CHAPTER TWO:
What are you looking to invest in?
Now that you know who "you are" and that, you have the stomach to invest in real estate, what types of real estate should you acquire? Yes, there are different types and steps you can take to purchase real estate. Let go over a few.
The Traditional Foreclosure Process
This type of real estate purchase usually occurs at the courthouse steps. You bring your boatload of cashier's checks, bid on the property, and turn over your money. The home is yours, lock, stock, barrel, including the previous owners occupying the property. This is a very difficult process, as you have to know which loan is foreclosing, are there any property taxes due, IRS liens, etc. The experts spend hours of research and make it look simple, and evaluate each property to its potential. If this is your bag of tea, then please conduct a lot of research with someone of great knowledge. You will need to get your team in place before you start making your first bid. First, you need to be able to search for foreclosure listings. I use www.foreclosureradar.com and find it very easy to use. It has all the information you will need. The next team member will be a Title Rep.; I use Lawyers Title, Sarah Elliott and her team. They are able to provide me with up to date information on the loans and any other liens on the property. You will then need a bag full of money, whether it is your own, an investor, or a group of investors. If you are the successful bidder then you will need an eviction company to deal with the current tenants or owner of the property. You might be able to offer them "cash for key" to get out quickly or you might have to go through the eviction process. Tenants still do have rights after a foreclosure, so check with your state laws on notices and procedures. Lastly, you need a crew that will go into the home and make all the repairs and improvements necessary in quick order. The usual turnaround time for a project is 10-14 days. Time is of the essence. Good luck and Good hunting.
Equity Share
An equity share is a joint purchase of property and is an offshoot of the joint venture. In an equity share, one party, called the Occupier, occupies the property. The other party, called the Investor, provides the down payment of funds.
- Have written agreements in place when you invest in this and any other fashion.
i. Who pays what in an equity share?
ii. Will the Occupier be on title to the property, or will they just really be a renter?
iii. What happens if the investor or occupier stops paying on the mortgage?
iv. If you are the investor, think of yourself like a bank. Would you make a loan to this person? Would you trust that this person is going to pay you every month?
Land Trust (http://site.landtrust.net/)
Via a unique documentation system that utilizes the (Illinois-type) title-holding land trust model, North American Realty Services (NARS)[1] is able to provide the professional real estate community a truly exceptional and safe vehicle for acquiring, selling and dealing with single-family Real Estate (1 to 4 units)...without standard down-payment requirements, without a new loan, without credit applications and/or credit history issues. Owner-Carry financing can at last be accomplished safely and conveniently without undue lender compromise relative to contractual transfer and alienation admonitions (i.e., in regard to the "Due-on-Sale Clause": see Garn-St. Germain 1982, FDIRA, 12USC 1701-j-3).
Lease Option (http://www.johnburley.com/)
Very similar to the Equity Share & Land Trust discussed above. However, the tenant occupier of the property never goes on title to the property, but there are separate written agreements that will lock in the price and transfer title upon successfully completing the terms of the agreement. Often used for those clients who may possess a low FICO score, but have a sufficient down payment. Not really a preferred use in California.
Bank Owned Homes
This is a very profitable area of real estate investing, but there are also rules and expertise needed to make profits. The lenders foreclose on these homes and then they turn around and place it back on the market with a price reduction. Local real estate agents usually offer these homes for sale and patience is the word of the day.
- Deal with a Real Estate Agent that knows the process.
- The banks want to get rid of these homes as quickly as possible, but are NOT yet willing to take "Fire Sale" prices.
- Negotiate, negotiate, negotiate…
- Remember the bank owns the home and getting an answer to your offer may take some time.
When banks, lenders and mortgage companies have an over supply of real estate inventory they turn to the auction process. Like any other auction, you may be able to pick up property at substantial discounts. There are specific rules that apply to this form of investing and you should work with a real estate professional whenever possible.
- Initial down payment? (Usually a $5,000.00 cashiers check)
- Total down payment? (Usually 5% of purchase price plus buyers premium.)
- A buyer's premium? (Usually 5% of purchase price, split 1% to Listing Agent, 1% to Selling Agent & 3% to Auction Agent.)
- Closing Time? (Usually 30 days, if you do not, you lose your deposit.)
- Property Inspection? (Go see the property in person; you are purchasing this home As-Is.)
Type of Auctions
Plan on attending as many auctions as you can. They are free to attend and you can gauge the crowd and prices from sitting through several of them. I have found that auctions around the holidays are LESS popular and you have more opportunity for a great deal.
Absolute – The winning bid gets the home. This is the best type of auction to participate in, as all the homes will sell the day of the auction.
Reserve – This is where the banks have a certain price in mind and will not accept any bids lower than that price. The auctioneer will sell the home, the day of the auction, but the bank will refuse to sell the home to you after the auction closes.
The auction process is just like anything else, learn, view, educate, and then invest. My personal experiences with the auction process are two fold, back in the 90's and currently. The 90's were a blast, as I did not experience too many investors, so it made it easier to acquire property. The process is simple, if you follow common sense techniques.
1. Always view the property you are bidding on in person.
2. Have your financing in place or make sure you qualify with the auction finance company.
3. Know the value of the properties you are bidding on.
4. Know how much you are going to "bid" on the property and do not be caught up in the excitement of bidding. (My business partner was bidding on a property and the auctioneer had to tell him that he was bidding against himself on two occasions.)
5. Do not think that the "Auctioneer" has someone in the audience inflating the values of certain homes, they do! What is commonly referred to as a "Shill"!
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