would be a sign of predatory lending.

Other tactics include:

You are asked to sign a sales contract or loan documents that are blank or that contain information which is not true.

You are told that the Federal Housing Administration insurance protects you against property defects or loan fraud -- it does not.

The cost or loan terms at closing are not what you agreed to.

Being told that refinancing can solve your credit or money problems.

You are told that you can only get a good deal on a home improvement if you finance it with a particular lender. Over the years, states and localities have piecemealed legislation to protect its consumers from those who would prey on their constituents. And now a couple of national bills have been introduced in the U.S. Congress to bring all these rules in line to close loopholes that allow predatory lenders to exist.

The Responsible Lending Act is one of those bills, introduced this session by Congressman Bob Ney (R-OH), Chairman of the Subcommittee on Housing and Community Development, and Congressman Paul E. Kanjorski (D-PA). The Coalition for Affordable and Fair Lending has published a clear summary of the bill on its web site, stating the bill will "cover far more loans, add many new protections for covered loans, strengthen penalties for violations, apply limited liability in certain instances to secondary market purchasers of loans (so-called "assignee liability") and set uniform national standards by preempting state laws dealing with these issues."

If you believe you've experienced mortgage fraud, there's a way to find out through, where you'll find a survey on mortgage fraud practices. In addition, by entering your zip code, you will be directed to your state and local commissions where, you can report acts of fraud.

Be a smart consumer, know who you're dealing with. The best way to protect yourself is going with a reputable professional who belongs to an accepted industry association, such as the Mortgage Bankers Association of America and the National Association of Mortgage Brokers.

Published: April 8, 2005

Friday, April 01, 2005

Tax Liens Provide Safe Real Estate Investing Option

You've been reading about it, listening to late-night shows and hearing about your friends making the jump into real estate investing. But you just can't bring yourself to taking the plunge into owning property, collecting rent, taking repair calls and possibly having a renter who won't pay the rent or take care of your property.

Never fear -- tax liens are here. For those who want a more conservative, methodical approach to real estate investing, you may want to consider one of the least risky ways to invest in real estate. reports that "$7.6 billion dollars in delinquent property taxes are created each year with total size of the market at any given time being in the $20 billion dollar range. There are 566 municipalities that sell municipal liens in New Jersey alone."

About 31 states issue tax liens, and the industry is growing at a rate of 8 to 12 percent per year, according to the Florida-based web site.

If you decide to pursue this investment option, be sure to conduct due diligence in your research. I appreciate the website's approach in that they do not promise extraordinary returns, such as 100, 500, or 1,000 percent on investor money, rather it points out that research and investigation are necessary to make the desired returns.

"Tax lien investing should be looked at as a modest return, lower risk investment. Goals should be set between 10 and 15 percent as a net return each year," according to the site, and it provides those who are skittish about the traditional method of real estate investing to take on a partner with the local government to create more than average gains on your money.

Tax liens can be purchased for as little as a few hundred dollars to tens of thousands of dollars. A simple explanation would be that you're paying someone else's taxes today while the issuing municipality (city or county) is pursuing payment from the landowner. Once they get their tax dollars, then they pay off the investor with interest. Keep in mind that about 98 percent of tax liens will indeed be redeemed by the property owners -- that means that most tax lien investors are going for the return of 10 to 15 percent net return on their money, rather than the hope of foreclosing on the property (which happens, as well, just not as often as you would think).

The internet has plenty of sites that deal with the practice and process of investing in tax liens. Your first move would be to go to one that lists what states actually issue tax liens, then drill down from there. What you're seeking are the local contacts you'll need to pursue the tax lien purchases (which are generally sold at a live auction), says Brian Lee, creator and webmaster of His company, Iron Clad Realty Services, is a professional services firm, that has purchased more than $23 million in tax liens, in six states, for its institutional investors, as well as completed more than $6 million in acquisitions in the secondary market for clients.

"Your best contact, to pursue tax liens, is the local tax collectors' office," he says, adding that the search for the tax liens is only the first step in acquiring this type of investment. Once an investor acquires a tax lien, then there is a redemption period where the jurisdiction allows property owners to eventually pay their back taxes -- that redemption period can run up to two years in some states.

If the property owner doesn't redeem the lien, then the process moves into the tax deed sale stage. (Reminder: the majority of tax liens get paid.) It is at this time that the foreclosure proceedings can begin and the tax lien holder can take possession of the property. Every state has different rules and regulations, thus research is key. Other web sites for research include: More than 5,000 tax sale lists published, both deed sales and lien sales.
Tax Title Services, Inc.: Helps tax deed purchases get clear title and insurance for properties acquired through tax deed sales.

Published: April 1, 2005