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When Real Estate Investing Becomes More

08 Dec

Today I attended a closing between one of our buyers and investors.  I rarely attend, usually a case manager goes, but today she had a conflect, and I found myself seated around the jovial closing table, watching the buyer sign piles of documents, chatting with an investor totally pleased with himself for investing, and, really against his will, enjoying the process and people.  I was glad I attended, it validates the job we do, and what can be achieved when an investor truly comes to enjoy what he is doing, and why.

Many flippers are about turning a house as quickly as possible.  They work on strict budgets (so do we), and take enormous risks with large sums of money to flip a house and make a tidy process.  They rarely meet and have the chance to interact with the buyers, and understand the gravity of what they are doing – creating a new home which will excite and create memories for a home buyer, whether they be new or otherwise. 

Our investors have the chance to interact with their buyers.  For 6 months, they are receiving rent, fixing small issues that might arise, making sure, as this investor did, that their buyer is truly excited about their home.  And this investor did.  He landscaped the house, even though it wasn’t in the ‘budget’.  He received the small notes that the buyer put in the rent envelope, even posting a couple of them on his kitchen appliances.  He grew to know his buyers, and when he paid a water bill ($10.00), and the buyer found out and repaid him, he was gratified, surprised, and filled with admiration that his buyers were so responsible that they would not allow him to pay even $10.00 out of his own pocket.  They joked about this at the closing table, and the joking added to the atmosphere of the closing, made it more personable, more enjoyable.  Indeed, with the right buyer, right product, the process does work.  Even I, heading the organization, felt pride, and that sense of accomplishment.

The buyers emerged after 6 months with a strong house that passed multiple inspections.  They understand their house, have resources required to ensure maintenance is continued.  And, they learned that investors do care, and are willing to ensure they achieve what they tried so hard for so long to do…that of home ownership.  Having achieved it themselves, they thought of their daughter, who also shares the same dream…and wants home ownership. But she requires a bit of structure, a program that will teach her how and what homeownership is all about, the financial responsibilities required.  And she may require an investor…. our buyer smiled, as did our investor.  Yes, when real estate investing becomes more…. I’m glad I attended this closing.

 
 

Becoming Approved for a Lease to Own: What can a Potential Leasee Expect

03 Nov

For candidates considering a Lease Option, the amount of program and variation can be baffling.  This is due mainly to the various objectives of each program.  Lease Option often sounds too easy, and in so doing, naturally raises suspicion.  I will cover some basic program objectives and discuss how to distinguish between a program wanting to get your money for something intangible, versus a program wanting to help you through the program, with the objective of the candidate ultimate ending in successful home ownership.  I have found 3 key types of programs – and objectives.

1. Lease to Own to anyone who has the ability to pay a % down, or set down, such as $3,000 or $5,000.  These programs are very good for Leasee’s who have down payment, and have the self discipline to take the steps required to obtain a Mortgage.  The program is suited with the Candidate decides to ‘exercise’ the option or not – they have received the down payment money, and should the Candidate not exercise, they will loose the right to purchase, and the investor is then free to offer the home to a new Candidate.

2. Credit Restoration Programs - Many programs focus on credit restoration.  Monies required go to paying for Credit restoration.  These programs are great for candidates who have completed their research, spoken with past participants, and validated that past Candidates have been success in restoring credit, and obtaining a Home Mortgage.

3. Programs which work with the Candidate through the lease to purchase – these programs are great for Candidates who like the discipline of a structured program, and are motivated to own the home they are ultimately qualified to lease.

Which program is right for you?  It really depends on your own motivation, and what you truly plan on doing at the end of your lease period.  From this writers perspective, we always recommend program 3, as we feel it is a strong win win for all parties.  That said, each party must be motivated – the Investor (Person holding the property or loan on the property) must be motivated to sell the home.  The Candidate (the lease option candidate) must be motivated to purchase that home.  When both work in tandem, it’s a beautiful program.  Your company representative will take you through two phases:

1. Needs analysis – This is a fact finding interview in which the representative will ask you to discuss your home ownership dream.  They’ll want ot know what is motivating you to own a home, what resources you have to own the home, what prevents you from purchasing a home outright, and what your plan is to follow through with a potential program.  After you have gone through this interview, you will most likely want to think about the seriousness of the program, and how it will impact you.  After you have given in some thought, you will enter the second stage.

2. Qualification – this is the stage that determines if you are a strong candidate for a Lease Option, and the results of this qualification will be of interest to the investor who will own the home during the time you are restoring your credit.  Elements that will be required:

a) Application – you will need to complete an application, very similar to a home loan application.

b) Credit Pull – A loan officer will put your credit and analyze you situation, to determine if you will qualify within the program option guidelines (some programs only lease for a year, some 2 years).

c) Credit Consultation – a credit consult with a qualified credit specialist.  The credit specialist works hand in hand with the mortgage officer, and knows what their underwriting department will require to enable a mortgage to be written.

Theses steps all require people power, and an application fee is normally required.  That fee can range from $150-$500.  What ever the fee, the program will not assess you without paying your application fee.  It’s important to note that an application fee does not entitle you to be accepted in the program.  It only allows you to be qualified.  Only you, your history, and motivation can qualify you for the program.  What ever the case, as a potential candidate, you have to decide if you are serious about owning a home, and if so, if the program qualification will benefit you, even if you are not accepted.  If so, then the fee has value.

In today’s economy, with a growing population of potential home buyers with credit challenges, Lease Option programs cater to every type of individual.  It’s important to understand what you want to achieve in the program, and then choose accordingly.  Which ever you choose, nothing unfortunately is free, and value of the fees charged will only depend on what you want to achieve, and that program’s ability to help you achieve it.

 
 

Spectacular Failures – Lease Option Candidates

15 Oct

There is nothing I would like more than to say that I have 100% success in funding all of our lease option candidates.  I believe I would be very rich if I were to be so accurate with my formula.  However, I can learn from my ‘Spectacular Failures’, and share wisdom (if any is to be learned) with readers of this blog.  I am going to provide 3 samples of Lease buyers who did not follow through with the transaction – correlate my learnings to the failure.

1. I haven’t seen enough houses after all – one of my worst failures was with a buyer with whom I felt was strong.  She drove through neighborhoods and ultimately found her dream house.  We found that, together with the investor we had lined up with her, that we could purchase the house.  The negotiation was straight forward – and price agreed for the house.   The buyer was thrilled.  She cried.  She couldn’t wait to move in.  The rehabilitation of the house was completed-and at the much anticipated move in date, the buyer took possession.  She was thrilled.  But the thrill wore off.  There were things wrong with the house, and has the lease time went over its expected term (the buyer’s credit score refused to increase, partly due to the purchase of a new car she told no one about), the buyer began to look around.  She engaged a Realtor, who told her she could do much better.  She jumped at the change and soon fell in love with another house.  She had been coerced – forced into the current house, and now in love with another, she gave notice, and in 30 days was gone.  The investor was left with a house he didn’t want.  It was released.  The learning? Be sure the  buyer is truly in love with the house.  Make sure they are willing to fight for the house.  Take them to several houses to ensure the house is really the right house for them.

2. This failure was and still is mysterious, as by all accounts what happened should not have.  This buyer had been on our roster for nearly a year.  She was a nurse, had good job history, was calm, and realistic in what she could afford.  Her credit score was strong, and the only item preventing her from purchase was a bankrupt filing, which was 6 months from the required 2 years for a home loan.  Each and every month, she rang our company and asked if we had an investor.  Once we did she forwarded houses that she liked.  This continued for nearly 11 months.  Finally, we found a house that met all the requirements, and it was purchased.  The buyer was excited.  She paid her $3,000 down, and prepared to move.  One week before moving, she went in for elective surgery.  While in, complications occurred causing her to stay away from work.  At the same time her employer decided to cut back on the number of nurses they employed.  Who was on the roster to be cut?  Our buyer.  Before she ever took possession of the house, she backed out.  The investor was forced to resell the house.  The learning? Make sure the buyer does nothing out of the norm during the time they are in the lease.  No elective surgeries, no new cars, no new accounts, no anything until they purchase.  If they can not agree to this…are they really responsible?

3. “We can kill you”.   Yes, that’s right, and that’s what one of my Lease buyers actually said to me after no paying for 3 months and making a mess of my house.  The learning? Do good and thorough background checks!  This was not my placement, but one I outsourced to an agency, and clearly I will never use this agency again.

I always remain positive about the well run lease option purchase programs when done correctly.  No matter how much screening, nor money put down, Lease buyers are human and can succumb to challenges which do not benefit investors.  However, if chosen with caution, using the 4 key traits I posted earlier, we can minimize our ‘spectacular failures’ and provide a program which benefits both buyers and investors.

 
 

Rates of Success – Tenant Buyers Who Purchase

11 Oct

The most common question I receive from investors is, “What is your ratio of success with ensuring Tenant Buyers actually fund”.  I have a standard answer – we are at 92% so far.  But there is more behind the numbers.  The rates are high, but they have come with their fair share of frustration from investors, and the few that have failed have been spectacular failures.  I’ll recount each in high level detail.

Our success rate has come with a certain sense of tenacity.  Our teams are following clients from before they actually move into the house, until they actually fund.  But drama is bound to ensue, after all these are client’s who lack training in keeping and maintaining credit scores worthy of purchasing a home.  These drama’s have included:

A) Potential Insurance Issues – yes, who would think that a high renters claim would completely through a buyers ratio out of whack when they went to purchase.  But it did.  While we don’t know the full circumstances of what happened, the buyer had difficulty obtaining mortgage insurance that was reasonable because of a high renter’s claim.  The drama, and subsequent solution, elongated the closing by nearly 45 days.  It was resolved – the mortgage broker was tenacious and the buyer truly wanted the home.  She managed, with a high deduction, to squeak by.  But just barely.  And the investor was on pins and needles the whole time.

B) Online purchases – again, who would think that excessive online purchases would prevent purchase – or drop scores 60 plus points.  Even with case management, the client denied any purchases.  The resolution..? Surrender of all credit cards, and physical watching as buyer closed accounts.  The buyer paid down her credit cards, and was able to fund.

C) Appraisal did not match purchase price – by nearly $20,000!  The solution – a detailed accounting and full scope of work that informed the appraiser what was completed to the home, how much it had cost.  The appraiser was able to reappraise the home with the new information, and it appraised accordingly.

Many lenders and organizations would let these situations slip, with the end result being a buyer who couldn’t buy.  In any lease option program, it’s critical that the team remain watching and working with the buyer, right up to the closing table.  Only after all documents are signed can you truly say a buyer has been successful.

More on the spectacular failures in my next post.

 
 

Determining the Ideal Candidate for Lease Option

30 Sep

I am often asked what the driving criterion is in determining who is a strong possibility for Leasing a home, with the option to buy.   I have developed some criterion, but ultimately, the criterion is based on the investors end goals.

When I first learned about a Lease Option program for Property Investing, I was told how it was such a great program.  The reasons stated were that the Optionee would always pay a ‘fee’ for the option to purchase a property for a set price.  Usually ( and this was explained in detail to me) the optionee does not exercise, and the $3,000 – $5,000 option money was forfeit to the investor.  Thus, the investor never really intended to sell the property, and was looking to increase his/ her return on investment by collecting the extra ‘option money’ over a 2 year period.  Certainly, when the market was trending upward, this was a sound investment strategy, though the ‘benefit’ for the optionee seemed, in my eyes, suspect.

Today, the real estate market is not trending upward.  Prices remain flat, and in many areas still continue to decline.  More and more investors want greater assurance that when a Leasee signs an option, they will actually follow through and purchase the property at the end of the options.  The returns are not as high, but neither is the risk.  Here are some criterion I’ve discovered that provide the best likelihood that an Leasee will ‘exercise’ at the end of the option period.

1. Time – first the time of the option is critical.  Studies have shown that the greater the length of time allowed for ‘exercising’ the greater likelihood the option will not be exercised.  I recommend setting options for 12 months and under.

2. Structure – Once the Leasee is in the property, they should appreciate the structure of the program that they are in, and be committed to following through and adhering to the structure, which will provide greater likelihood of exercising the option and ultimately funding.

3. Product – As an organization we create a product.  It may be necessary to pass numerous inspections, or it may be general updating to the property that adds value and equity.  A Leasee should be engaged in this process, and feel ownership in it.

4. Love of the Home – If structure brings the Leasee to funding, Product is what induces them to fall in love with the home.  They must be willing to fight for that house, and feel true ownership, even as they are leasing.  If they do so, their willingness to exercise increases dramatically.

5. Motivation – A leasee must have the motivation to make the corrections in their situation that will allow them to purchase.  Demonstrating their motivation can be seen through prompt production of required documents,  and attention to meeting dates.

There is no single set of criterion that can reduce risk 100% and completely ensure your Leasee will exercise their option.  However, if followed closely, these 5 criterion will significantly reduce the risk for an investor, and help ensure that both parties are engaged and moving toward a common end goal, home ownership.

 
 

Investing in Section 8 Buyers

06 Sep

There is a logical progression to investing in section 8 home buyers, but as logical as it can be, it’s also fraught with investment danger, and can end up easily depleting already narrow profits as well as disappointing prospective buyers.   To ensure the buyer, as well as investor reap the reward of solid homeownership,  here are 3 tips that should help both investor and buyer:

1.  Desired area of the city -  Too often, I have had Section 8 clients with limited funds want to live in higher retail areas then they are qualified for.  It’s natural – if you are purchasing a house, you want to better your circumstances.  I have walked away from seamingly great Section 8 buyers because they wanted an area that was just out of their price range.  When I have been successful in placing them in their area at under value pricing, our investor has ended up loosing money, due to the reduced margins and numerous inspections and subsequent remedies required to pass the house for government funding.  Tip – if a Section 8 buyers is qualified at $80,000. then look in areas that retail for $80,000 – $100,000.  If the buyer wants / insists on an area that retails for $120,000, walk away.  It will either take too long to find the right property for them, or, if found, will most likely cost more then margins permit to complete repairs to Section 8 inspection standards.

2. Amenities – It almost never fails, if a buyer has a 2 bedroom vaucher, they want a 3 bedroom house, a 3 bedroom voucher, 4 bedroom house.  I often relate the experience of having a section 8 buyer who, though unable to climb stairs, insisted on a basement because she wanted to buy a pool table for the few times her nephews came to visit.  In this case – walk away.  At $50,000 total qualified, a basement in an investment property (together with the 3 bedrooms, 1.5 baths and garage was not going to happen).  Walk away.  Tip : Work with the section 8 buyer to stay within their voucher limits.  They’ll get more house, and better amenities by being realistic.

3. Motivation – This is a big one.  Is this section 8 buyer focused solely on purchasing a home?  Is this their true dream?  Is this more important then Christmas, Birthdays, Graduations or any other celebrated event?  It has to be – at least for that year.   This is an event of a lifetime, and it must take all precedence.  Is this buyer working with a home ownership program?  Are they attending all classes?  Are they missing any classes?  Just how motivated are they really?  Tip – When screening section 8 home buyers, track their progress in their classes before you decide to invest.  Have conversations wtih the Homebuyer personel.  Ensure they have supplied all documents to the credit restoration specialist, and mortgage loan officer.  Ensure home buying is number 1 priority.  Interview them thoroughly.

Working with a section 8 buyer can be truly rewarding, but the elements or dynamics, as I call them must be correct.  If they are, its possible to invest in, and find amazing homes that will add value and provide long term stability to the new home owner.  If not, it can lead to disappointment from both the buyer and investor, as well as cost more then the house is ultimately worth.

In the end, it is possible for government and private investment to benefit a core sector of our population that can cherish their new home for a lifetime.  But realistic goals, expectation and level of development must be followed.  Area, amenities and motivation, 3 key area to watch for when working with, and investing in a section 8 home buyer.

 

A Home Buyer Experience

25 Aug

This is really a story of an older lady who squeaked and squeaked to get what she wanted.  I’m not sure if it’s sad, or happy, you be the judge.

Our lady is an older lady in her mid 60′s of indeterminate ethnicity (it’s really not relavent), with ambulatory problems (she walks bent over with a cane and has a heck of a time climbing stairs).   She has an engaging smile, promised to bake a pie for the team once in her house, and, well as a last discriptor, often wore large and stylish wigs.  Our lady ( no name used) is often on the phone, an old fashioned wall mounted unit, by which she sits perched on a stool, calling… well just about everybody.  She came to our organization through a referral, and we were excited to help her … she was far to engaging not to help, and in any case, she would call us daily until we agreed.  So we set about helping her.

Though a single person, our lady wanted a 3 bedroom house with a full basement and a garage for her car ( and the other that did not run as eventually became known).  On her fixed income, she was limited as to what and where she could purchase, and required a number of agencies to provide downpayment and closing costs assistance.  She rang them all… constantly, nearly daily.  She was shown some nice conservative homes, which, with a little work and upkeep, would have well served her purposes.  But she had her heart set on a brick 3 bedroom home (“bricks can not be blown down” she said), with a fully finished (though leaky) basement and a nice 2 car garage with a rusted in operable door.  Nothing would deter her from that house (with its rotting facia, old appliances, molded bathroom and leaky basement).  Our investor put a low offer on the house, and it was estimated that about $20,000 would fix the house.  There was an error here though… the estimate did not take into account the numerous inspections required for the amount of assistance our lady needed.  Somehow (our lady reckened it to an act of god), the low offer was accepted by the bank.  The house was in contract and our lady stated the lord worked for her.

Once contracted, the work began and though our lady had agreed to the basics to ensuring funding, it did not stop her from asking for many other small things, since the crew was there.  The costs mounted.  Our lady, true to charactor, was on the phone (with a blocked number), constantly, organizing… and asking.  The $20,000 renovation mark was passed, and more inspections came, and more issues were found.  Our lady was undeterred, and at one point our investor wanted to give her the boot, since she was financing under appraised value and costs continued to rise.  Lawyers were called, threats were made, repairs continued.  Finally, after significant sums of money spent, much yelling (can I say grief?), the house passed all inspections, and our lady was ready to finance.  I personally attended the closing, and she arrived 30 minutes early (for the first time) neatly dressed, cane in hand, beautiful wig on, smiling broadly as she signed her papers.  The house was hers.  The investor breathed a sigh of relief, as did I.  Done!  We all smiled waved good bye, and chalked up a bit of experience …. watch these older ladies.  The end.

Not….I learned  not the end at all.  And it may still only be the beginning.  Why?  After all the money spent, all the time spent, all the grants given, after the tax incentive earned, what happened on the very first payment?  Our lady was upset as some money had not come in from the city.  She refused to pay her very first mortgage, a mortgage that she had fought so hard for 7 months.  She insisted the money arrive before she paid, though she had sufficient funds in her account for the payment.  True to charactor, she phoned daily everyone, complaining that she had not received her money.  She even went into the mortgate office from where she had obtained her loan, stipulating she would not pay until she recieved her money.  In the end, she paid 15 days late, told her story to anyone who would listen, and set the stage for all participants that while she owned the home, she had no intentions of responsibily managing that home.  Her story will continue, and while I will keep my fingers crossed it ends well, I am in doubt.  As a society, I believe we really need to help those home buyers that desire home ownership … it’s a dream that all can earn.  But it’s just that, an earned responsibility.  Once earned, it can lead to a new sense of achievement, and as such responsibilty.  It’s a truly great thing to achieve and be successful.  Somehow, for all the work, for all the complaining, I don’t believe our lady is there yet.  But that’s just me…..

 
 

When buying a home in a down market makes sense

03 Aug
Buying Homes in a Down Market

My Web Designers First Home

I love to use my web developer when I discuss this subject.  He is a young (30) educated (MBA) professional that has traveled a fair amount, worked abroad, and set up in Columbus Ohio.  He drives a sporty BMW 323ic (paid for), and he can often be seen driving down the trendy part of Columbus with his convertible top down, with seemingly no care in the world.  He is serious, dresses smart, and focused on his business.  About 9 months ago, he became a home owner.  When he told me he was purchasing, I immediately conjured an image of a smart house, in a nice neighborhood, sleekly furnished with the latest modern Euro design.

In fact, the opposite was true.  He purchased a small 2 bedroom house in a suspect area of town (I usually refer to it as the ‘shoot out zone’), in need of repairs, for the grand sum of $20,000.  He budgeted a grand total of $5,000 for repairs, and for several Sundays, after his purchase, i would curiously drive over to see him grinding original hard wood floors, painting trendy colors, and putting a new tub and toilet in his tiny bathroom.  He did this with the help of his laborer…and you have to wonder, with that small budget, and the work he required, just how much he paid that laborer.  However, the times I visited, both seemed busy, and oddly content.  And then, just as suddenly as he started, he was managing his move in.  He craftily negotiated the purchase of some old IKEA furniture I used for staging and with that, for just under $26,000, he had a furnished home.  Wow, let’s take a look at the math.

Other like homes in his area are and have sold for between $35,000 and $75,000.  Therefore he has equity, the exact amount to be seen when he sells.  He pays in total mortgage, taxes and insurance a grand total of $187.00 per month.  He purchased the house from HUD, so is required to live there for a year.  Let’s look at a year’s earning on this purchase.

Equity – we’ll be conservative, and say he will sell for $35,000.  So, h will earn $10,000 in equity.  Rent on a normal 1 bedroom unit in Columbus is $500 per month.  The difference between his total payment and what he was paying in rent is $313.00.  Excluding the tax benefits of interest paid and expenses, his total earning for one year are $13,756.00.  He put 20% down on his loan, totaling $5,000.  His total 12 month return on investment was is a whopping 363%!

When buying makes sense.  All across America there are great deals available for first time home buyers.  If they choose their home correctly, they stand to make unprecedented rates of return.  Renting vs. buying…If you ask Eric, I think he will tell you he laughs all the way to the bank every month.