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Dec 14, 2007
Avoid foreclosure
There are two types of sellers:
- Those who want to sell;
- Those who HAVE TO sell.
We hear, almost on a daily basis, from home owners in the second category; they are desperate to get rid of their houses for any number of reasons, such as:
- They are behind on payments and have no hope of getting current before a foreclosure;
- They must move and have no equity to pay selling expenses on their home;
- They must move and they cannot rent the house for the amount of the payments;
- The payments will increase because of taxes or a loan rate adjustment and they won’t be able to meet the new payments.
Home owners who find themselves in any of these positions need to bite the bullet and act fast; that does not mean they should act with thoughtless haste. The immediate goal is to accept the fact that the current ownership situation is unsustainable. No matter how much the owners would like to keep the house, sitting back and letting time pass will not change things. They must make an informed decision and stick with it. The goal will be to avoid foreclosure.
There are several options. The first is to sell the house at a loss—take an economic blood bath—and go to closing with a chunk of money to get rid of the house; not a good choice for most owners; an impossible one for those who aren’t even able to meet current payments. Another option is the prolonged way to take an economic blood bath: rent the house at a loss and bleed money slowly instead of doing so in one large chunk; that’s also not a good way for most folks to unload a house.
Another method is to sell the house through owner financing to someone who is willing to make larger payments—after making a good down payment—for the right to own the house rather than just rent it. In the current market this will work in a few rare instances; but it will become a better and better method as there are more people with damaged credit who cannot get a loan from increasingly-scared or weak lenders who have come to realize that making sub prime loans is a good way to lose a lot of money.
For most home owners the best path will be the sale in compromise, more popularly known as a short sale. A short sale means the lender accepts payment short of what’s owed on the loan. The short sale avoids a foreclosure, and generally helps the lender as much as it does the home seller for more reasons than I have room to go into here. The important point is that if a short sale closes, the home seller avoids the many problems associated with a foreclosure.
Most short sales close with the help of real estate agents; most lenders insist that agents be involved in the process. Do all short sales close? No. Do all real estate agents know how to do a short sale? No. The more experienced the agent is in working with lenders’ loss mitigation and short sale departments, and the entire short sale process, the more likely it is that the deal will eventually close. An inexperienced agent will probably not sell the house in the short sale process; the house will go through foreclosure. The very experienced agents will close 85% of their short sale listings. Some short sale houses don’t sell for a number of reasons, including reasons brought about by the lender, the seller, or the market; that’s the 15% of the listings that experienced agents are not able to sell.
A foreclosure negatively affects the home owner to a much greater extent than does a short sale; that’s the reason for working to get out of a bad situation rather than throwing in the towel and letting the lender take the house. The short sale can help the home owners’ cash positions as well as their credit. We’ve worked with home owners in trouble for over 25 years. If you have questions about a short sale, or know someone who might need more information about one, give us a call. - ☺md
Dec 10, 2007
The bubble continues to pop; advice for sellers
I spoke about the sound of a popping real estate bubble back in 2005; nobody was talking about it then; everybody seems to be aware of it now. We currently have a real buyer’s market, and becoming more so by the day. If you’re a buyer, it’s time to start looking for deals. And there are some real deals out there. Here are some examples. Not long ago we sold a million dollar house for 60 cents on the dollar; we recently closed on a house for 67 cents on the dollar of the loan balance, two lenders took a $100,000 hit; a small house with a $110,000 loan balance netted the lender slightly over $70,000. In this type of market, what can sellers do to maximize their sale price?
The answer is condition. There is nothing better that the home seller can do to a property to help it sell quickly and for maximum price in an extremely competitive market than to make it shine; in other words, you must beat the competition. New paint and carpet are generally of foremost importance in getting a house to look better than the competition; but sellers can’t stop there. Pets, furniture, and the overall “feel” of a house can make a huge difference in how well a property sells.
Here’s an example of a potential problem. I’ve known several buyers who would not buy a house whose owners had pets because their children have allergies aggravated by animals; the allergens will not be completely eliminated with carpet cleaning. If the carpet is replaced, pets should be kept off the carpet till the house sells; preferably, remove pets from the property to avoid that possible selling obstacle.
Colors can kill a sale. Repainting the interior of a house in colors that are pleasing to the seller can result in colors that offend the buyer. Neutral, light colors in floors and walls is the best way to prep a house for the selling process.
You must also understand what is worth fixing, and what might be a huge waste of money. Sold By Owner covers a range of items that the home seller can do to help sell the property without breaking the bank. - ☺md
Dec 1, 2007
Understanding a good deal...why price per square foot is important
In a buyers' market it's easy to imagine that nearly every property is a good deal; prices in our market are not climbing enough to keep up with inflation (real inflation, and not the sugar-coated lies we're getting from Federal agencies); in fact, due to the bloated residential market and the increasing number of foreclosures and government-agency-acquired properties, plus all the new homes available, a host of properties have declined in price, some quite significantly. How can buyers possibly determine which sellers are offering a good deal, and which ones are in what we call La-La Land?
Price per square foot ($/sf or p/sf) is an excellent way to separate La-La Land from the Real Deal. Back in the mid to late 80s we bought a good number of investment properties; many of them were in south Fort Worth. Our goal was to buy the houses for less than $30/sf; generally we were looking for houses considerably under that figure, often hitting under $20/sf; a good number of very modest houses we bought under $2/sf (that's not a typo, that's two dollars/sf). This meant that we wouldn't even consider a house that was priced above $30/sf. It was a convenient way to search for the kind of deals we were looking for.
For this house hunting shortcut to be effective, buyers must be careful to segregate type and size of houses. For example, there's a huge difference in p/sf between a 5000 sf house in relatively-modestly priced Mesquite or north Fort Worth and the luxury Park Cities areas; things won't compute when lush hardwood panelings and slate floors are compared to the more lowly painted sheetrock walls and vinyl floors.
On the other hand, comparing a 5000 sf house and a 1000 sf house of similar construction in Lewisville won't compute either. It is always cheaper p/sf to build bigger; that's because simply adding square footage does not involve increasing the cost of items like the lot, the garage, the concrete flatwork, main plumbing and electric lines, and expensive items like kitchen cabinets and major appliances. There's a more detailed discussion in Home Buyer's Confidential on this and other time and money saving subjects.
The key is to look at the p/sf of sold properties in and around areas where you contemplate on purchasing. Once you have a handle on figures for different types, sizes, and seller types, you'll easily and quickly differentiate Good Deals from La-La Land ones. - ☺md
Nov 27, 2007
I don’t want to rent my house...the tenants will trash it!
Yes, and if you loan your Lexus to a sixteen year old who’s had ten beers he’ll trash it; maybe even kill himself in the process.
Not a week goes by that we don’t hear from home owners about the fear of renting a home because they can’t chance being stuck with “bad” tenants. Those of us who have managed rental properties for a few decades have all known “bad” tenants; we’ve had our share of trashed houses. But we all learn the hard way; or we learn from others the easy way. We’ve not had a bad tenant, or a trashed house in years.
For some home owners with little, zero, or even negative equity, renting is the only alternative to throwing in the towel and either letting the bank have the house, or working for a sale in compromise (two easy ways to hurt credit ratings). There are three easy steps to becoming a happy landlord:
- Rent only to “good” tenants;
- Understand that your tenants are your customers and treat them that way;
- Maintain the property as if all your wealth depends on it.
The biggest hurdle is economics: understand your position, accept what the market gives you, and refuse to let your emotions guide you. In other words, don’t rent your property without a spreadsheet; that way you’ll rent at the right price to obtain the right tenants.
If you have a property you must vacate and either sell or rent, call us for ideas on selling or getting good tenants, becoming a top notch landlord, and your overall best course of action depending on your economic position. - ☺md
Nov 16, 2007
"We have not seen a nationwide decline in housing like this since the Great Depression..."
This is a quote from John Stumpf, chief executive of Wells Fargo. He added, “I don’t think we’re in the ninth inning of unwinding this. If we are, it’s going to be an extra inning game.” It’s an interesting way to explain banks’ troubles. Citigroup wrote down $11.28 billion worth of bad loans for the third and fourth quarter. Merrill Lynch $8.48 billion, Morgan Stanley $4.68 billion, Bank of America $3.88 billion, Barclay’s $2.7 billion, Wachovia $2.48 billion...there are too many more to mention.
Bad loans on housing has caused much of the grief; there’s a real domino effect here. Since I like to look at the half-full glass rather than the half-empty one, I think all of this grief will be good for buyers; extremely good. Not long ago we closed a deal where two lenders wrote off over a third of the loan amounts; believe it or not, the deal helped the seller and the banks avoid more pronounced losses. But it was such a great deal for the buyers - to the tune of a hundred grand.
I see the housing market during the next two or three years going through the “lost sack of money” syndrome. Imagine a jogger finds a sack of money on the side of the road; it has $100,000 cash in it; there are no identifying marks on the sack; the bills are legitimate, of different denominations. Whoever dropped the sack took a great loss; the jogger has a great gain. The banks will be the ones dropping the sacks; buyers will be the joggers finding them. - ☺md
Nov 9, 2007
The greenback is sinking fast
For a brief instant this morning, the dollar index hit an all-time low of 74 - the first time it’s dipped into that number. The index has since stabilized into previous lows in the 75 range. What does that mean? It means we’re printing dollars (and creating credit and digital dollars) with no concern for inflation. But inflation is heating up. While we have a large supply of homes in the market, in the long run inflation will hold up or bring back home prices. Don’t sell your home yet if at all possible; buy a good deal in real estate if at all possible.
On another note, Wachovia announced today that it lost $1.1 billion in loan losses in October. Loan losses mean more foreclosures; that translates to more foreclosures and more deals for buyers. Lender loan losses are not surprising; our own John Dubois was fond of saying back in 2005 that “If you can fog a mirror you can get a house loan.” He was dead-on right; today it’s a lot tougher to qualify for a loan; but still a lot simpler than back in our grandfathers’ day. - ☺md
Nov 8, 2007
The country’s largest S&L bleeding profusely
WaMu (Washington Mutual) is the nation’s largest savings and loan. They announced that they expect a $1.1-1.3 billion loss in this quarter; and about the same amount in the first quarter of 2008. Ouch! Could they be taking a lot of houses back in foreclosure? Yes. Are there some real deals out there for buyers? Definitely; however, some are not deals at all; you can overpay in any market.
If you’re looking to buy a home - and get a really good deal - this is one time you need someone with a lot of experience to help you with your purchase. Ask your agent how long she/he has been in the business. Make sure you have a very qualified agent helping you with your home or investment real estate purchase. Don’t buy a new home without an experienced agent. All good, reputable builders will be happy to work with you and your agent.
Just in case you don’t have a good agent, give us a call; we’ll be glad to help you. - ☺md
Oct 31, 2007
Inflation soaring - hold on to your house
This week’s edition of the Economist gives us some scary figures. It says that an average of “all items” is going up not at 2% or 3% per year as the U.S. government claims, but at 16.7% per year! Food is going up even faster – at 31.6% That’s not surprising since the Fed excludes three of the highest-priced items from the CPI: Energy, food and the price of our homes. - ☺md
That’s nifty...and convenient. It would be nice if folks could exclude increases to their mortgage payments, the cost of their food bills, and fill ups at the gas station; heck, even if those costs only went up 3% per year, the 99 cent per gallon fuel we bought at the end of the twentieth century might only be a buck thirty today. For those who owned (and owed) homes back in the 70s, how about having that cozy payment now? Of course, with homes those who stay put for a number of years can hold payments down considerably; trading up every few years can be costly. - ☺md
Oct 25, 2007
Can you “fix” a broken foundation?
Soil movement is a problem for buildings everywhere. You typically cannot “fix” a broken foundation; you can’t glue it back together like you can a broken plate. Once a foundation has broken, it’s broken; just like a broken plate that you can’t glue back. You can lay a broken plate on the table with lot’s of cloth padding underneath it and it will stay level and hold food; but it’s not in one piece as it was before it broke. But if you were to take a broken plate and glue it to a flat piece of iron that had the shape of the plate, you’d have a very useable plate, even if it were a bit heavy.
A house foundation works the same way. You can dig holes every six feet around the perimeter of the house foundation, pour heavy, steel-reinforced concrete pads in those holes, and when the concrete cures the foundation can be leveled with inexpensive hydraulic jacks. This would be like putting cloth padding under a broken plate; it won’t stay level for long. Other, better methods, use concrete piers, push or helical piers, mud jacking, hydraulically driven concrete or steel pilings; I could go on and on with a list of leveling methods. But here’s the key point: no matter what “good” method is used, nothing can guarantee the foundation will stay level except the company that does the work. The longer the company has been in business, the more valuable is the guarantee; the more experienced the owners, managers, and workers of a foundation leveling company, the more valuable is the guarantee; and the more “seasoned” references the foundation leveling company provides, the more valuable is the guarantee. In other words, check them out, and check their references - the older the references, the better. - ☺md
Oct 15, 2007
Gold and houses give the real story on inflation
When I was in college (I majored in Home Building) I worked for a small homebuilding company in San Antonio - that was in 1965. I did the design work on the modest houses we built. The homes were typically 3 bedrooms, 2 baths, and a double carport or double garage; prices ranged from $9,500 to under $11,000, the average house had 1,200 s.f. of living area and sold for $10,000. In 1965 gold averaged $35.12 per ounce. Simple math tells us that you could buy one of our average houses for 284.7 ounces of gold.
Today gold is priced around $750 per ounce. In dollar terms, the 284.7 ounces it took to buy our modest 1965 homes are worth $213,525; however, those modest homes in San Antonio are not worth that many dollars. You can buy one of those same houses for a mere 140 ounces of gold at this time. Does this mean real estate is not a good deal right now? That it might be better to buy gold? Absolutely no to both questions. From a buyer’s perspective, real estate is a bargain at the moment.
Can it become a better bargain in the future? Yes, but that does not mean today’s bargain will be a bad deal in the future. If you buy correctly today, that good deal now should still be a good deal in the future.
So what about inflation? Inflation is a measure of the sinking value of money - dollars, fiat currency, colored paper the government tells us has value. We measure inflation by the rising cost of goods in relation to money. But inflation is really a measure of the sinking buying power of paper money. As you can see by the example above, gold - real money - has not inflated; rather, there has been deflation when the price of houses is measured in real money terms. It now takes less real money to buy the same house than it did over forty years ago; however, it takes about ten times more fiat currency to buy the same house.
What does all this tell us? Perhaps it’s time to put your savings in real money, and buy bargains in real estate. This is a great time to buy investment real estate. Want to learn more? Call me for more ideas and suggestions on your specific situation. - ☺md
Oct 10, 2007
Still lots of property for sale in the D/FW Multiple Listing Service
The statistics for the regional MLS don’t look good for sellers this month. Since we work for sellers and buyers, we have to be very careful we don’t do what the folks on Wall Street and so many people in the media do: take sides. If the stock market goes up, you see happy faces in newspapers and TV. Sellers would have a happy face; they can get more money if they sell their stocks. But what about buyers? They have to pay more; and lately they pay more for stock that pays little, if any, in dividends.
Back to real estate and the MLS. It’s good news for buyers: lots of residential listings. The means there are more sellers than there are buyers. At the end of September there were over 53,000 residential listings for sale - most of them single family houses. That’s up over 4% from a year ago. The real bad news for sellers is that in September there were less than 6,500 residential sales. These statistics DO NOT take into account the huge number of new homes that home builders have under construction, or completed that are not in the MLS system.
As in any economic system, a debit here means a credit over there. This is very good news for buyers; good deals are everywhere. The news is not rosy for sellers; however, some sellers can look on the bright side of this. Those wanting to move up might get beat up on the selling end, but they will have a chance to beat up the seller of the house they buy. The trade off is really no different than in a balanced market, or even a sellers’ market. The point here is that if you are selling and buying in the same market, you’ll do quite well if you move up.
There are two types of sellers:
- Those who want to sell, and;
- Those who have to sell.
If you want to sell and move up - assume you’re selling in Grapevine and buying in Grapevine - go for it; you’ll come out ahead. If you want to sell in Carrollton, and buy in Highland Park, watch out! You’ll get beat up both ways; of course, if you can afford to buy in Highland Park, the sale in Carrollton won’t matter.
Those who have to sell and won’t be buying for a while have a different problem. The problem is greater if there’s no equity, or the sellers are upside down in equity. If that’s your problem, you need to call me. Every situation is different, but generally there IS a solution. Whether you want to sell, or have to sell, make sure you have someone with a lot of experience working for you. This is no time to seek the advice of someone who has not been through at least one real estate cycle - real estate cycles last seven to ten years. - ☺md
Oct 1, 2007
Too late to save a sinking ship
I had a call from a home owner in trouble today. She had lost her job and got behind on her house payments. After several months she had landed another job with not quite the same income as her previous job. She wanted to avoid foreclosure; didn’t think she could catch up her payments, even with a loan modification from her lender. She had an adjustable rate mortgage (ARM) that was to reset next year and payments were to rise beyond her means.
I asked her for information about her house and the loan; it sounded like there was a strong possibility I could help her avoid foreclosure. I then asked about any correspondence she’d had with her lender. That’s when she confessed that foreclosure is set for tomorrow, October 2nd (known as “Texas Tuesday,” the first Tuesday of the month, the only day foreclosures are allowed in Texas). My heart sank for her. There was no way to save this sinking ship; she’d called me too late.
I don’t get many calls where we don’t have time to at least give avoiding foreclosure a good try. If we’d had even a week we could have had a chance; not a huge chance, but the effort would have been well worth a try. - ☺md
June, 2007
Your House has Doubled in Price.
Are You Wealthier?
Setting value on a home with worthless promises
A house was bought in 1990 for $100,000; it is now worth $200,000.
A reasonable person would assume the owner is $100,000 richer:
That's an assumption that can lead to catastrophic financial decisions.
As a general rule, houses DO NOT automatically go up in value with the passage of time. Sure, there are instances when proximity to trendy areas increases the real value of properties. Some properties are situated in extremely desirable, locked-in cities - where there is no more room for development - and demand for housing in them far exceeds the available stock of housing. The Park Cities just north of downtown Dallas is a good example; multi-million dollar remodeling projects are not uncommon in Highland Park; often large houses are torn down to build larger houses. Except for these instances, most houses remain at a constant value when compared to almost any other commodity EXCEPT the dollar.
Here's how it works. A house worth $100,000 in 1990 might be worth $200,000 today. The value of the property is represented by a medium of exchange that is decreasing in value in relation to almost everything else that people buy: the dollar. The owners of that house hold onto the unfortunate illusion that their wealth has increased by $100,000. But if we look at the house in relation to other goods and services, the value has remained constant.
I'll give you a couple of examples to illustrate my point. Let's say you had ten brand new Honda Civics in 1990; they were each worth about $10,000. It's reasonable to assume that you could have traded them for that $100,000 house. It is now 2007; you have ten brand new Honda Civics today; they are worth about $20,000 each; again, it is reasonable to assume that you could trade them for the same house today.
Okay, so not many people want to trade their house for ten Honda Civics. How about trading them for REAL money: silver? Towards the end of 1990 silver was trading for about $4.00 per ounce. It would have taken 25,000 ounces of silver to buy the house back then. Let's say the owners would sell it today for silver. How much could they get? The current price of silver is a bit over $13 per ounce. Hold on to your hats with this figure: they would only get 15,384 ounces of silver! If the house were priced in REAL money, it would have lost 38% of its value! The owners would NOT feel richer; they would feel poorer.
What happened? First of all, let's not look at how much each one of these goods - the house and silver - has gone up in value. The point here is that the DOLLAR has lost more value in relation to silver than it has in relation to the $200,000 house. But the ratio doesn't matter to understand what happened; the fact is that the dollar has lost a huge amount of value. Whether we like it or not, the dollar is headed the way of the Dodo Bird. What is a dollar? It is simply a piece of paper with a promise: the full faith and credit of the Federal Government; that promise is as rock solid as an IOU from Enron some time before its demise. Why is the dollar sinking to oblivion? The short answer is overprinting of a fiat currency that is not backed by anything of value to pay for an infinite number of promises made by politicians to rich and poor alike; to pay for bloated bureaucracies; to pay for wars; to pay for programs and entitlements we cannot even imagine; and finally - apologies to those in my generation - to pay for Social Security, Medicare, and Medicaid.
Overprinting of dollars is the real cause of inflation. Increase in the "value" of goods is the symptom of that inflation. Back to our $100,000 house; we now realize that we cannot assume it has doubled in value. It just takes twice as many dollars to buy it today as it did in 1990. The owners should not for a minute think they are $100,000 richer, because if they sell it they can still only buy ten Honda Civics, and a whole lot less ounces of silver than back in 1990.
But here's where so many people have made catastrophic financial decisions following the assumption that because their house was worth more, they could tap into that additional wealth to do neat things like consolidate credit card debt, take overdue vacations, even buy Honda Civics. The owners of those $200,000 houses have borrowed an additional $100,000 on refinances and made it very difficult to ever own their homes free and clear. Unfortunately, I get calls every week from one or several owners in trouble because they need to sell their $200,000 house and they no longer have enough equity to cover the selling and closing expenses, much less receive any money at closing.
The most important rule in real estate for most homeowners is this: DO NOT REFINANCE!
The cost of a refinance is excessive - I've seen some exceed 10% of the loan amount - the interest savings through lower payments often will not recoup the cost of the refinance for a decade or more; and if the existing loan had 20 years left to pay out, a new loan will set the clock back to 30 years.
Maurice Dubois
The Housing Wiz
June, 2007
Can Everyone be an Investor?
In this world of limited commodities, limited population, and limits placed on everything and everyone by the grand scheme of nature, the obvious answer is that there is no field of endeavor from which everyone can benefit. The answer here, then, is that not everyone can be a real estate investor.
Judging from the number of calls I receive weekly from investors with problem properties, it’s obvious that a large number of folks have entered the real estate field anticipating massive profits from one or more real estate purchases just by the fact that they own more than their homestead. Any business must operate at a profit; that profit comes after ALL expenses and contingencies are taken into account. In addition, the business must be run by someone who is proficient, experienced, and capable of running the business. I’ll give you an example in a moment, but to understand what I mean, let’s look at the medical field.
Just because someone can inject a medicine or suture a wound doesn’t mean that person is a medical doctor, or that they can run a medical practice. Reading a book or attending a three day conference on the subject won’t make that person a medical doctor either. I’m not suggesting that real estate investing takes the degree of skill or amount of knowledge that’s required to become a physician; however, I wouldn’t be lying if I said that to be a true professional in the real estate investing field it takes ALMOST as much knowledge and experience.
I don’t mean to imply that you should not become a real estate investor; there’s plenty of room for many knowledgeable investors in real estate. I simply want to caution you about joining the ranks of naïve beginners who labor—waste vast sums of money and their good credit—under the delusion that success is a signature away on a real estate note at the title company. So beware that it is still too easy to buy property with good credit, little cash, and a lot less real estate knowledge.
Here is and example of real estate investing gone wrong. A house we listed in 2006 closed towards the end of the year; it sold for around $110,000. The buyers were “investors” who painted the house and replaced the carpet immediately after acquiring it. I drove by the house last February and noticed a FOR LEASE sign in front of the house. A few days ago—four months later—I again drove by the house. The same sign stands leaning in the front lawn amid a sea of high grass. Please understand that I was the listing agent; the buyers had their own agent. That house, at that price, was not a good rental property; the rental values in that area are $1,000 to $1,100 per month.
I don’t know how many times I’ve heard real estate “gurus” explain that monthly rent of 1% of the value of a property is a good deal—that would be $1,100 on this property. Baloney! Even if bought for cash it’s not a good deal—including factoring inflation, depreciation and any other reasons that might tempt one to overpay for a rental property. Real estate investing is a business; it must provide a profit. Don’t buy a property under the assumption that it can be rented for minimal profit or merely to cover the mortgage payments. Holding on to a losing rental just to wait till inflation kicks the value up and you can sell and make a killing is not a good idea; you might not last long enough in the business to make your killing.
I will assume the house in the above example has a monthly payment to the lender of $1,100—including taxes and insurance. It would be a good investment as follows:
|
1
|
Monthly loan payment
|
$ 1,100.00
|
|
|
2
|
Reserve for vacancy
|
$ 110.00
|
10%
|
|
3
|
Reserve for repairs and maintenance
|
$ 110.00
|
10%
|
|
4
|
Owner's profit
|
$ 275.00
|
25%
|
|
5
|
Required monthly rental income
|
$ 1,595.00
|
|
There is no way the lender will let you keep the house if you ignore #1 above; if that’s the case, you should also NEVER leave out #2, #3, and especially #4. That means you must be able to easily achieve #5 and nothing less; you can ascertain that prior to your commitment to buy. Can these expectations be met in this market? Absolutely! And things should get better as the next few years unfold. Print this little spread sheet and use it as an example of the VERY LEAST that you should strive for in your real estate investing endeavors. It CAN be done; which means you WILL get rich investing in real estate.
Want to know how to get rich investing in real estate with minimal risk? It’s coming later this year: Starting Real Estate Investing.
Maurice Dubois
The Housing Wiz
April, 2007
Is there a way to buy a house with
NO money, NO job, and a credit score under 100?
Can Fido buy a house?
Foreclosures started rising in the Dallas/Fort Worth market over a year ago; every month more people are losing their homes. You’ve probably heard the story in the evening news.
Many more people are in trouble; foreclosure rates will continue to climb.
Homeownership is declining as a result of foreclosures, and vacancies on rental units are coming down because those who have lost their homes can only rent.
Wait! Is that true? Can they only rent? That’s what everyone and his brother would tell you; that’s what the talking heads on TV will tell you as this story unfolds during the coming months and years.
I have good news for those who want to buy but have NO money, CANNOT prove their income, have TERRIBLE credit. It’s so easy to buy a house even Fido might be able to pull it off; with help from his master.
Here’s the secret. You must step out of the “conventional thinking real estate box” to understand how it works. Common knowledge says that to buy a house buyers pay for the house with cash, or borrow money to pay the sellers. The sellers in turn sign a deed and hand title to the buyers.
But let’s delve a little deeper in the sellers’ position. What if they owe money on the house? Do they really own it? Yes and no. What if the house is worth $100,000, and the loan amount is $100,000? Do they own the house? Not really. Well then, who owns it?
The lender is the real owner. So can the lender sell it to you? Not hardly…unless it were to foreclose sometime in the future.
Oops, this is getting confusing. Let’s simplify it. Is there a connection between the owners and the house? Yes, they have title; they got a warranty deed when they bought the house. Is there a connection between the lender and the house? Yes, it sort of has title; it got a deed of trust when the owners bought the house.
That didn’t help. It might still be confusing. Let’s simplify it even more. Let’s say the owners of that $100,000 house with a $100,000 loan balance don’t want the house anymore; perhaps they can’t afford it. What if you want it? Can they just hand you a warranty deed and give you the house? Yes, they can. Is the lender going to check your credit, your bank account, your job? No. Will you own the house? Yes! Of course, you’ll have to continue to make the payments.
Whew, that was easy!
There’s only one Slight Little Problem (SLP). It’s called the Due on Sale Clause in the deed of trust. Oh, bummer! You knew there might be a catch; an SLP.
Yes, that’s actually a big catch. But it’s not an impossible catch. During the last 20 years I’ve discovered the secret for completely eliminating that SLP. The secret is a series of steps—lengthy and complicated, but completely effective—that allows buyers to take title to a property from the original owners and continue to pay on their original loan. At some point the loan gets paid off and the buyers are left with a home that was bought under the buyers’ most adverse credit position.
During those 20 years I have bought countless properties for investment and speculation. We still service a large number of other people’s loans. Was it profitable? Absolutely!
If you’d like to learn how to buy a house with NO money, NO job, and NO credit, drop me an email: Maurice@HousingWiz.com. I’ll put you on our list of people to contact later this year when I will teach a select few how to…
buy a home with NO money, NO job, NO credit check while completely avoiding the SLP.
The Housing Wiz.
March, 2007
How to NOT go broke investing in real estate...get rich in the process
In any investment situation, whether it is stocks, gold, or real estate, the most important consideration is preservation of capital; simply stated, that means being safe; not losing money that you have earned through your job or other investments. If you can do that you are well on your way to becoming RICH by investing in real estate.
Here’s what you want to avoid. If a person makes $1,000 per week at her job, and she loses $5,000 in a poor investment, that’s a loss of five entire weeks of income. That’s ten percent of her income for an entire year. That’s a serious loss.
You do not want to get into real estate investing with highly-leveraged, high-cost properties. In the Dallas/Fort Worth area an example would be any property that costs over $80,000 with a loan over $50,000. If you’ve heard the late night gurus, or more scary yet, have attended one of their seminars, you’ll think my advice is nonsense. In a minute I’ll show you why it makes complete sense.
With due diligence you can buy a $100,000 house for $80,000 in this market; you might have to spend a little money cleaning the carpets and doing some paint and minor repairs. There are a lot of $100,000 houses in the DFW area; they are houses that in a good market would sell for $110,000 to $120,000. We’re not in a good market for sellers; we’re in a good market for buyers.
Okay, so it takes money to make money. You can’t be a safe real estate investor buying houses with zero down. It can be done, but it is either risky for your bank account, your credit rating, or the credit rating of the person who hands you a house coupled with a loan (taking title subject to the loan).
Here’s how the above deal would work:
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$ 80,000.00
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Purchase price
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|
|
|
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$ (30,000.00)
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Down payment
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|
|
|
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$ 50,000.00
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Loan amount
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Loan term
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Int rate
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$ (349.61)
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Monthly loan payment
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30
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7.50%
|
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$ (233.33)
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Taxes
|
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$ (2,800.00)
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|
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$ (50.00)
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Insurance
|
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$ (600.00)
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|
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$ 995.00
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Monthly rent
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|
|
|
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$ 362.06
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Gross monthly income
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|
|
|
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$ (49.75)
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Reserve for repairs
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5%
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|
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$ (49.75)
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Reserve for vacancies
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5%
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|
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$ 262.56
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Net monthly income
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$ 3,150.71
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Yearly net income
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|
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$ 30,000.00
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Down payment
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|
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$ 1,500.00
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Closing costs
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|
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$ 3,000.00
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Repairs
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|
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$ 34,500.00
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Cash invested
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9.13%
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Return on investment, first year
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|
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Is this a good deal? Yes. You have a home potentially worth $110,000, with a potential $60,000 equity; it only cost you $34,500 in cash outlay.
Is this a safe deal? Yes. If the rental market were to spin and crash to the ground, you would be the one to survive. You could cut the rent all the way down to $632.94 and still pay your mortgage, taxes, and insurance. You would not have reserves for a while, but you would not need much at that rate since you could pick the very best tenants.
Is this a good return on investment? Yes, considering the safety of the investment, and the fact that rents will increase in the future due to the government’s propensity to print money and cause inflation.
This example works in the real world; it’s working for us now, and after decades of owning and managing rental properties I can assure you that in this day and age, rents under $1,000 per month are very easy to accomplish; this property would always stay rented, to good tenants and not to Section 8 tenants.
I want to show you a better deal; this was one of a number of houses we owned about 15 years ago (that we should never have sold):
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$ 2,400.00
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Purchase price
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$ (2,400.00)
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Down payment
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|
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|
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$ -
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Loan amount
|
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Loan term
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Int rate
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$ -
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Monthly loan payment
|
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30
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7.50%
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|
$ (50.00)
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Taxes
|
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$ (600.00)
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|
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$ (25.00)
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Insurance
|
|
$ (300.00)
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$ 395.00
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Monthly rent
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|
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$ 320.00
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Gross monthly income
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|
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|
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$ (19.75)
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Reserve for repairs
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5%
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|
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$ (19.75)
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Reserve for vacancies
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5%
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|
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$ 280.50
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Net monthly income
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|
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$ 3,366.00
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Yearly net income
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$ 2,400.00
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Down payment
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|
|
|
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$ -
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Closing costs
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|
|
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$ 3,000.00
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Repairs
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|
|
|
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$ 5,400.00
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Cash invested
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|
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62.33%
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Return on investment, first year
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|
|
|
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These two examples show you how NOT to go broke investing in real estate. They show you how to eventually get rich while you sleep well at night.
Now here is what people are doing today; a real world example from someone I spoke with not long ago. This is how to go broke investing in real estate:
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$ 210,000.00
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Purchase price
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$ -
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Down payment
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|
|
|
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$ 210,000.00
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Loan amount
|
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Loan term
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Int rate
|
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$ (1,540.91)
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Monthly loan payment
|
|
30
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8.00%
|
|
$ (483.33)
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Taxes
|
|
$ (5,800.00)
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|
|
$ (87.50)
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Insurance
|
|
$ (1,050.00)
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|
|
$ 1,595.00
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Monthly rent
|
|
|
|
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$ (516.74)
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Gross monthly income
|
|
|
|
|
$ (79.75)
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Reserve for repairs
|
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5%
|
|
|
$ (79.75)
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Reserve for vacancies
|
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5%
|
|
|
$ (676.24)
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Net monthly income
|
|
|
|
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$ (8,114.87)
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Yearly net income
|
|
|
|
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$ -
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Down payment
|
|
|
|
|
$ -
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Closing costs
|
|
|
|
|
$ -
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Repairs
|
|
|
|
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$ -
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Cash invested
|
|
|
|
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0.00%
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Return on investment, first year
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|
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The above loan is an Adjustable Rate Mortgage (ARM); the rate will go much higher than 8% before it ever goes down. This deal could never be called an investment; it is a disaster from which the investor won’t recover unless we get inflation rates over 25% per year. There is no way to rent this price house to cover the monthly expenses. This explains why zero down deals are rarely zero cash invested. This investor is putting over $8,000 into the house every year.
If you are interested in real estate investing in the Dallas/Fort Worth area, call me any time.
Maurice Dubois
The Housing Wiz
March, 2007
Is it Time for Your McMansion?
In 1965 I worked for a small homebuilding company in San Antonio while I went to college. Our typical house was 1,000 to 1,200 square feet, 3 bedrooms, 2 baths, a 2 car garage or carport. The homes sold in the $10,000 range, give or take a few hundred bucks on either side of that price.
Nobody; I mean, nobody has asked me for a 1,000 s.f. house in the past few years. The other day a very conservative buyer told me she wanted to build a house with about 1,500 s.f. on her acreage in the country. Even though that figure was fifty percent higher than the houses we were building in San Antonio, it was refreshing to hear such a modest figure after working for years with people who tell me 3,000 s.f. is the minimum size they “need.” Some tell me that 4,000 s.f. with at least 5 bedrooms is their bottom size requirement. It’s amusing when they tell me they only have one or two children.
I’m not denying anyone their right to have whatever size house they feel is necessary for their pleasure and well-being; however, too many people are looking for what’s commonly called a “McMansion” – as in super-size it – when they’d be just as well off, and countless thousands of dollars ahead with a more modest home. I’m convinced that one of the causes of our high foreclosure rate is folks buying extreme size.
Not only is a very large house much more expensive to purchase, but higher costs come through property taxes, insurance, maintenance, furnishings, heating and cooling, and countless other nickel-and-dime-you-to-the-poorhouse expenses. Put it on a spreadsheet with all the additional costs you can think of and you might get faint from the shock.
A poorly designed 4,000 s.f. house won’t live any better than a well-designed 2,500 s.f. home. The savings over the life of the buyer’s ownership can be tremendous. When it comes time to replace the heating/cooling unit, the McMansion will require two, and maybe even three units. Ouch! How about the water heater? Need I say water heaters? How about the roof? Or inside and outside painting?
Here are some ideas that can make that 2,500 s.f. home live almost like a 4,000 s.f. one:
- Vaulted ceilings or high, flat ceilings (limited to 10’ high).
- Few, short hallways (make them at least 3’-4” wide – 4’ is better); better yet, build without any hallways.
- Open living areas.
- Wide doors (never, ever, ever accept a 2’ wide door anywhere in the house on your new home).
- Light colors on walls and floors.
- Bright windows with few or zero drapes (blinds are economical and practical).
I’ve just designed a 5 bedroom, 5 bath home with 2204 s.f. The bedrooms will all hold a king-sized bed, and the living areas are spacious.
Need help designing your new home? Call me for ideas.
Maurice Dubois
The Housing Wiz
March, 2007
The cheapest way to save serious bucks on home energy use
Saving money on home heating and cooling energy can be as easy as a quick turn of the dial—the thermostat dial, that is. In most parts of Texas, savings on heating is the easiest to accomplish. While a house temperature in the mid 70s can be comfortable, an extra layer of clothes can allow you to be just as cozy with a temperature in the low 60s.
We had some very cool days in the Dallas/Fort Worth area this November (2006); some nights the mercury dipped into the low 20s. Our heating bill has been steadily climbing, so I decided to try an experiment in the realm of very cheap energy conservation when the temperature began to drop. I discovered that with enough layers of clothing—and I’m not talking about dressing like an Eskimo—inside temperatures as low as 50 degrees were bearable, although not quite acceptable. At night I turned off the heat pumps; the house was 49 degrees on two mornings; chilly, but bearable. We found that we slept very comfortably with no heating (with good bed covers), and in the morning when the sun began to heat the day, the heat pumps ran very little to bring the temperature back up in the low 60s. The units stayed off most of the rest of the day.
You might wonder what was the result on our electric bill? It was half what it was last year during the same time.
For the summer, fans that circulate the air can allow you to set the thermostat much warmer than you might realize; however, ceiling fans are usually not good enough, especially in areas with high ceilings where they pick up hot air and bring it back down. You need fans that circulate the air horizontally.
Want to save more money? Slow down on the highway. One of our cars is a Toyota Sienna van. It is very roomy, holds 7 people, and has plenty of power (210 hp); it should be a gas guzzler. But we normally drive it around 68 mph on the open road. It gets between 25 to 27 miles per gallon, even with the A/C running.
Even better than saving money is the fact that if everyone did as much energy saving as possible, we might not need much foreign oil.
The Housing Wiz
March, 2007
Real estate investing - getting rich or getting burned
I can't count how many times people have called me this year to tell me they are investors. I ask what they do. Their reply is always the same, “I buy houses, fix them up, and then sell them for a profit.”
Often I'll ask exactly how many houses they have bought, fixed up, and sold for a profit. All too often the answer is anywhere between zero and one. The more experienced ones might have two under their belt. They all have one thing in common: they call themselves investors. In reality, though, they are speculators.
True investors, whether in real estate, stocks, or businesses, buy investments to receive an income. Speculators buy to resell at a profit. We've all heard the term, “land speculator;” that's a person who buys land to hold for a while and resell at a profit later on, or to subdivide into small plots and resell at a profit.
Don’t get the terms confused. Unless you are able to buy houses at 50% or less of REAL rehabbed value, you should not go the speculator route. There are too many people who have been burned speculating in real estate in the current market. Most people will not get rich speculating in real estate; do it only if you have plenty of experience, or if you have the type of luck to win the lotto.
Smart real estate investors always end up rich. They do it one property at a time, hold the properties a long time till any debt is paid off, and they make plenty of cash flow every year they own the property.
People ask me what is considered good cash flow. I always answer that Return on Investment (ROI) is not a measure of good cash flow. Here are two examples:
- Good ROI—bad investment. House valued at $100,000 with an $80,000 loan. The payment is $800; it is rented for $975. The cash flow is $175. The cash flow for one year is $2,100. The house was bought for $80,000 and $10,000 cash went into fix up. The ROI is 21%; an excellent percentage as long as things all go smoothly. Problems can crop up if there were to be one or two months’ vacancy and serious expenses to get the house ready for the next tenant; the entire year’s worth of cash flow could be required. If that happens, there is zero ROI.
- Good net cash flow, not very good ROI—good investment. Let’s assume the same house is bought with a $40,000 cash investment. The loan would be for $50,000 and the payment might only be $500, so the cash flow is $475 per month; that’s $5,700 per year, with an ROI of 14.25%. This is a much safer investment with good cash flow. It gives the investor almost zero money worries, and allows the loan to be paid off quicker if the investor so desires.
My advice for getting rich in real estate is to be an investor, and not a speculator. In time you’ll have enough properties throwing off enough cash flow to allow you to retire in style.
The Housing Wiz
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