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What Is The Wrong Way To Invest In Real Estate?

“Real estate fever” . . . it’s hit the Country like a plague. Zillions of “newbies” are hitting the bandwagon, trying to make a profit where they lost in the stock market. I meet them all the time, and many are making big mistakes!

Mistake #1: Stock Market Mentality

You’d think after losing $7 trillion in the stock market people would have learned! Nope, they are making the same mistake, which is assuming what happened yesterday will happen tommorrow. Nine of ten new investors I meet say they are interested in real estate because they saw someone else make money from the rapid appreciation of the market over the last few years. But, buying real estate solely for short-term appreciation is often a big gamble! If you buy real estate to hold for 15 years or more, the chances are you will come out on top. If you buy a property and flip it in within a year, you probably are fine, too. And, despite the risk, many people can intelligently time the “boom” of a local market (or subdivision within a market) and make a profit. But, if you buy a rental property for full market price with break even or negative cash flow, you’d better have a backup plan if the market doesn’t keep going up. Investing is a lot like surfing… if you don’t know how to ride the wave, you will drown!

So, should you refrain from investing if you think the market has peaked? Absolutely not! You can find bargain-priced properties in every real estate market, even the hottest. You can find low-interest rate financing that will increase your cash flow so if values drop, you still are covered. You can plan short-term (six to 12 months), because real estate markets rise and fall slowly. And, if you keep a cash reserve for your business, you won’t sweat when the market tanks, because you know that in the long run, real estate markets virtually always come back.

Mistake #2: Investing Blind

You’d think after losing $7 trillion in the stock market people would have learned! Nope, they are making the same mistake, which is blindly buying real estate based on bogus advice or complete lack of education. Real estate is one of the few investments in which risk is directly proportional to knowledge. True, it has a higher learning curve than investing in the stock market, but there’s no proof that having knowledge of the stock market reduces risk (just ask your mutual fund manager).

I read a comment on a real estate discussion group on the Internet. In response to an inquiry as to whether a particular seminar or training program was worth the money, someone answered, “Why waste your money on that stuff? Just use your money as a down payment and learn as you go.” This is probably the worst advice you could ever give a beginner. Money for real estate deals is easy to find if you can find good deals. But, you won’t know what a good deal is without having first invested in your education!

The more knowledge of real estate investing techniques, financing, acquisition, negotiating and, of course, your local marketplace, the less risky your investments will be. A bargain real estate purchase will generally always be a safe investment; a bargain stock purchase isn’t – after all, who says the company you bought into will be in business next year?.

Mistake #3: No Cash Reserves

Ask anyone in real estate long term (or any other business, for that matter) and they will tell you the two most important words for survival are: “cash flow.” Heck, even K-Mart failed to learn that valuable lesson!

In order to stay in real estate long term, you need cash reserves. Buying real estate nothing down is easy; handling negative cash flow, repairs and other expenses in the meantime is the trick. In fact, if you can handle the bad times, real estate will always make you come out on top. Lack of cash reserves puts unnecessary pressure on you to do substandard repairs, accept less than qualified tenants and give into tenants’ demands for fear of vacancy.

When you have a sufficient cash reserve, you act rationally. You hold out for a higher sales price. You hold out for a qualified tenant. You leave properties vacant rather than rent to low-lifes. You call a tenant’s bluff when they threaten to leave. You take care of necessary repairs and improvements on your properties. It’s a whole different ballgame than operating from a lack of cash. Like I said, buying properties with no money down isn’t hard; it’s handling the cash flow. In other words, you can buy real estate without money, you just can’t survive in business without cash reserves. Thus, consider accumulating cash reserves before investing in rental properties.

Mistake #4: Being Greedy

Many investors get started flipping properties to other investors, which is a good idea to generate cash reserves. However, you must be realistic about how much profit is in a deal. If there is a potential for a $20,000 profit in a rehab project, you can’t expect to make $10,000 flipping that property to a rehabber. A rehabber has a huge risk in embarking in such a project and wants a large enough profit to justify the risk.

For example, if a house needs $10,000 in repairs, the rehabber investor wants to make at least a $20,000 profit. If you find a deal with $20,000 in profit potential, how could you expect to get $10,000 for flipping the property if the rehab investor you flip it to is only going to make $10,000? You should be happy making $2,500 and moving on to the next deal. If you want to make more than $2,500 on such a deal, then you must find and negotiate a better bargain that has more profit potential.

Mistake #5: Treating Real Estate as Anything Other Than a Business

People are lured to real estate because of the quick buck that it promises. Don’t hold your breath, you won’t get rich quick. An “overnight sensation” usually takes about five years. More than ninety percent of the people who take a real estate seminar quit after three months.

Why the high fallout rate? Lack of action and unrealistic expectations. Real estate investing should be treated with the seriousness of a career. It takes months, even years for a business to cultivate customers and have a life of its own. You need to treat real estate like any other business. Give yourself at least six months to see if real estate works for you. It may even take a year before you buy your first property. Maybe in the second year you will buy three or four properties. If you work hard at it and keep your eyes and ears open, you may even find your first deal in 30 days. Certainly, you will not make money by talking or thinking about it; you must go out and take action.

Position Realty
Office: 480-213-5251

How To Bid At Phoenix Trustee Sales

Perhaps the most well-known method of obtaining foreclosure properties is buying them at the auction. The foreclosure auction is a live bidding process, just as you may have imagined. The auction is typically conducted at a public place, such as a courthouse or trustee office which is the case in Phoenix, Arizona. Although the process is slightly different from state to state, the basic idea is the same – the property goes to the high bidder. The first bid will usually be made by a representative of the foreclosing lender. The lender can bid up the amount that is owed to him, without actually tendering money. If nobody else bids, the lender gets the property. In a majority of cases, nobody will show up but the auctioneer and the lender’s representative. Thus, in most cases, the lender gets the property; the less equity in the property, the less people show up at the auction.

Buying at the auction is not for everyone, especially beginners with limited funds. You need cash, and lots of it, to buy properties at auction. If you have access to a large credit line or have a money partner, you can sometimes find real bargains at foreclosure auctions. Do not get too excited, though, because most properties either have too little equity for people to bother with, or have so much equity that a large crowd will show up to compete. Despite popular beliefs, a real steal at the auction is very unlikely.

Finding Out Where the Auction Is Held

The auctions for Phoenix are published in a legal newspaper or the legal section of your local paper. You can also subscribe to information service providers that will fax, mail and/or email you this information on a regular basis. Position Realty can provide you with such a list upon request. If you are following a particular property, contact the lender’s attorney or the trustee for information about the sale date. Call the day before to make sure the auction has not been postponed or delayed by the lender or by the borrower filing for bankruptcy.

Before Going to the Auction

Before you even consider bidding at the auction, you need to do some homework. Remember that your bid at the auction is absolute; there is no backing out. Your due diligence in researching the property can be quite time-consuming, and chances are you will not get a huge bargain. Sounds discouraging? It is, but you should try it a few time to get a feel for the process. Choose a few neighborhoods that can familiarize yourself with and bid only on those properties.

Check the Condition of the Property

You need to drive by the property to find out what condition it is in. Good luck in trying to get inside, since the homeowner isn’t likely to let you in. If people are living in the property, you can make the assumption (most of the time) that there is running water and electricity in the house. However, you must assume the house needs at least the basic cosmetic upgrades: carpet, paint, new appliances, new kitchen cabinets, new vanity in the bathrooms. If the house looks vacant, take a peek inside the windows. The less information you have about the inside, the more conservative you need to be with your fix-up estimates.

What to Bid?

Before you bid on the property, the most important factor you need to think about is what you intend to do with the property if you win the bid. Are you going to live in it? Fix and sell it for cash? Flip it “as is” to another investor? Finance it and rent it out? Each one of these strategies will change your maximum bid price. I would suggest that you take the most conservative approach, that is, ask yourself what price you would need to pay if you had to resell the property quickly. In other words, don’t bid what you think will be the high bid, rather bid what you want to pay!

What You Need to Bring to the Auction

Contact the attorney, referee, sheriff, trustee or other official to determine how much money you need to bring to the auction. In Phoenix you must bring a $10,000 cashiers check payable to the trustee, the balance being due in 24 hourss. In some states, the entire balance is due the day of the sale. Rather than bringing one certified check or money order, bring several if you plan to bid on multiple properties you plan to purchase.

Tips for Buying at the Auction

You must arrive on time. Most auctions begin and end in a matter of minutes. If the auction is set for 10:00 am and you arrive at 10:05 am, you may be too late! If you are going to a county building, it will likely be in a part of the city which parking is a problem, so arrive extra early. Get a feel for the other bidders at the auction. It won’t take you long to figure out who is a pro and who is a “looker”. Even if you don’t buy the property, make friends with the pros so you have someone to sell other properties to at a later time. Don’t get in a bidding war! Many beginners get caught up in “bidding fever.” Don’t be one of them. Determine what you want to pay before you come to the auction, and don’t bid any higher!

Position Realty
Office: 480-213-5251

HUD-Owned Homes Expected to Surge

The U.S. Department of Housing and Urban Development is reportedly going to be releasing more of its homes to the market, which could be welcome news to buyers who have faced slim pickings in for-sale inventories.

Over the next two years, experts predict that HUD homes on the market will increase significantly as lenders work through the backlogs of foreclosures and foreclosure reviews.

“The inventory is there, [it’s] just not being released during the banks/servicers review of the loan/mortgage documents,” says Nat Genis, a HUD listing broker in Riverside County, Calif., which is already seeing an increase in HUD-owned homes.

“HUD homes are back,” Genis told HousingWire. “FHA financing went away with the ‘creative’ financing of the 80/20 loans, and now with the increase of FHA financing, these government-backed loans guarantee that if the borrower defaults, HUD will pay off the mortgage, obtain the deed, and re-sell the home.”

HUD-owned homes can be appealing because of the discounted sales price, even though they can be in poor condition often times, HousingWire reports.

HUD had 39,442 homes in its REO inventory nationwide as of Feb. 28, 2013—with 20,536 of those having pending contracts on them, according to HUD.

Office: 480-213-5251

More Banks Halt Foreclosures for the Holidays

Several of the nation’s largest banks announced they will halt foreclosures during the holidays, following a similar move made by mortgage giants Fannie Mae and Freddie Mac last week.

The following banks say they will stop foreclosures until after the New Year: Wells Fargo, U.S. Bancorp, PNC Financial Services Group, Bank of America, SunTrust, and Citigroup. U.S. Bank, Citigroup, and PNC’s foreclosure moratorium will be from Dec. 17 through Jan. 2. Wells Fargo and SunTrust will begin their temporary halt to foreclosures on Dec. 19.

B of A did not specify dates on which it will halt foreclosures, but spokesman Rick Simon said in an email “it is the bank’s policy to avoid foreclosure sales or displacement of homeowners or tenants around the Christmas holiday.”

“We hope this suspension provides families who are experiencing financial hardship some stability over the holiday season,” says Saiyid Naqvi, chief executive officer of PNC Mortgage.

Last week, mortgage giants Fannie Mae and Freddie Mac announced a temporary halt to foreclosures during the holidays. Fannie Mae will halt foreclosures from Dec. 19 through Jan. 2 on single-family homes and two- to four-unit properties. Foreclosure proceedings may continue, however. Freddie’s moratorium will be from Dec. 17 to Jan. 2.

Office: 480-213-5251

Foreclosure Review Deadline Gets Another Extension

Regulators are granting a third extension to a program that allows home owners who were foreclosed upon to request a free, third-party review of their case. Home owners now have until Dec. 31 to request a review.

Originally, the Federal Reserve and the Office of the Comptroller of the Currency had set a deadline of April 30, and then have continued to push that date back to allow more home owners time to take advantage and spread the word. As of May 31, only about 193,000 borrowers had requested a review, according to the OCC.

The extension “provides more time to increase awareness about the Independent Foreclosure Review and how eligible borrowers may request a review and to encourage the broadest participation possible,” the regulators said in a statement.

Home owners who had a foreclosure filed against them between 2009 and 2010 are eligible to request a review of their case. If errors are uncovered—such as a home owner not getting a fair chance at a loan modification prior to a foreclosure or an error in processing the paperwork—home owners may be compensated. Compensation may include anything from home owners receiving a lump-sum payment (anywhere from $500 to $125,000, plus equity) to suspension or recession of their foreclosure to a loan modification. They also may receive a correction to their credit report and deficiency amounts on record.

For more information, visit independentforeclosurereview.com.


Foreclosures Plummet to 5-Year Lows

For the third consecutive month, foreclosure filings dropped, sinking to their lowest level since July 2007, according to RealtyTrac’s April report on nationwide foreclosure activity.

Foreclosure activity, which includes default notices, scheduled auctions, and bank repossessions, fell 5 percent from March to April and were down 14 percent year-over-year.

“More distressed loans are being diverted into short sales rather than becoming completed foreclosures,” says Brandon Moore, CEO of RealtyTrac.

The drop in foreclosure activity was mixed, however.

“Rising foreclosure activity in many state and local markets in April was masked at the national level by sizable decreases in hard-hit foreclosure states like California, Arizona, and Nevada,” Moore said in a statement.

For example, in Nevada and Arizona, bank repossessions dropped about 70 percent and by more than 50 percent in California.

Meanwhile, in states like Florida, New Jersey, and Illinois, which require judicial review, foreclosure activity increased. New Jersey had the largest annual increase in foreclosure starts in April seeing a 180 percent jump.

In the 26 states that have a judicial foreclosure process, foreclosure activity was up 15 percent compared to April 2011.

Sean Heideman, Broker ~ Position Realty ~ 480-213-5251

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Short Sales Start to Outpace Foreclosures

Nationwide, banks are agreeing to more short sales, and for the first time, short sale transactions are exceeding foreclosure deals, according to the most recent housing data from Lender Processing Services (LPS) Inc.

In January, short sales made up 23.9 percent of home purchases, according to LPS. Meanwhile, foreclosures made up 19.7 percent of sales.

Just one year prior, foreclosures made up the bulk at 24.9 percent of transactions while short sales made up 16.3 percent.

“It’s a fairly recent phenomenon that short sales have been increasing,” Jonathon Weiner, a vice president with LPS, told Bloomberg News.

So why are banks getting more agreeable to short sales? Banks are realizing that short sale transactions usually sell for higher prices than foreclosures. In fact, foreclosed homes tend to sell for 29 percent less, on average, than comparable non-distressed properties. Short sales tend to sell at a 23 percent discount, according to Lending Processing Services data from January.

Banks and government agencies in recent weeks have taken steps to speed up the short sale process, setting new timelines for how long mortgage servicers have to respond to short sales offers. Also, some banks, such as Wells Fargo and JPMorgan Chase, are even offering some home owners cash incentives — up to $35,000 — if they agree to do a short sale instead of let the home fall into foreclosure.

In the Phoenix real estate market, short sale account for 25% of all transaction as compared to 26% for foreclosures. Currently, Phoenix real estate is a hot item for investors and home buyers where the majority of transactions are with traditional home sellers. A year ago, Phoenix short sales accounted for 16% of all transactions as compared to 27% for foreclosures.

Foreclosures Recede to 2007 Levels

Foreclosure filings are continuing to fall, dropping 2 percent in the first quarter of this year compared to the previous quarter and are down 16 percent compared to the same time last year, RealtyTrac reports in its latest report.

Foreclosure filings include default notices, scheduled auctions, and bank repossessions.

Filings were at their lowest quarterly total since the fourth quarter of 2007. In the first quarter of this year, one in every 230 U.S. homes received a foreclosure filing, according to the report. But analysts warn to take the progress in numbers with caution.

“The low foreclosure numbers in the first quarter are not an indication that the massive reservoir of distressed properties built up over the past few years has somehow miraculously evaporated,” says Brandon Moore, RealtyTrac CEO. “There are hairline cracks in the dam, evident in the sizable foreclosure activity increases in judicial foreclosure states over the past several months, along with an increase in foreclosure starts in many judicial and non-judicial states in March.

“The dam may not burst in the next 30 to 45 days, but it will eventually burst, and everyone downstream should be prepared for that to happen—both in terms of new foreclosure activity and new short sale activity.”

5 States Seeing the Biggest Increases

For the third straight month, foreclosure starts have increased, rising 7 percent from February to March. For the first time since November 2011, foreclosure starts surpassed the 100,000 mark, according to RealtyTrac. However, starts were still down 11 percent compared to March 2011.

Thirty-one states saw monthly increases in foreclosure starts last month. The five states posting the largest monthly increases in foreclosure starts are:

1. Nevada: Up 153%

2. Utah: Up 103%

3. New Jersey: Up 73%

4. Maryland: Up 53%

5. North Carolina: Up 47%

Short Sales Get Shorter: New Deadlines to go into Effect

As part of a settlement with state attorneys general, the five largest mortgage servicers are adopting new requirements for short sales, which is expected to speed-up what has been known as a lengthy process.
Here are some of the new requirements for servicers under the settlement:

Servicers must provide borrowers with a decision within 30 days after receiving a short sale package request.

  • Servicers will be required to notify a borrower, also within 30 days, if any necessary documents are missing to process the short sale request.
  • Servicers must notify a borrower immediately if a deficiency payment is needed to approve the short sale. They also must provide an estimated amount for the deficiency payment needed for the short sale.
  • Servicers are also required to form an internal group to review all short sale requests.
    Banks will be considered in violation of the settlement requirements if they take longer than 30 days on more than 10 percent of the short sale requests. Violations can carry fines of up to $1 million and $5 million for repeat offenses.

“If a real estate broker can get a checklist from the bank detailing what documentation is needed, everything can be provided up front, and the bank will be required to give a thumbs-up or a thumbs-down within 30 days,” short sale specialist Chris Hanson with the Hanson Law Firm told HousingWire. “That’s not a bad deal.”