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!
“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!
The seller doesn’t get it! I’m reading from the end of an email chain in which the seller is blasting me for not taking his counter offer on a single family house. A few email messages ago he discussed ad-nauseum why I ” . . . really need to reset my expectations in this market.” The truth is that I’m not buying the deal for one simple reason: the deal has been stripped of it’s equity. I have no issues with a person wanting to make a profit. That’s par for the course. But if a property is not in Turn Key condition (requiring no work or upgrades) paying market price leaves me no upside potential in the property. NEXT! I’ve been around single family deals long enough to know when a seller has priced a property for a fast sale and when they are speculating. What’s a speculator. Here’s an example: A brand new remodeled home recently sells in your neighborhood for $500,000. The house was move in condition, no upgrades or repairs needed with all the latest shiny features, materials, etc. The seller has priced his outdated house with none of the latest features for $485,000. Yet when I look around the neighborhood the price for comparable quality and features is more like $450,000. As a contractor I determine that is would take a $25,000 investment to bring the outdated home to date with the $500,000 remodeled home. If I pay $485,000 I’m speculating that an extra investment of $25,000 will fetch an even greater price than the $500,000 newly remodeled home. However, if I pay $415,000 the $25,000 investment should bring me a $500,000 home for the cost of $440,000. This is a value-add strategy because I have “built in” $60,000 of equity by doing the upgrades. If I decided not to do the upgrades but still purchased the house for $415,000 another strategy is to sell the house for $450,000 (the value for similar outdated homes). This is the wholesaling strategy which would net a profit of $35,000 minus my costs to quickly sell the property. And as you can see from this example, if you can get an offer accepted at a discount you will have more options available should your plans ever change. Food for thought.
Picture twenty years from now. You and you’re families needs have changed. Maybe you had children that are grown and out of the house now. Maybe you and your significant other are quickly nearing retirement. That four bedroom house is really “a lot” of house to clean, maintain and pay the property taxes. And maybe you made other investments in real estate and those properties have appreciated as well. You bought the house at a time when real estate was considered cheap, realizing now that your house IS your nest egg and has grown three to five times the price you originally paid! If you considered downsizing your lifestyle the prospect of having to pay the tax on the gains you earned makes the idea seem impossible, right? I mean why would anyone pay so much in taxes on the sale of the home to downsize right before retiring and your dependable income disappears? The tax will deplete a large amount of money that you could have gone towards your retirement! For this reason it is a MUST to learn about selling your home using the Installment Sale method. Before I go too far, please remember that I am not licensed tax professional and I am not giving tax advice. I am a real estate professional and like you I get my tax advice from a licensed tax professional and pay them a fee for that advice. So if you need tax advice please see your tax professional BEFORE taking any action that could trigger a taxable event! That said, an Installment Sale is a method of selling your house now, and spreading out the taxable consequence over time. For example if you purchased your house for $100,000 and it is now worth $500,000 you have a basis in your house of $100,000 so any amount that you sell your house over and above that amount will have a taxable consequence. And the tax would be paid for the current year’s tax filing. However, if I offered to purchase your home for $700,000 with a $100,000 down payment and then pay you the remaining $600,000 over the next 30 years, we now have an installment sale. You may have hear of the term a “carry-back” which it is similar. In this example the seller is taking back an income stream for the next 30 years instead of all the money up front. The seller gets to spread out the taxable consequence over the next 30 years and the house is sold. What binds the buyer to pay this balance due? The purchase and sale agreement (which is the executed contract), the promise to pay secured by a promissory note and a deed of trust against the property. The deed of trust is the 1st position lien holder with rights to foreclose and take back possession of the property if the buyer fails to pay the remaining balance due.
Here are some additional resources to understand how the sale of you’re house can qualify for an installment sale. As always feel free to send me a message if you have questions about how this strategy can help you sell your home!
Skip the spouse, buy a house. Right? Recently the National Association of Realtors found that single head of household females were outpacing their male counterparts in the first time home buyer surge going on across America. The percentages from today’s infographic speak clearly to the fact that women value home ownership and are wiling to use a greater amount of disposable income to maintain housing ownership. In Australia, woman are outpacing their male counterparts also because they no longer need a guarantor for they are encumbering against the home they are purchasing (https://www.westpac.com.au/news/money-matters/2018/02/women-holding-the-keys-to-the-housing-market/). According to data released in 2006 by the Joint Center for Housing Studies at Harvard University, the three main reasons a single woman would buy a home are:
1. A strong desire to own her own home.
2. Needing more space or wanting smaller home.
3. Relocating closer to job, school or family.
And a 2012 blog post on Redfin revealed that women buying a home are more focused on whether they love it — 46 percent of women first evaluate a home based on this, compared to 24 percent of men. Fifty-four percent of women and 76 percent of men evaluate a property based on cost and value (https://www.huffingtonpost.com/2013/07/10/single-women-buying-homes_n_3573801.html).
I am all for more woman becoming homeowners. Neighborhoods that are predominantly owner-occupied tend to be maintained better, safer and maintain higher asset values. Want to learn more about becoming an owner for the first time? Send me a message at firstname.lastname@example.org Today!
The headline read “U.S. stocks plunged to their lowest levels in nearly three years Monday, and the Dow Jones industrial average suffered its worst point-loss in history…” That day in history was September 17th, 2001 (http://money.cnn.com/2001/09/17/markets/markets_newyork/). Imagine trying to market time a stock investment the week before? Whether your investing in stocks or real estate, planning is the process that prepares consumers for the possibility that timing works against them. If you look at the chart above you can see how home prices in southern California topped out in July of 2007. County wide, prices lost as much as HALF their values by April 2009 with the median home price finally recovering by 2017. Good planning is how you get through the tough times so that your not forced to sell if the market sells off. For example, imagine if you had purchased a house in June 2007 and then one of the following happened to you:
- Loss of a job/income
- Health emergency not covered by insurance
- Auto accident not covered by insurance
- Home repair not planned that drains savings
- Tax levy from the IRS or State taxing board
- Legal settlement not covered by insurance or savings
- Family emergency not covered by savings or insurance
I could go on with this list but each of these items can severely impact a homeowners ability to pay the mortgage. And consider this, NONE of these factors are market related! They are all issues that happen in LIFE. It goes to say “Plan for the worst, hope for the best.” Homeowners who carefully plan out the monthly payment including taxes and insurance are less likely to struggle during the tough times because they have “plans” in place to take care of such emergencies. For example, private disability insurance can protect a homeowner from the possibility of becoming unemployed from a disability. Drafting a will and living trust can make the process of losing a loved one a little more manageable to deal with a families daily affairs. An umbrella insurance policy can cover owner liability and certain potential lawsuits claims. Hiring a qualified CPA who is also designated as an enrolled agent(EA) can protect a homeowner from the potential conflict of filing a frivolous tax return. Home warranty programs can cover home repairs that are costly and unforeseen. The same goes with product warranties that are sold as “extended warranties” from resellers. Boosting an auto policy coverage can ensure that an unforeseen accident doesn’t leave a homeowner in massive debt from health care bills. This is just a short list of plans are designed to address unforeseen emergencies, not market pricing. Yes it’s still possible to buy a home at the top of the market. But, by working with a professional you can structure a plan to ensure that if the market turns, you still have a roof over your head, enough money to pay your mortgage and avoid being forced to sell your home. Need a plan? Contact me and I can help you get started!