Nothing Fancy – Just Another REO Purchase

This home was a standard REO home listed for $55,000.  We originally offered $35K and came to a final compromise of $38K with the bank.  Once again, our offer was accepted over other higher offers solely on the basis that ours was a non-contingent cash offer.

This is the 10th property added to our rental portfolio all of which are in the same neighborhood.  This property was purchased with all cash in order to keep things simple and provide leverage in our offer.  Based on the 50% LTV after repairs and large equity positions in our other properties, our commercial lender allowed us to cash-out 100% of the purchase price and and provided 100% of the repair funds.  So at the end of the day, we had no cash invested in this deal.

Project Numbers

Only 6.3 years to Payoff this Rental Property

The plan is always to use all the positive cashflow to help pay down the monthly mortgage in order to own these properties free and clear as soon as possible.  In this case here, after a proper cash reserve is established, we will take the $379 monthly cash flow and apply it to paying off the mortgage which will happen in a short 6.3 years!

Rehab Analysis and Walkthrough, Pt 1

Our construction manager and partner performs a detailed walk through of the property the day after we get it under contract.  We discuss numbers and first impressions since this is the first time some of us our seeing the inside of the property.

Rehab Analysis and Walkthrough, Continued…

Below our video continues with a look at the basement and the plan for its rehab.

What is Foreclosure Defense?

Foreclosure defense is a legal strategy in which a homeowner retains the services of an attorney to complete a forensic loan audit of all the documents associated with the mortgage. The attorney is looking for fraud and predatory lending violations than can then be used to aggressively counter sue the bank for damages and in return force the bank to negotiate with the homeowner or investor.  This process can typically take 12-24 months depending on the severity of the findings.  Remarkably, on average over 80% of all residential loans since 2003 contain such violations.  During the housing boom, banks could not push new mortgages through their system fast enough to satisfy the appetite for profits by Wall Street.

In the midst of this frantic churning of mortgages, many T’s were left uncrossed and many I’s were left undotted.  There is a long list of items than an experienced foreclosure defense attorney will pursue in order to delay the foreclosure process or in some cases even completely rewrite the actual terms of the note.  Just a the few of those items include: chain of title issues, backdating of documents when deadlines were missed, loss of original paperwork including the note, good faith estimate (GFE) numbers not adding up, unauthorized individuals signing paperwork, strict pooling and servicing agreement (PSA) guidelines not being followed, and on and on.

In the worst-case scenario, the attorney is able to delay the foreclosure 1-2 years while the homeowner or investor does not make a single mortgage payment during that time. This allows an individual the time needed to get back on their feet and regroup prior to the foreclosure occurring.  In the best scenario, the attorney is able to delay the foreclosure process 1-2 years and settle with the lender for a reduction in principle, lower interest rate and in many cases a brand new loan. There are even cases where the bank has not been able to produce the original note and the case goes into extended limbo or even the note is forgiven since the is no legal proof that the owner owes that money.

Is Foreclosure Defense Ethical?

Everything being performed here in legal, but is it ethical?  First of all, banks don’t make decisions based on emotions; the words in the contract are all their attorneys stand by.  In the majority of cases, investors and homeowners did not take out mortgages in order to defraud an institution.  Most individuals approached their banks looking for a forbearance, a loan modification, or a short sale once they realized the trouble they were in.  The problem is that the majority of the requests were denied or ignored according to the statistics.  Foreclosure defense is a viable and effective way to force the banks to actually take notice of your case and work with you.

Foreclosure Defense Costs

According to Adam Ackerman, one of the managing partners at www.foreclosuredefense.com, the initial forensic audit of the mortgage documents costs approximately $750 per property.  Then after that, there is a monthly $750 retainer fee that is charged per property.  So given these costs, this option isn’t for everyone.  If your a homeowner or investor with a monthly mortgage in this range to start with, it may be better to just save all your money and ride out the process until the property is sold at auction.  But for the many homeowners out there with much larger mortgages, in many cases a $750 monthly retainer would be more than a 50% reduction in the monthly payment while the attorneys fight on your behalf.

Applications for Real Estate Investors

During the interview, Ackerman detailed several examples of how real estate investors struggling with under performing rental properties asked the banks for help in the form of a loan modification or a short sale and were turned down or ignored.  Now these investors are using foreclosure defense techniques to force the banks to negotiate with them.

Banks are not set-up to deal with aggressive countersuits when they foreclosure on someone.  Foreclosure attorneys working for the banks earn a flat fee based on the minimum work required to process a foreclosure.  So when requests for detailed information, proof of documentation and countersuits start coming in, most of the time the banks don’t want to deal with this kind of headache and magically become receptive to the investor’s request for a loan modification or a short sale.

In one case, an investor with a two multi-unit buildings purchased during the boom was struggling to pay his mortgage due to the reduced rents from his struggling tenants.  The bank refused to work with him and in turn he hired a foreclosure defense attorney to represent him.  Even after paying $1500 per month (2 properties) for the defense, this investor is still taking home $3500 per month in rents. Even if the foreclosure defense fails, after two years of delaying the foreclosure process, the investor will have collected $84000 in rents.

Short Sale Investors

Foreclosure defense can also be a good tool for those real estate investors working with homeowners to either buy or flip their property after the banks approves a short sale.  Deals with large profit margins may be well worth saving using foreclosure defense techniques in order to buy the added leverage needed to help the bank change its mind.

Special thanks goes to Adam Ackerman at www.foreclosuredefense.com for contributing to the information in this article.  Their network of attorneys work with investors and homeowners across the country in all 50 states.  Please feel free to contact them for more information and a free consult.

Flippers and Rehabbers Caught in the Crash

Many real estate investors, flippers, and rehabbers were caught with their pants down when the real estate market crashed in mid 2007.  Rehabbing and flipping foreclosures was the craze at the time, as depicted on the many popular TV shows such as Flip This House and Property Ladder.  As long as the money was flowing loosely from the banks to the investors and homeowners, flipping a rehabbed home was relatively easy.  Almost anyone could arrange 100% financing for their end-buyers back then.

Bankruptcy & Real Estate Investors

But when the money dried up and banks stopped lending almost over night, many investors were left holding fully rehabbed homes with no buyers to be found.  Many of the flippers at that time had no intention of ever being a landlord and therefore were determined to sell their property rather than rent it out.  The problem is that the real estate markets only got worse.  For several different reasons, the REO’s being flipped for quick cash were not good rental property candidates.  They were either too expensive or in too rough of a neighborhood to find quality tenants to occupy them.

Bankruptcy – What Does it Accomplish for the Real Estate Investor?

Many investors spent their entire savings and even their retirement savings (ouch) in an effort to keep their under performing rentals afloat when selling them didn’t work.  Stuck with maxed out credit cards and uncooperative lenders, many investor have filed for bankruptcy to get out of this mess.

Bankruptcy Accomplishes the Following for a Real Estate Investor:

1. It eliminates the right of the lender to collect a deficiency judgment from the investor when the property sells for less than its loan amount.
2. It relieves the investor from the obligation to repay the note on the property.
3. It eliminates the need to pay the real estate taxes, since the bank cannot come after the investor anymore.  The bank will be stuck paying the taxes for you, in order to avoid the property being sold at a tax sale.

Bankruptcy Does Not Accomplish the Following for a Real estate Investor.

1. Bankruptcy itself does not relinquish ownership of the property. The real estate investor still legally owns the investment property after a bankruptcy is filed.  The bank has to legally foreclosure on the investor in order to take back the property.  This means the investor could keep collecting any rents received until the property is sold at auction assuming the bank does not assume the rents as they are entitled to.
2. Bankruptcy does not eliminate the landlord’s liability for what happens at the property.  Since ownership still belongs to the investor, the investor can still be sued by a tenant, the city, or issued violations that will have to be dealt with.
3. Bankruptcy does not eliminate the landlord’s responsibility to the tenant as dictated by a lease or local tenant-landlord laws.

Your Real Estate Investing Career is Not Over

Remember, bankruptcy stays on your credit report for 7 – 10 years so make sure its your only way out.  But if that’s your last resort, don’t be pressured into doing anything that’s not required of you.  Being eligible to file for bankruptcy usually means you’re in pretty bad shape financially, so understand the law and do what’s necessary to get yourself back on your feet as fast as possible and investing once again.

Bankruptcy does not mean your real estate investing career is over.  There are still many options out there for the creative investors.  Private lenders, hard money, transactional funding, and owner financing can all be used to continue investing in real estate even with bad credit.

Foreclosure Viewing Instructions: Remove the Front Door Yourself!

Most experienced real estate investors and rehabbers have figured out a way to bypass being accompanied by a real estate agent when viewing vacant homes including bank owned properties.  Some investors have real estate agent friends that get the lockbox combos for them, while others sweet talk or persuade the listing brokers into offering up the combos.  This may not be legal in some cases, but it is a fact in our business.  Some agents listing vacant properties including REO’s, will actually instruct investors to bring a power drill with them to remove the front door to gain access to the house as long as the door is screwed shut upon leaving.  This is understandable given the number of real estate investors just kicking the tires and rarely ever buying anything.

Viewing several (6-8) foreclosures in one morning is very tiring work and always an adventure in of itself.  This is especially true for those investors choosing to invest in some of the rougher neighborhoods out there due to the above average cash flow opportunities these hard hit areas present.  One day, I managed to walk through and estimate the rehab cost on 11 REO’s while in pursuit of my next rehab project.  I was mentally and physically drained at he end the day, but it was this process that helped me develop the knowledge I needed to eventually stop viewing every property prior to placing an offer.  Based on certain neighborhood generalities and housing types, I created a worst case scenario formula for placing offers.  If the numbers made sense, I submitted an offer without ever viewing the property until it was actually under contract.  This is what really kick started my real estate investing career while simultaneously reducing my time away from home.

Rehabber’s Tool Bag

Foreclosure Search Tool Bag

After viewing over 500 properties over the years, I have learned that the following tools are essential to maximizing one’s time in the field.

• Pre-planned list of foreclosures to see and in what order to see them
  • When you leave your house in the morning, there should be no doubt as where your going first, second, and third that day.  Bring printed maps or directions if needed.  Don’t forget the lockbox combos.
• 1 million candle power flashlight with spare battery and car charger
  • Most REO’s and foreclosures are boarded up and the electric company has turned the power off to the house.  For efficiency and safety reasons do not try viewing a dark beaten up house with only a small utility flashlight.
• Back-up flashlight
  • Just in case your spot light goes out and the second battery is drained always carry a back-up flash light in your car so you can at least finish looking at the property your at.
• Cordless power drill with various bits
  • As I mentioned earlier, in some cases the front door will actually be screwed shut and you’ll need to remove the door to enter.
• Screws for re-securing windows or doors
  • Always have spare screws for re-securing doors, windows, and boards on your way out.
• Digital camera or camcorder
  • Even if you took meticulous notes, it is nearly impossible to remember what the first house you saw looked like after viewing 5 others that day.
• Clipboard/pen and paper
  • Some investors use a checklist when they are estimating the rehab costs of house, especially when starting out and that’s a good idea.  Do this long enough, and you will be able to estimate the rehab cost to within $2,500 off the top of your head after your walk through.
• Heavy duty boots
  • Sandals won’t cut it when walking through mold, water, and broken boards.
• Wear pants not shorts
  • Vacant foreclosed homes have sometimes been trashed by their previous occupants; don’t take any chances.
• A snack and drink
  • This may sound like your in third grade, but when your really in the groove or sometimes not in an area where you wan to stop, the candy bar and drink can prevent a serious headache from coming on.
• Navigation
  • Never get lost again.  The one negative side to always using GPS, is that it tends to dumb down my natural sense of direction which makes it twice as hard to find something when I don’t have my GPS.
• Laptop with wireless card or an iPad
  • This is not necessary but definitely very useful.  Have all your info at your fingertips; it’s like never leaving the office.
• Cell phone
  • One phone call to your real estate agent is all you should need to submit an offer on a hot property.  Also, for safety reasons, never view vacant properties without a cell phone.  It can be pretty nerve racking when you come across a squatter.
• Pocket knife
  • Necessary for cutting and lifting up the carpet to check for old hardwood floors underneath.  Always look to see what’s under the carpet.  Finding old natural hardwood floors in decent condition always put a smile on my face.
• Baseball bat (Louisville slugger is my preference) in the car
  • Again, you can never be too cautious.

I would love to hear what other items, tools, or technology other investor’s have utilized to ease their foreclosure house hunting trips.

Shop your Landlord Insurance Rates

When was the last time you shopped around for quotes on your landlord policies?  Not often?  Not once since getting your policy?  I have personally seen insurance costs all over the board over the past 10 years depending on the financial stability of the company usually.  It costs you nothing to have an insurance broker quote all of your policies to see how competitive your current rates are.  If you have several properties in you rental portfolio it can be real easy for you to realize significant savings.

Is there Insurance Broker Loyalty?

I was using the same reliable insurance broker for the past 6 years with no issues to note.  She was fast, thorough, knowledgeable and always returned my phone calls or e-mails the same day. So why would I switch when finding a competent real estate professional nowadays seems to be harder than ever?  The bottom line was the extra money in my pocket at the end of the year.

What do you think?  Was it unfair or wise of me to just drop my established broker after many years of outstanding service?

What I Evaluated before Switching

Well I didn’t change insurance brokers blindly.  Here is what I compared and the results that convinced me to switch.  Tell me if you would have done the same thing.

• We went line item by line item down each landlord insurance policy and made sure that at a minimum I was going to receive the same coverage on each property I own. As it turned out, I received BETTER coverage and half of my policies while reducing my yearly premiums.   The total savings turned out to be $3,400 per year!

• Then the insurance broker pointed out that this insurance company he wanted to switch me to had a sewer back-up rider that could be added very cheaply to each of my policies and that I should really consider this option given where my rental properties are located.  That suggestion alone just proved to me that this guy knew what he was talking about.  My old company didn’t offer this option and I actually experienced city sewer back-ups twice in the past year on two of my rentals and had to pay for water heater, furnace, and basement bathroom repairs out of my own pocket.

• My new insurance broker then suggested I really consider adding an umbrella liability policy as part of my wealth preservation plan.  He explained to me the different scenarios where a real estate investor’s corporate shield (an LLC) has been pierced in the past and the investor himself suffered significant losses.  After doing some research on my own, I realized that he was right and many other investors suggested the same.  So once again, my new broker had proven his knowledge to me when it came to dealing with rental property insurance needs.

• My new insurance broker was also a landlord himself.  He had his own small portfolio of rental houses and this was exactly how he insured his own properties.

• The insurance quotes being offered to me were from one of the big name insurers in good financial health.

• Finally, this independent insurance broker’s office has been around in my area for 47 years and they have a strong client base.

We discussed many other aspects of a good landlord insurance policy that I won’t get into that here.  For a brief overview on the different aspects of a proper landlords policy check out the following article:

http://www.biggerpockets.com/articles/606

Reevaluate your property expenses on a yearly basis and don’t be afraid to shop around.  Relationships are important, but if you can find better deals on the same product don’t be afraid to switch.

What’s your opinion? Let me know.

FHA Admits They are Hindering the Real Estate Recovery

The FHA has finally come to the realization that many investors buying and fixing foreclosures are taking much less than 90-days to rehab their homes.  Good rehabbers can actually have an ugly house ready for occupancy less than 30 days after its purchase.  So beginning February 1, 2010, the FHA is suspending the 90-day resale restriction imposed on sellers selling to buyers using FHA insured financing.

In order to re-sell a home to a FHA buyer in under 90 days, the following conditions must be met.

This chart was created using the information listed in the Waiver of Requirements of 24CFR 203.37a(b)(2) which is located on the HUD website at http://www.hud.gov/offices/hsg/sfh/waivpropflip2010.pdf.

Here are two more points not listed in the chart.

1. The 90-days flip restriction waiver will expire one year from February 1, 2010.  If the program is successful with minimal fraud, it can be extended by the FHA.

2. If the FHA discovers a significant increase in mortgage defaults and insurance claims attributable to insured mortgages obtained through this waiver, then this waiver may be canceled immediately.

Now let’s analyze the following four key points

.

1. Title must be held be the seller

I know many investors including myself were thinking that simultaneous closings would now be possible.  A to B and B to C all in the same day, where C is the FHA insured buyer.  Unfortunately that’s not the case since the seller must hold title.  In many area across the country it takes about 30 days for title to be recorded assuming your county is not backed up in red tape bureaucracy.  I guess it’s still less painful to pay for 30 days of transactional funding  instead of 90 days, so there’s an improvement.

2. No pattern of previous flipping activity

There has been a lot of fraud and properties changing hands multiple times in the past several years.  So we can’t just assume that the property we are going to sell has not been flipped in the past 12 months.  I see zero tolerance on this policy.

3. If the sales price is greater than 20% above the sellers purchase price

A second appraisal will be needed to justify the increase in value through the repairs performed.  Anytime you have to deal with appraisers now a days it can be hit or miss.  Make sure to cross your T’s and dot your I’s and keep everything in a nice folder to prove your rehab work later.  But now, what if your purchase price was $300,000 and you are trying to sell for $350,000?  No second appraisal required per the guidelines since that’s less than a 20% increase in value.

4.  Repairs not needed to justify a sale price increase

Good news for wholesalers.  Repairs are not required to justify selling at a greater than 20% increase in value above the original purchase price even a day after your purchase.  All that’s required is that the appraiser justifies the sale price and hands the home buyer a home inspection report performed by a third party.

The true investor impact of the 90-day flip waiver

This isn’t the holy grail that will jump start economy and turn small investors into millionaires, but it’s a step forward. This change will help investors save some money on holdings costs and minimize their risk of vandalism since FHA buyers can now buy immediately once a project is complete and not at the end of a 3-month waiting period.

Renter’s Insurance

I never used to require my tenants to obtain a renter’s insurance policy when leasing one of my properties; I just suggested it.  I figured it was a good idea to have but it was ultimately the tenant’s decision not mine.  The landlord is not liable for the tenant’s personal belongings in almost all cases of loss (unless it can be proven that the landlord’s negligence caused the damage), so why should I care?

Well after years of owning many rental homes in blue-collar neighborhoods, I have changed my views and now require all new tenants to obtain a renter’s insurance policy as part of the lease agreement.  In many cases it’s only about 50 cents a day.  Check out this link for a good overview of the benefits of renter’s insurance to the tenant.

http://www.themoneyalert.com/rentersinsurance.html

Here is the series of events that lead me to making renter’s insurance mandatory.

House Fire #1

This is the wrong time to think about your insurance needs

Tenant overloads electrical outlet in the kitchen (6 electrical cords) and causes fire to begin in the middle of the night.  Everyone is OK, but everything in the house is lost.  The first thing the tenants did was to demand that I pay for their temporary rental housing and for their lost belongings.  Obviously that didn’t happen, but if they had a renter’s insurance policy they would have been covered.  Lots of crying I had to listen to.

House Fire #2

Tenant forgets to turn off stove after making dinner.  Grease catches on fire in the middle of the night and burns down house.  Everyone is OK, but again, all personal items are lost and tenant has no where to live.  The tenant demands that I compensate them for their loss and again there’s a lot of crying on their part when they realize it’s not my problem.

Three Basement Floodings

Three separate rental houses had their basement flood due to city sewer back-ups caused by major rainstorms in the area.  In all three cases, the tenants had argued that some of their personal items were damaged and asked if they could be compensated.  Again I said no and told them they should have obtain a renter’s insurance policy like I suggested.   Nobody ever listens.

Burglary

In this case the burglars broke through the back door while the tenants were away and stole their laptop, cell phone, some other electronics, and the copper water lines from the basement.  It was a good score for these guys, probably several bags of crack.  Anyway, my insurance covered all of the repairs and damage to the house while the tenants cried about their belongings.  When my property management company informed them I would not pay for any of their items they threatened to call the Alderman on me if I didn’t install security screen doors on the front and back of the house.  They didn’t have a case against me, but I actually started installing security screen doors on all future projects as a best practice in these neighborhoods.

Mandatory Renter’s Insurance Policy

In all these cases the tenants were informed upfront of the benefits of renters insurance and still decided to try and come after me when their personal items were destroyed or damaged.  So now, obtaining and maintaining a renter’s insurance policy is a requirement of the lease.   Any prospective tenant who does not like it is probably not a tenant I want anyway.

Landlords Insurance Policy

I’m not an expert on insurance, but make sure to get your landlord’s policies from someone experienced in dealing with real estate investors in your area and preferably someone who owns rentals in your area.  I used an experienced insurance broker familiar with dealing with investors in my area and fortunately I was well covered in all the above events.  The following article gives a good brief overview of a landlord’s insurance policy. http://www.wisegeek.com/what-is-landlord-insurance.htm

Fire Damage Profits

Check out this video of my first rental property that made me $41K because the tenant was a dumb ass.

My tenant’s poor decisions burned down this house and in turn made me a $41K profit!  The tenant lost everything because of his failure to follow my recommendation of obtaining renter’s insurance.  I hired a public adjuster (an insurance adjuster that works for the client and not the insurance company) to represent my case to the insurance company and received the maximum amount the policy would payout.  The adjuster received 10% of the $80K payout and it was worth every penny.  After paying off the $62K mortgage, I sold the house to another investor for $32K in as-is condition.

Over the past year, I have talked with several investors down on their luck because of the real estate market crash.  Everyone seems to have the same story, “I didn’t see this coming”.  More accurately put, I would say that most of us had our blinders on and tried to enjoy this gravy train as long as we could.  So what does an investor do to get through this downturn?

Banks are Approving Loan Modifications for Investors

Banks are approving loan modifications for investors

Bank of America (Countrywide), Harris Bank, and local community banks are some of the banks that we have first hand experience with in successfully modifying the loans on rental properties.  Surprisingly, contrary to all the news you here about how difficult this process is, all the loan modifications we have done have been fairly easy!

Here are some of our key points and experiences dealing with the loan modification process:

1. On one property involving a local community bank, we were turned down for a loan modification even though we put together a perfect application showing that this property would be behind on payments any month now.  The property was struggling but the bank wasn’t since the loan was still current.  So we fell behind on the loan for two months and reapplied.  Guess what?  The loan mod was completed in 4 weeks with the monthly payment being reduced by 30%.
2. In the case of Bank of America, the entire application process was done over the phone including the hardship letter.  Now this process was long and drawn out, 9 months in total.  6 months of the process were a trial period to make sure we could make the new payments.  This loan modification reduced the monthly mortgage payment by 43%.
3. In the hardship letter, it’s important to explain how and why the situation occurred and what is being done to correct it.  Explaining that the tenants are behind on payments and are being evicted or put on repayment plans has worked in every case.
4. You will have to prove that you will be able to make the new payments on the loan.  This is either has to proved on paper or during a trial period before the loan is officially modified.
5. In all of our dealings, late charges and fees immediately stopped once the application for the loan modification started.  In most cases the late fees were waived upon approval of the loan mod.
6. We never received any principle reductions.  All modified loan terms centered on lowered interest rates and changing option arms and variable rate balloons to 30 year fixed loans.
7. The banks never inspected any the houses.  One bank did a drive by to make sure the property wasn’t boarded up.
8. There were no fees involved to complete any of the loan modifications.
9. Attorneys and special loan modification companies are not needed to successfully complete a loan modification.
10. Keep a log of all phone calls and what was discussed.  Always ask when you should expect to hear back from the bank and follow-up immediately once that date hits.  Make sure to get any new terms or trail period payments in writing.
11. One investor dealing with American Home Mortgage found them very difficult to deal with and ultimately decided to let the property go into foreclosure. The interesting thing to note here is that the foreclosure proceedings are now approaching 14 months!
12. On a slightly different note, I actually got my primary residence home equity line of credit modified from an interest only variable rate loan to a 30 year fixed rate loan at 4.875% WITHOUT ever being late on any payments.  This loan is with Fifth Third Bank.  I have to say that the hardship statement that they took over the phone was pretty much a joke.  I just said I had several poorly performing rental properties in my investment portfolio; no proof needed.  I think in this case it helped that I was a very good customer.

For those Severely Behind on Payments

First of all, this downturn will not be over in 2010.  If you’re struggling with keeping up with payments on unrented rehabs or poorly performing rentals, then stop dreaming that this will be over anytime soon.  The key is to evaluate your situation objectively by eliminating all emotion from the evaluation.  That means that the best option for some of you that are severely behind on payments will be to file for bankruptcy and let the banks foreclose on your bad investments.  It happens; get on with your life.  It may take 5 to 7 years before you recover enough equity to make selling is an option again.  Also, please do not start using your retirement funds to stay afloat because you think it’s the morally right thing to do.  It’s a business decision, period.

Upside Down Investor Mortgages

Did you get way in over your head during the housing boom? Are you now drowning in debt trying to keep up with the payments on your upside down investment properties? Did you cash out refi every penny of equity you could squeeze your mortgage broker to find for you? Do you have tenants that constantly miss payments and there’s nothing you can do about it because you have run out of money to evict them? Unfortunately, there are many real estate investors that can answer yes to these questions.

Upside Down Mortgage Options

First of all, don’t panic. The worst thing that can happen to you is that your credit score will be ruined for some time, maybe a long time.  But remember, this is NOT a life or death situation and there is no debtor’s jail. Do not let financial worries lead you into depression and health problems; it’s just not worth it.

Investor Loan Modification

This is the first option to consider. Investment property loan modifications are possible and are happening quite frequently today. First of all, you will not get a loan modification approved if you are current on your mortgage, period. You must also be able to show hardship, which in most cases is not that difficult for many people. Monthly mortgage payments can be reduced 20 – 60% depending on your situation and the bank.

Investment Property Loan Modification Denied? Try a Short Sale

If your loan modification is denied, you can try performing a short sale. A short sale is selling for less than you owe on the property with the banks permission. The problem is that most investment properties are upside down on their mortgages today and the markets are only moving for severely deeply discounted properties. There’s a good chance you won’t be able to sell your property at all. So now what?

Deed in Lieu

A deed in lieu (DIL) is typically only considered by the bank after an unsuccessful short sale attempt. This is where the bank agrees to take back the  property as-is with no recourse to the investor; basically just hand your keys over. Only do this with a guarantee in writing that they will not come after you for a deficiency judgment. Deficiency judgments aren’t that common right now, but they still are occurring depending on the bank and part of country you live in.

How to Deal with Banks Unwilling to Deal with Investors Looking for Help

We don’t advocate this option, but it is an option if you don’t have many assets left and bankruptcy is an option for you.

Some investors have decided to screw the banks if they won’t work with them! There are many stories of banks not willing to work with investors looking for solutions to their problem. So here is what we have seen others do. Plan to file for bankruptcy and collect as many rents as you can in the mean time. The morals of this are a completely different story.

Foreclosures are taking over a year to complete in many hard hit areas across the country. Stop trying to make payments on your bad investment(s) and collect as much rent as you can until the property or properties are sold at the sheriff’s auction. This can add up to tens of thousands of dollars depending on how many properties you have left that are still paying the rent. Now this money can’t be spent on purchasing new assets, so consult a bankruptcy attorney on the details of this process.

A good bankruptcy attorney will help you understand the details of the timing of when you should file for bankruptcy and how the rents collected can be spent.  All deficiency judgments will be wiped out through the bankruptcy, but the landlord’s responsibility to the tenant will not be. Filing for bankruptcy does not remove an owner from title on the property. So if a tenant hurts themselves or sues you after the bankruptcy, you are still liable as the owner of the property until the day the property is sold back to the bank at auction.

Good luck and consult a bankruptcy attorney for more details on your specific situation.

Short-Term Loans

A hard money lender makes short-term loans based on the value of an asset, in this case a property, with little regard to the borrower’s credit and/or finances.  Hard money lenders charge higher interest rates than standard banks due to the high risk nature of these loans.  Unlike traditional banks, hard money lenders can provide funds quickly, usually in 10-14 days, to purchase and rehab distressed properties.  These properties can be in need of significant repairs or be in various stages of foreclosure. This makes these loans popular with first time real estate investors that have little working capital or poor credit scores.  Look to use hard money loans to rehab foreclosures as your means to purchase and rehab your first couple properties.

Rehabber Loans

Hard money lenders will only provide loan terms of 4 – 6 months at which time the investor has to sell or refinance the property.  It is EXTREMELY important that the first time rehabber have a rock solid exit strategy, otherwise his rehab investments will soon belong to the lender.  Not having a SOLID exit strategy is the biggest and most common mistake that a newbie home flipper can make when utilizing hard money.  If this happens to you, work with your lender to get at least a 6 month extension and ask them for referrals to end-lenders that specialize in refinancing these situations.

In order to refi the hard money loan, you will need to find an investor friendly lender that has no seasoning requirements and will appraise the property in its newly remodeled condition and not at its most recent sale price.  Also, do not list the property on the MLS (multiple listing service) if you are planning to refinance.  Lenders will not refinance a property that is currently for sale.  The bottom line is that you either have to have the property pre-sold pending completion of repairs or have guaranteed refinancing in place.  Otherwise, you are setting yourself up for failure.

A typical hard money lender will lend up to 65-70% of the after repaired valve (ARV) of a distressed property.  The ARV is calculated by the lender’s appraiser and is based on an expedited sale scenario in case the lender has to foreclose on the property and resell quickly.  This gives the lender the safety margin needed to minimize their losses when things turn sour.

100% of Rehab Funds

The lender will typically provide 100% of the rehab funds needed to make the property saleable or rentable as detailed in your rehab estimate that you will provide to the lender.  This rehab estimate needs to correctly address the rehab plan in its entirety.  It is very difficult and time consuming to ask for more money in the middle of a project because you missed something in your initial estimate.  It often makes more sense to fund that portion out of your own pocket if possible.  Otherwise you most likely will be waiting for another appraisal and/or underwriting (or committee) approval for the additional funds.

The rehab funds will disburse in 3 – 4 draws as work is completed throughout the project.  Most hard money lenders will not issue your first draw until a portion of the home rehab has been completed.  Work with your contractor to have him put up the initial money to start the project.  If your contractor refuses or says he has no money then you shouldn’t be using him in the first place if he is that poor.  Be wary of giving unknown or untested contactors money upfront in order to start construction.  You will get burned eventually.

High Interest Rates

Depending on the lender, the down payment will vary from 0 – 10% of the purchase price and the origination points will also vary from 0-10% of the purchase price.  Interest rates will typically vary from 13 – 18% and will be charged on a monthly basis on your outstanding balance (only the money you have actually used).

Little to No Money Down

Hard money lenders vary greatly so the newbie rehab investor must shop around to find the best programs out there.  Local rehab clubs and real estate investment groups are a great source for finding hard money lenders you can trust.  Be wary of unscrupulous private money lenders and expert real estate investors that drive themselves around in their own limos.  This may sound funny, but you wouldn’t believe how many crazy people are out there.  Stay away!

I have personally purchased HUD foreclosures with only $500 out of my pocket using a hard money lender to finance the whole project including all closing costs.  Once you have some cash in your pocket, look for cheaper ways to finance your deals.  Community reinvestment banks are who you need to develop relationships with next.

Example of Hard Money Financing:

After Repaired Value (ARV) is $90K

70% of the ARV is $63,000.

As long as the total loan amount is less than $63,000 the deal will work.

Bank foreclosure (REO) purchased for $25K

Rehab Estimate is $30K

10% down payment on purchase price is $2,500

4% origination is $1,000

Closing, attorney, insurance, titles fees – $2,000

Total loan amount in this case would be $55,500 (assuming the lender rolls in closing costs and points).  This deal will work every time.

Note: Remember to subtract your down payment from the calculation of the loan amount.  Depending on the tax prorations (in most states the seller has to give you the prorated amount for the current year’s taxes) you may not have to bring the full down payment to the closing table.