We now have over 10 offers on House #13.  After isolating our 3 favorite offers we sent them all the same counter and the two responded quite interested.  We did some additional negotiation and one couple was going to re-submit their offer today.  The agent called and said the couple was going to withdraw their offer, they looked up the address on Megan’s Law web site and there is a convicted sex offender on the same street.

I’ve never really looked into this before, but I typed in a couple addresses and it seems like there is way more out there then I would have ever guessed.  Even in the neighborhood I live in there is quite a few of them.  The site is well done, you can type in your address and it has pictures and stars where the people live.

Does this change our buying strategy?  I think from now on I will look up any address before we buy, but don’t know if it will stop us from buying a property in a certain neigbhorhood.  It is sad to me that there are so many in each neigbhorhood.

Just another thing for Real Estate Investors to watch out for!

We have now bought 15 bank owned properties and probably made over 1,000 offers on property! Banks and sellers are usually looking for more then the person who is willing to pay the most, but people they know will be able to actually close the escrow.

The most important thing is to portray that you are a real buyer and will be able to close on this property.  This means to show a pre-approval lender with a direct lender, provide proof of funds and a current copy of your credit scores.  You want the seller to know that you will follow through with your promise to buy the property, do whatever you can to portray this.

If you are using a buyer’s agent you want to make sure they are experienced.  The seller’s agent typically has a lot of say in what offer banks and sellers accept.  A phone call, or multiple phone calls, to portray to the agent that you are real and willing to answer any concerns  the seller has.  When selling properties, I like to work with good agents, so if they call me a lot I know they will be easy to contact throughout the transaction.

Try to offer as big of a earnest money deposit as you can.  Up to 10%, if possible, shows that you are very serious about making this happen.  This money is almost always refundable as long as you do what you promise.    I know of one investor that buys properties from 20-30,000 and sometimes he offers his full offer amount as an earnest money deposit.  This shows he’s serious and he will close.

Last, but not least, follow-up once you submit the offer and follow-up every couple of days.  Once you send an offer in, contact the agent and discuss it with them.  You typically can get a feel for their thoughts on your offer and if you look good or not.

I see a lot of new investors asking this question.  The answer seems quite easy to me. YES!!

The only major downside is you will be considered a professional in the industry and be expected to behave like one.  If you know of issues with a property you own, or are selling, you must disclose them.  If a legal battle does arise with one of your properties, you are acting as a professional and expected to behave like one.

The Upsides:

1. You can pay for access to the multiple-listing service (MLS).  If you are licensed you can pay a fee to the local MLS association and get a list of all the properties for sale and how to get inside them.  You can also get a list of all the properties recently sold and a treasure trove of other tools available to agents.  I am still discovering more valuable tools in our MLS everyday.
2. You can list and sell your properties yourself, and keep the selling side of the commission.  When we get a property ready for sale, we simply put a lockbox on it, price it right and list it on the MLS.  We typically offer the buyer’s agent 3% commission, but save on the typical 3% we’d pay.  Sure we don’t have open houses, but sometimes rookie agents will call and have an open house at your property to get buyers.  That’s a win-win!
3. You can pay for access to thousands of stock real estate related forms.  Purchase Agreement, Option Agreement, Commission Agreement, etc.  This makes life so much easier.
4. If you pay for MLS access, they typically offer other tools to their agents.  Ours has a free legal help hot-line.  I’ve used it a couple times already and it’s sure nice to have an expert real estate lawyer one call away (FOR FREE!!).
5. Having a license puts you in the industry, even if you don’t have any property.  You’ve made your first step of getting in the game and now it’s time to hunt for those deals.

I mentioned the main downside.  There a couple others.

The Downsides:

1. The biggest one, as I mentioned at the beginning.  If you are a trained professional, you are held to higher ethical and legal standard.  You must disclose everything, you must not break real estate law.  If you run your investments by the books this really isn’t that big of a deal in my eyes.
2. Motivated sellers may treat you in a different light.  If you are an “expert” in their mind they might think you are trying to take advantage of them more so though a traditional investor.

Overall, if you are serious about this business, and intent to be investing for a long-time you should get your license.  The test (at least in California) is really not that difficult.

If your an experienced investor you have probably heard people talk about hard money.  I am going to provide a brief explanation of what it is, and who it is best suited for.

Hard Money in terms of Real Estate is basically a private loan against real estate.  Typically it is a single person or a smaller company buying the loan and the interest rate is much higher.  The qualification process is very different then a traditional mortgage.  Hard Money Lenders are most worried about, the quality of the deal, the exit/refinance plan and the borrowers ability to execute that plan.

The Advantage

A hard money loan is very similar to a traditional mortgage.  The  lender takes a deed on the property, forces you to have insurance, will commonly require you to make monthly payments.  The biggest difference is they loan money where traditional banks will not (a property is badly damaged, you only want to own it a short period of time, you need to close really fast, you do not have great credit etc).

The Terms

Sometimes it seems like Hard Money Lenders speak their own language.  But it is very simple once you get the hang of it.

• HML - Hard Money Lender as they are sometimes referred too.
• ARV – After Repaired Value, this is essentially what the property is worth (would sell for) once your plan is complete.
• Points – This similar to a traditional loan.  A point is 1% of the total loan amount, and usually due upfront.  So if a deal has 3 points, you will have to pay 3% of the loan amount upfront to get the loan.

So if a lender says their lending requirements are:

• 70% of ARV, 3 points, $500 in Processing Fees, 15% Interest Only Loan for 12 Months with a Balloon Payment, No Prepayment Penalty

This means:

• 70% of ARV
  They will loan you 70% of the ARV they determine.  Typically a hard-money company has their own appraiser that they will send out to a property (at your cost).  So if a property appraises at $100,000 (after the repairs are completed), they would be willing to loan you 70% of that which is $70,000.
• 3 Points
  The lender will charge you 3% of the loan amount to process the loan.  On a $100,000 loan, they would charge you $3,000 to establish the loan.
• $500 in Process Fees
  This is the flat fee (in addition to the points) that a typical lender will charge to establish the loan.  This number will be added to the points and charged upfront.  FYI, this varies greatly between lenders, try to get as much information on this as you can upfront.
• 15% Interest Only Loan for 12 Months with a Balloon Payment
  This is your monthly payment and your terms.  Once again, if we have a $100,000 loan you would be paying $1,250 a month ($100,000 * 15% / 12 months).  The full principal amount would be due within 12 months.
• No Prepayment Penalty
  This is another area to be careful with.  This can vary widely.  Some Hard Money Lenders want you to pay back the loan as quickly as possible and do not charge an early payment penalty, while others like the high interest rate and want to be paid a premium if you pay that back early.  Factor this into your budget.

Don’t feel stupid asking questions of the lenders.  Sometimes there terms are different from industry average, so they are not going to laugh at you if you ask an educated question.

Other Comments

• Most HML’s will force you to have insurance just like the traditional banks.
• In the current market conditions expect lenders to want you to put at least 10% of your money into a transaction.
• Most HML’s will provide a pre-qualification letter to you.  They are usually pretty vague but it is always something nice to add to your arsnel.

The Process

• Pre-Qualification – Like most banks you typically will have to pre-qualify with HML’s.  They will usually run your credit, will want to see your balance sheet and some rough guidlines of your income.  The strenght of your deal is highly factored into their decision though.  If you have a property under-contract taht will appraise for double your price, most lenders will do it, no matter what your credit is.
• Get a Deal Under Contract and Send them the Specifics – Once you have a deal under contract and you have been pre-qualified you will send the specifics out to the lender.  You will send: your purchase price, the escrow documents and your general idea of what you think it will appraise at.
• They will make you an offer – Once they get their valuation back they will let you know what loan amount they are willing to do and the terms of the loan.  If everything works for both parties you are ready to close the deal and make some money!
• Close the deal!!!

Where to find them?

I have been working on compiling a list of HML’s in Southern California as there is not a great resource on the internet.  But in realty, in most markets there are only a few good ones and if you go to your local REI club the members there should point you in the right direction.

Note: This post is completely from my personal experience and probably not true for all of the United States.

We think we are pretty good at buying properties at a relatively profitable discount compared to the rest of the market.  This allows us to fix up neighborhoods and make a bit of profile while doing it.  We are still always looking for new ways to pickup real estate at a deep discount.  Our offers are typically cash strong, large earnest money deposits and a cash closing within 14 days.

An investor friend had mentioned that he had heard the local auctions had started to yeild some better deals, so we decided to check it out.  The well publicized REDC US Home Auction was coming to town and we went to visit all of the 23 properties in our market.  Probably about 5-6 of them where heavy fixers, and did not qualify for their “conventional finacning”.  We built an intense spreadsheet, determined the ARV of all 23 properties, subtracted the 5% buyers fee, rehab costs and our other fees and came up with a maxiumum bid on all of the properties (other then 2 that we would not take for free).  We got pretty excited thinking we could pickup 3-4 properties at a great deal and came to auction prepared with enough cash to buy up to 5 properties.

The morning of the auction we got there about 15 minutes before it was starting and the room was overflowing, with people of all types.  I would imagine 25% where investor types and 75% where retail buyers.  This was not a great sign, but we where hoping many of the buyers where just looking.

Before you know it, they where warming everyone up and getting everyone excited.  Mock auctioning the convention center for 100 million dollars.  After we saw the price of the first couple properties we where shocked.  Our town was quite early in the auction…  the first house, our maximum bid was 147,000.  It sold for 217,000.  Pretty much every house after  that went for at least 150% of our maximum bid, with many of them selling for much more then our fully fixed ARV was.

We left the auction soon after with somewhat mixed feelings… we are very happy about what we pay for the houses we currently buy right out of the MLS, the biggest realization is there is still a lot of STUPID money out there in California.  They must be better at selling the properties then we are, or ready to loose a lot of money.