Life Events – The Good and the Sad

Life Events 2

Effective Real Estate investing is about preparing for the next life event – WELL before it happens.  The common passages of time are marked by life events that help define the people we chose to become and the path we choose on our life journey.  Earlier this year I met with a friend who described to me that she was living a life that anyone would envy.  A happy marriage, financial stability, large cash balances in her savings accounts, million dollar real estate holdings for a retirement nest egg, a comfortable income from a good paying stable job with the city – she and her spouse were comfortable on every level.  At least – until it wasn’t.  In overnight fashion, the sudden passing of my friend’s spouse caused her world to turn upside down.  My friend, who held a good paying job used all of her income in which to live and pay monthly bills.  HOWEVER, all of the  couples real estate holdings were held in the name of an irrevocable trust.  For my friend, this was bad.  The irrevocable trust only named my friends spouse as the trustee and the spouses child (from a previous marriage) as the beneficiary.  My friend was not named in the trust anywhere!!! 

While my friend’s spouse was alive they were fine.  The income from the real estate was accessible for any purposes that they chose.  But a minute after her spouse passed away, NONE of the real estate money could be accessed by my friend.  To make matters worse, the spouse had large quantities of unpaid credit card balances and taxes.  Any cash the trust owned disappeared to pay off debt.  Once the cash was used, and ALL of it was used, my friend was now on the hook to help pay off these expenses.  Within 30 days my friend found herself broke.  Fifteen days later she filed bankruptcy.

How could this happen?  Simple.  My friend was not listed as a Trustee or a Beneficiary in the irrevocable trust.  While my friend and her spouse were together life was very good.  The real estate was pouring out large amounts of cash flow in which to pay down the remaining real estate loans over their near 25 year marriage.  THESE HOLDINGS would be their nest egg.   And the day my spouse passed away, she would be blocked from ever accessing that money ever again.  As her family attorney explained it, this single life event triggered the ownership of the real estate holdings to revert to her spouses child.  Nothing in California law could give my friend access to that money.  IT ALL WENT TO ONE CHILD BENEFICIARY.  $$ MILLIONS $$.  A child that my friend had never developed a close and personal relationship with.  And as my friend found out at the reading of the will, and now an adult, cared about one thing only:  what was in it for them?   My friend was ordered at one point to leave the apartment that her spouse and she had shared throughout their marriage but an argument ensued and was eventually resolved.  The resolution created a lease that would allow my friend to remain in the apartment building, or at least until the day it might be sold.   Given the immense value of the apartment building and windfall the beneficiary stands to gain, that could happen any day now.  Worse, my friend is now on her own with no savings to fall back on.

To say this is a sad story is an understatement in so many ways.  My friend cold have never foreseen the untimely death of her spouse.  But it happened.  She also couldn’t foresee having to pay creditors for her spouses debts, but it happened.  She also couldn’t see being cut off from the income the trust was generating the apartment buildings, but it happened.

This is why it is SO IMPORTANT to understand at every point in life, if the unexpected were to happen, what would happen next?  We invest in real estate because we want to be ready for the next life event BEFORE it arrives.

What life events have you planned for, or failed to?

Do you have a plan for the unexpected?

Questions about your situation?

I’m happy to address your questions or concerns at 310-850-5178 or buyorrentmyhomes@hotmail.com!

Solving Real Estate Problems Part II: Selling at Any Price

Buyer and Seller

Motivation.  It’s a 2-way street.  Both the buyer and seller have to have a compelling reason to enter into a contract to buy/sell a home.  So does that mean we should assume that sellers that try to get a higher than market price are unmotivated?  It depends.  One of the main reasons I have found a seller might be asking a higher than market price is not only to test the market, but because they don’t have any other source of funds to close the deal.  A seller might either have (1) over mortgaged the property, or (2) overpaid for the property, and in both cases will need a certain amount of money to “untangle” the deal out of their lives.  In this article I am going to focus on sellers, and specifically how to earn a sale with an above average market price.  And the strategy that is the most enticing is known as seller financing.  Seller financing simply stated is a term of the deal that the seller offers to allow the buyer to make payments for the property with minimal underwriting (and sometimes no underwriting) for the buyer to take equitable title to the subject property.  This enticement can usually create an emotional motivation for buyer simply because the buyer now doesn’t have to qualify to obtain a home loan.  Highly motivated sellers will make qualifying to finance the home easy.  Additionally, a buyer who doesn’t have a perfect 800 credit score and can’t qualify for a competitive rate will now have more leverage negotiating an affordable monthly mortgage payment by negotiating with the seller direct, rather than being told how much by a traditional mortgage lender.  For example if the going price for 10 year old 3 bed 3 bath home is roughly $300,000 and the seller’s asking price is $319,000 the extra $19,000 is the cost of getting flexible terms.  Some would argue the extra $19,000 makes the interest and monthly payment bigger, which is true.  So there is a trade off.  The seller wants a higher price for the property so by offering flexible terms the seller motivates buyers who want the house but might not be able to afford the the monthly payment if they use a traditional lender.  Some seller financing terms I have seen are:

  • 30 year amortization, balloon payment due in 5 years.
  • 30 year amortization, balloon payment due in 10 years.
  • 15 year amortization, balloon payment due in 3 years.
  • Interest only, 30 year amortization, balloon payment due in 7 years.

The balloon payment simply means that the remaining loan balance owed is due at the end of the period agreed upon.  Whether a buyer choses a 3, 5, 7, or 10 year balloon payment the financing program structured by buyer and seller should be comfortable for the buyer so they will be able to refinance the property in the future.

If you know someone with a real estate problem or questions feel free to email Paul at his email address at buyorrentmyhomes@hotmail.com.

Paul Krause is a full time real estate professional with Keller Williams in Los Angeles California, DRE #01835890 and CSLB #1029575.

Solving Real Estate Problems Part I: Down Payment

solving problems

The number one reason to hire a realtor is to solve a problem.  As I share the story I’m about to tell you keep that in the back of your mind as I share my client’s recent experience with a competitor realtor:   It’s year end 2018 and my clients were at a Christmas Holiday party.  My clients were enjoying the festivities when they met a competitor neighborhood realtor.  They shared with this realtor that they were still renters living in a duplex and were actively looking at single family homes for sale.  The competitor realtor asked them about their plans to buy real estate in 2019 so they replied that they were ” . . . actively looking for a seller that will accept a smaller down payment or that will accept the down payment assistance we qualify for.”  The competitor realtor was a bit surprised and said “well if you don’t have the down payment it will be hard to buy a house in this market.  Inventories are very tight.  You might want to just wait till you can save enough for the down payment and continue working on your credit.”  At first glance that sounds like great advice – right?  I would challenge that and tell you hands down – WRONG!  Whose problem did this realtor solve?  In fact, when my client asked my opinion of this advice I responded “well, do you feel the realtor solved your problem?”  They obviously said no, to which I then reminded them that like many services professionals, it’s not about the badge one wears but the person behind the badge.  I continued, “your going to meet realtors who have never found creative solutions to solving real estate problems.  They are so intently focussed on how they closed their last deals that they simply cannot think beyond that because of their fear that they won’t get paid.  And THAT, is really the problem that they are focussed on solving.  Not yours.”  On a bigger scale let’s take the situation with the Los Angeles (Anaheim) Angels.  The Angels don’t own Angel Stadium, the city of Anaheim does.  But that hasn’t been a problem for the Angels who, as a professional baseball organization are essentially renters.  Through all the options on leases and lease contracts that the Angels management must negotiate, agree upon and ultimately enter into, the Angels still find a way of showing up on game day to a packed crowd.  A lot of creative juggling, but they make it work.  On a smaller scale, my clients have done the planning that it takes to buy a home.  They know exactly what down payment they want to make and the down payment assistance they are going to use when they find a home they are excited about.  But they aren’t just focussed on the house, they want the deal that they want.  Not just price, but terms!  The competitor realtor’s advice lacked the focus to solve a problem and instead would have sent my away clients off confused and frustrated.  The real estate market is going to do whatever it’s going to do.  It’s not a controllable factor by any one person.  Therefore strategizing how a home will be bought or sold and if the timing is right is what buyers and sellers depend on when they work with a realtor.  Planning is essential in order to getting what the buyer (or seller) wants.  There are times traditional methods will work just fine and times when creative methods work fine.  Either way doesn’t really matter, so long as I’m solving my clients problem and they are getting what they want IS what matters.

If you know someone with a real estate problem or questions feel free to email Paul at his email address at buyorrentmyhomes@hotmail.com.

Paul Krause is a full time real estate professional with Keller Williams in Los Angeles California, DRE #01835890 and CSLB #1029575.

Sidelined!!!

Sidelined

You came really close to buying that house.  It had everything . . . except . . . RIGHT?!  Has this happened to you?  Everything about that home tour was going great until the agent said “oh don’t forget there’s no AC in this home,” and instantly you were turned off and heading straight for the door!  Although central air and air conditioning has become hugely popular amongst home buyers in almost region of the county, you found yourself looking at a home that was missing that one “thing” which killed your deal. Leaving you sidelined again.   This months infographic was excellent because as some seasoned homebuyers know, December can be one of the best months of the year to strike a deal.  There are a variety of reasons the “December Effect” exists.  The bottom line is that motivations to close a deal before year end the December 31st has caused more home buyers to find a deal in the slow, dark days of winter more than any month of the year.  Buying or selling, December is NOT the month to get sidelined!  As the graphic shows in Box 1, over 60% of home buyers put less than 6% down to close!  That reason alone can get any homebuyer off the couch and into this weekends next Open House.  Box 3 gives another example of judging a home just by it’s price alone.  Because of the “December Effect,” I always recommend homebuyers look at prospective homes regardless of listing price.  I know of a seller in Los Angeles that listed a home for more than $2 million as a For Sale by Owner that was offered cash of $900k and a very quick closing.  Instead of the seller being insulted or turning away they started negotiating the deal into the low $1 million range with the buyer.  Although the deal didn’t go through for other reasons, the point is most buyers would never think that such a low offer would even be considered.  And maybe that is true much of the time.  But this buyer learned by writing and submitting an offer the sellers motivation was substantial enough to negotiate the deal rather than turn away.  Don’t get sidelined this December!  The best home buying opportunity of your life could be one Open House away!

 

Avoiding Surprises!

 

It is so easy to fall in love with the “money shot” that it can cause a home buyer to forget how to evaluate a home purchase.  In real estate it is always emphasized that “location, location, location” is what counts.  And there is truth to that.  Which is why I wanted to share this home in my blog.  At first glance the home looks like an impressive compound.  It’s got that elegant “money” look to it.  So thanks to Google Space and Street View technology I was immediately shocked to find the front gate banged up and entrance featuring an old office chair prominently on display.  In addition the seller excluded photo angles that reveal a barren desert dirt front yard, which if I were to buy this property would end up becoming a dust bowl on a windy day – not uncommon for California!  The street view picture across the street is the neighbor across the street –  a home that is quite a bit different in dimension, style and size.  Which would lead me to ask “who would buy this property?”  Honestly there always a buyer for any home at the right price, but it is clear the featured sale property is well overbuilt for this neighborhood and is quite possibly the biggest and nicest in the neighborhood.  So how would that work out if you were currently the owner trying to sell this house?  Would you know someone who is willing to buy this home?  It’s possible.  If you want to avoid surprises one of the questions home buyers need to ask themselves is, if their situation changed would they want to be the one having to sell this house.  Again, there always a buyer for a home at the right price, but being that seller is easier said than done.  In high density city areas we can usually find plentiful comparable sales.  But in my experience the further your travel from urban sprawl the less information will I find for a given neighborhood.   That doesn’t bode well for buyers that need a loan to purchase a home if the bank has to stretch over many miles and calendar months of home sales to determine a fair market value.  A lack of sales data sure will make the sale of a property more difficult to compel buyers.  In this case, this seller might do just fine selling this beautiful home and find themselves having no difficulty finding a qualified buyer.  The point is as a buyer, you have to picture yourself as the potential seller first to ensure there are no surprises as a buyer.  Asking lots of questions about real estate trends in a neighborhood is something a competent and qualified realtor is happy to do.  In my case I even shake hands with the neighbors face to face by door knocking a few times a week just to keep up so that I know what buyers and sellers are not only doing, but where there thinking is so that new buyers get the best possible information to make an informed decision.  Avoid surprises by slowing down, taking a closer look, imagine yourself the owner and potentially seller first – this is a great way to avoid pitfalls and start your home buying process.

To get more information on purchasing a home and home trends feel free to write me at buyorrentmyhomes@hotmail.com.

Foreclosure with Equity?

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It’s hard to imagine in this day and age with the amount of information available on the internet about how homeowners can avoid foreclosure that they still happen.  But they do.  Although the foreclosure process ends with the possession of the home (the collateral for the mortgage loan) returned back to the bank that is servicing the mortgage, what some people still don’t realize is this:  foreclosures with equity can be just as common a foreclosures without.  What is a foreclosure with equity?  It’s a foreclosure of a home that is worth more than what is owed on the outstanding mortgage.  Banks that service the mortgage loan for homeowners will use a Trustee to handle the business of sending notices and ultimately the sale of the property at auction if a mortgage is in default (has not been paid in full and on time).  In some cases, a property that is sold above what is owed on the original mortgage+interest+legal fees is classified as an Equity Foreclosure, meaning, the amount over what is owed to the bank is equity, the borrower’s equity.  BUT the borrower must makes a demand to the Trustee for the equity portion to be returned!  Although the bank does not get to keep this “overage” the borrower must make a demand to receive it.  The foreclosing Trustee will almost never make an effort to find the borrower if the borrower is still owed money from the sale of the property.  It is very important to understand that a borrower who has equity in their home can still experience a death, divorce, disability, loss of employment or income source or a variety of other “life events” that can cause a borrower to get behind on their payments.  If the payments continue to remain unpaid the bank who is servicing the loan can still move to foreclose the home, even if the home has equity.  One strategy to avoid foreclosure of a home with equity is the sale lease-back.  As a true win-win strategy it allows the borrower to lease back their home from a new buyer with a promise that they will be able to purchase the property back after a certain period of time has passed.  After the borrower repairs the financial damage that caused them to get behind on their payments, the borrower (who will temporarily become a tenant) will have the option to purchase the house back in the future at an agreed upon price.   The new buyer and the borrower will negotiate how the equity in the property is split before either party enters into the sale of the house and after reviewing the contract with qualified legal counsel.  The equity in this scenario is used by the borrower as a bargaining chip with the buyer and in turn offers the opportunity for a buyer to earn a return on dormant cash that might be earning a meager 1% or less in a savings account.  In my next article I will discuss ways to avoid foreclosure of homes that have no equity.  To your prosperity!

Building a Portfolio versus Building Equity

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“My portfolio is growing!  I just closed on my fourth house and I just got a promotion at work – things couldn’t be better!”  On the outset this sounds great.  Until you ask, “do you have any debt on those properties?”  The eager up-and-comer quickly responds “well, yes, but I have renters, so I’m building equity!”  As the onion peels away we start understanding the situation much better.  “I took advantage of a low down payment loan program to buy the houses so my renters (as they pay their monthly rent) are paying down my mortgage for me.  These houses will be my retirement portfolio one day.”  If this sounds familiar, then I agree with you.  I am learning about more and more “investors” who are buying homes at or near market price, adding some fresh paint and carpet, replace a few kitchen cabinets and toilets and then rent their properties out.  This strategy is only one paycheck (of the renter) away from becoming a disaster for the owner.  Simply put, the only viable reason to rent out a single family house is because either (a) you are using your own money, and (b) the rental rate is so far above your holding costs that your net profit is better than any other investment alternative on a return-on-cash basis.  Otherwise, if you are buying a house near or at market price, one missed rental payment (and usually will at the wrong time) can spell disaster for the owner.  The cost of eviction and missed payments will eat up any “discount” you bought the property for.  So now you have to ask yourself, DID YOU GET INTO REAL ESTATE TO BUILD A PORTFOLIO OR TO BUILD EQUITY?  The purchase of a rental home should made at a steep enough discount that lost rents, non-paying tenants, and expensive repairs do no cut significantly into PROFITS.  Remember profits are why you got into real estate investing to begin with!  Four home purchases made at or near market price with a low to zero down payment is speculation.  The buyer is speculating that the renter will not default, that the house will not need repairs, that economic circumstances won’t change, that a host of factors will not cut into profits.  Homes in several hot markets during 2007-2012 including Las Vegas, Phoenix and Tucson went through a boom/bust cycle that wiped out half the value of the residential market.  Short sale properties were so common few people wanted to buy them and so many more couldn’t because the banks were barely lending to even the top tier borrowers in the country!  Build a portfolio Yes, if you bought equity on the day of closing.  But, depending on a series of factors that are not under your control No.  Equity is bought on day one.  Having a strategy to cash in on that equity will be in my next article!  To your prosperity!