The process of searching for investment rental property can be exciting; however, before you get too excited it is important to run some preliminary numbers to make sure you know exactly what you are facing to ensure a successful investment.

First, you need to carefully examine potential rental income. If the property has already served as a rental property, you need to take the time to find out how much the property has rented for in the past and then do some research to determine whether that amount is on target or not. In some cases, properties may have rented for lower than they should have while in other cases a property may be over-rented. Look at comparables in the area to make sure you know whether the property in question is on target; otherwise you may find that the amount you think you will be receiving in rental income is unrealistic.

Mortgage interest is another area that should be considered carefully. Make sure you know and understand prevailing interest rates as well as the details of your specific loan because mortgage interest is the biggest cost you will face when purchasing investment property. First, understand that homes and duplexes tend to have loan structures that are similar to any mortgage loan. With a larger property; however, such as a triplex; rates tend to be higher. If you are looking at commercial property with even more units; the matter of terms and rates is completely different. Typically, the more money you are able to put down on the purchase of the property, the less interest you will have to pay.

Taxes are another issue. Many people use the taxes from the year in which the property was purchased and assume they can use these figures to estimate expenses. This is not always the cases because taxes do not remain the same; they typically change every year. Usually, taxes go up after a property is purchased. This is especially true if the property was previously owner occupied. So, it is typically a good idea to just assume that the taxes will go up on the property after you purchase it.

Are you looking to buy a new home?  If you are, you may examine the online websites of real estate agents or pick up copies of their printed brochures.  Of course, this is a great way to find and buy a new home, but there is another step you may want to take.  That step involves reviewing foreclosed properties available for sale.  In a time where foreclosures are on the rise, you may be surprised just how affordable they are to buy.

One of the most common questions asked by perspective buyers is what causes a property to enter into foreclosure.  Typically, there is nothing wrong with the property itself.  In fact, the current or previous homeowners may have taken great care of it.  Foreclosures occur because of financial difficulties.  These difficulties may include an injury that prevents someone from working, being terminated or laid off, excessive debt, or divorce.

If you are interested in buying a cheap home, one of the best approaches to take is to negotiate directly with the current homeowners.  In many states, this is possible before the foreclosure proceedings get underway.  In this case, the home is in a pre-foreclosure stage.  As this point in time, homeowners facing mounting debt can try to sell their homes.  And, you will find that many want to.  You may be able to get a great deal.  It depends on the current balance owed on the mortgage, as well as the amount of money the homeowner needs to relocate.

Homeowners trying to sell their homes while in the pre-foreclosure stages will often advertise their home is available for sale online or in newspaper inserts.  A significantly reduced home is a good sign that the homeowner is facing foreclosure.  You also have the option of approaching those facing foreclosure independently.  Information for doing so can be acquired online or in local government offices, as foreclosures are public notice.  Approaching a homeowner in financial trouble may work to your advantage, but many consider it be a risky and immoral approach.

After a home has been foreclosed on, many banks will try to find a new owner right away.  This is often done through an auction.  This auction often occurs at local county office buildings or at the lending institution.  Foreclosure auctions are often considered one of the best ways to get an amazing deal on a home, but you, as a buyer, may be faced with multiple rules and restrictions.  You may need to have the money upfront or at least proof of required funds, as most auctions do not allow loans.  You also rarely get the opportunity to see the property in question or inspect it.  This means that you are not only buying the property as-is, but you are buying it blindly.

Before deciding to buy a foreclosed property, it is important to review all state laws pertaining to foreclosures.  Learn as much as you can about the proceedings.  For example, certain states have what are known as redemption laws.  This, essentially, gives a borrower time to make good on their loan payments.  If you are unaware of these or other similar laws, you may find yourself in a pinch.  Why?  Because even after you have successful won a foreclosure auction, the borrowers can reclaim their home if they can rectify their delinquent payments.

Finally, know that if you purchase a foreclosed property, whether you do so through a real estate agent, directly through the bank or at a foreclosure auction, you are required to evict all current occupants.  Many individuals actually find this difficult, on both physical and emotional levels.  If you foresee a problem, such as if the tenant or previous owners are already making it known that they will not move, you should seek professional assistance.  This assistance should come from local authorities or a well-known and reputable lawyer, namely one who specializes in real estate or foreclosures.

I have been to quite a few seminars and bootcamps and everyone talks about buying and selling.  Buy property for ‘X’ and sell for ‘Y’.  They even talk about how you can provide owner financing to help buyers get into homes.  But what is usually brushed over is what happens when your buyer stops buying on the mortgage you have provided for them to buy the house.  Sure it comes up in discussions but it is usually answered with “..oh yeah, you foreclose on the property and resell it.”  Well that sounds well and good but that is easier said then done.

Now we are in a market that has been hit hard and add to it the economic storm and you have some interesting times.  We have a property that we sold last year to a very good buyer.  He has made his payments on time – sometimes with a little prompting, but for the most part a good credit risk.  But he told us last week that the company he was working for closed its doors, not an uncommon occurrence here in the valley.  So we are now looking at foreclosing on the property.  Foreclosure is not the easiest process in California especially when you have never done it before, but we are in a good position becuase we got a large down payment.  Enough to cover our expenses for the foreclosure process.  We will first start with a discussion with the owner about his situation and then see what steps we need to take to secure the property.  Our private lender will remain secure and payments will continue to be paid them while we resolve this situation.  Just part and parcel of being a real estate entrepreneur.

We have been buying foreclosed properties for the last two years and while it has been good for us and the community (our buyers) we are ready to take it to the next level. Yeah, everyone talks about that but what does it mean.  In our case we want to step up buy foreclosed properties in bulk or Bulk REOs.  This is where you by directly from an Asset Manager to buy a large number of properties, for cash, at a big discount.   photo credit: MichiganMoves

Our current business model is:

1. Identify a foreclosed property, usually outside our front door
2. Have our realtor make an offer
3. Counter the counter
4. Offer accepted
5. Arrange private money to buy and rehab property
6. Arrange Lease Purchase Opt

Number 5 takes just as long to get $100,000 as it does to get $1 million dollars and we sweat every second until we have it in hand.  So why not build your business model on the bigger prize.  We have been working for the last couple of months on our business plan and model to buy foreclosures in bulk.  We will be approaching some very influential people who could help get to that next level and we will make our presentation.
Challenges I see are many: the biggest being the number of properties that we will have available at one time.  It is one thing to work on one or two houses at the same time but to have 10 to 15 houses that you are buying, rehabbing and occupying will challenge our procedures.  Procedures become more important than ever.  We will not be able to do all the work required so we will need a dedicated hard working team to pull ths off.  We already have the foundation of a great team.  Now it is a matter of building on top of it.  We are ceretaily ready for this challenge.  I will keep you posted.

Everyone, including me, will tell you that Private Money is the way to buy real estate.  No bank qualifying; flexible terms and fast actions.  But one more part that some will not tell you is how flighty that money can be.  We ran into with our current purchase.  photo credit: sanderovski & linda

We are preparing to close the property in Riverbank when our private money walks away.  Why?  Just read the paper.  The economy is creating opportunities for us but also scaring others away.  A first time private lender needs time to get comfortable with the idea.  Do not use a first timer on a purchase that requires a short time frame to close.  That is a recipe for disaster.  Here are some steps that can ease the situation should it arise.

1. Never turn anyone away:  The opportunity is gone only when the property is closed.  First with the money wins.  Everyone else in two place can be on the next deal.  What a problem to have.
2. Constantly advertise it to your warm list.  There will be a time when you have multiple properties for private money.  You keep that list in front of your prospects.  Send out a weekly newsletter so people see what you are doing.
3. Get the money from the private lender into escrow as soon as you can.  Even if you have to offer interest for the money prior to closing.  This will help you sleep at night.
4. Be prepared with a back-up plan.  We offer to pay expenses of the lender if they transfer the money from a CD or other account.  You want to make it as easy as you can.
5. You should be working your warm list all the time.  Keeping them informed of what you are doing.  This inspires confidence, always a good thing with any lender, and makes the emergency call easier.  But if you are always talking to your warm list they know what you are doing and the money will always be there for you.

We solved our problem by sending out an email with a flier of the opportunity.  The next day I had two people calling me asking about the deal.  We are still on track to close, but I did not sleep very much last night. Communication is the key and keeping your warm list informed of what you are doing will help a great deal.

We had a good week last week.  We got another house under contract, this one in Merced.  We are not sure how to handle this one.  Usually when we buy a foreclosed property we have all kinds of work to do to get it ready for lease or sale, but this house is almost new.

First it is only 4 years old so the structure and infrastructure is in good shape.  Two areas we have had problems with lately.  Then the bank put in new carpet and appliances.  The only work we need to do is paint one pink room and start watering the front & back yard.  We finished our inspection last Friday and should have the report any day.  So now it is a matter getting our private money in place and we are ready to close.  What could be easier than that.  This house is ready for Owner Financing or Lease Purchase Option.  Look for this house on our website JM2 Sells Houses to get the details.

Looking back over the last month we made over 20 offers on foreclosed properties and got one accepted.  That shows the level of competition out there for homes.  You need to be persistent to get a contract.  You also need a realtor that understands what you are looking and is patient enough to stick with you.  We have a great one.  She understands how investors think – she is one herself.

We are currently working on our business plan to help take our business to the next level.  I will talk about that in my next post.  Make it a great day.

I missed June 1st.  I have had my head down for the last week working on a presentation that I will be giving next Saturday, filming our latest video for Emerson (I will have it posted by today), reviewing properties (foreclosed) to make offers on and working with ur private money people to acquire money for our next close (Riverbank).  The 1st just sailed by.

A quick summary of what is going on at Emerson.  This house will be pratically new when we are done.  We had a plumbing problem and ended up replace a considerable amount of plumbing piping (both water and drainage).  That work was completed last week.  The electrical, upon further investigation was jury-rigged and needed to be replaced. So that is this week’s agenda.  The windows are installed and they look great and the front yard clean-up has started.  Look for the video on our YouTube channel later today.

We close on Newman to day.  That has been a long road.  We will begin clean-up in the coming week.  That is a really nice house – a rare house with a basement in California.  It does need some TLC but we should be complete in a couple of weeks.  We have already checked the plumbing and electrical.

Riverbank is proceeding nicely.  We should be siging this week with a possible close next week.  Jeff has secured the private money for the property.  We will be paying a private lender 8% for a first position note with a LTV of 22%.  You can not get more secure than that.

I am going to get back to work on the video for Emerson and I will post it soon.

We are coming to the end of another month and we look at what is the road ahead for real Estate.  The National Association of Realtors annouced in a news relaease, dated May 27, 2009, that sales of existing-homes rose in April “… with strong buyer activity in lower price ranges”  That is our market – the foreclosed market.   It goes on to say:  photo credit: Allie_Caulfield

“…first-time buyers continue to influence the market but there also is a seasonal rise of repeat buyers. “Most of the sales are taking place in lower price ranges and activity is beginning to pick up in the midprice ranges, but high-end home sales remain sluggish,” he said. “The Federal Reserve needs to help restore liquidity for the jumbo mortgage market by buying these loans under the TALF program.”  This tells us that we need to be at or below the median price range.  The credit crisis is still with us and despite the programs that are available buyers need help to get into homes.

That is exactly what we see in our market (California Central Valley).  That is why providing Owner Financing and Lease Purchase Option are keys to our sales in the next several months.  We continue to buy foreclosed homes, rehab them and offer them with our programs to help buyers.  We currently have three properties available in Tracy, Riverbank and Ripon, CA.  The next several months will provide an opprtunity for buying foreclosed properties.

“Because foreclosed properties will likely be released into the market over the rest of year, it is critical that distressed homes be quickly cleared from the market,” Yun said,NAR chief economist. “Fortunately, home buyers are being attracted to deeply discounted prices and are bidding up many foreclosed listings, particularly in California, Nevada, and Florida – this will set the stage for healthy market conditions going forward.”  This creates a challenge for us as investors.  We are finding that end users are bidding up the price for foreclosed properies that need rehab higher than the market value.  We are making many offers (5 -7 per week) and finding that we are being out bid by end users and other investors.  We must be careful and not follow the bidding up just to buy a house.  We have to ride the market values when making our decisions.

“The national median existing-home price² for all housing types was $170,200 in April, which is 15.4 percent below 2008. Distressed properties, which accounted for 45 percent of all sales in April, continue to downwardly distort the median price because they generally sell at a discount relative to traditional homes.”  The number of foreclosed (the news release is careful in its use of “Foreclosed” properties) in the Central Valley is closer to 70% of the number of home sales.  This has pushed the median price of homes in Modesto, CA to below $110,000 as I found on Trulia.com:

“The median sales price for homes in Modesto CA for Feb 09 to Apr 09 was $110,000. This represents a decline of 16.4%, or $21,609, compared to the prior quarter and a decrease of 45.6% compared to the prior year. Sales prices have depreciated 54.2% over the last 5 years in Modesto.”

That is a big drop in pricing after a two year drop and we still have a large number of foreclosed properties being held by banks.  I am looking for more price drops in the months ahead.  You should be lining up your private money so you can buy these properties for cash and close quickly.  That will give you an advantage on your offers with the banks.

What a week it has been. Work on the Emerson rehab goes well.  We have finished painting the interior of the house and the stucco on the exterior.  We are waiting for the windows to arrive – that should be any day if they have not already.  Flooring will start next week.

We are moving along on our new contract.  We have opened escrow and we are now arranging our private money to complete the deal.  We are putting a private lender in the first position (1st Deed of Trust) for $30,000.  This money will be used to pay closing costs, fund repairs and run our business.  The seller financing will be placed in the second position (2nd Deed of Trust).  We pay the private lender 8% interest only for 36 months.  That is how you do a no money down deal.

We also had one of our contracts accepted for an REO this past week.  It was a 1500 square feet 3 bed – 3bath house in Ceres, CA.  We went to do the inspection on the property and found some interesting things.  First off the size of the house maybe 1500 square feet, but it was not added on with a permit.  All the work was substandard and falling apart.  There was no 3rd bathroom that we could find and the 2nd bathroom had the sink in the hallway and the toilet and shower in a room the size of a small closet.  The MLS described the property as having central heat and air, but all we saw was a wall heater and a wall unit AC not quite central heat and air.  We sent an addendum to the bank with a revised price that was $25,000 lower than our accepted price.  We are waiting for their response.  I am not holding my breath.

So lets review our week:

1. Mail out Direct Market – Done and sent out today (almost late)
2. Make video of Emerson rehab – Done
3. Complete on report for website – Not complete
4. Continue to work on business plan for private money – Finished 5/19/09
5. Submit 5 offers for REOs – Submitted 7 offers
6. Write three articles & submit them – Done
7. Refine TwoAverageJoes.com website. – Working on it
8. Do weekly reviews on Saturday – Done – this blog
9. Complete first video for Rehab series – Done today

So my biggest challenge is the report for the website (TwoAverageJoes.com).  The action I am taking to correct this is getting help.  I have hired a Virtual Assistant (VA).  She will be helping me get the important tasks that I do not need to do myself done.

I am working on what I will be doing for the coming week.  We have some momentum from the last two weeks that we want to maintain and build upon.

You hear a lot of Real Estate experts talking about different ways to buy property.  Some work and some don’t.  We know because we have purchased and tried many of them.  But I can tell you one method that does work is “No Money Down” purchase.  We purchased a property just yesterday with that method.  photo credit: MichiganMoves

I did not say that no money was involved – it was no money of ours.  Every real estate transaction will require money to close.  If nothing else you need money for the escrow, recording, title insurance, etc…..  We use private money that we will put in the first position to help buy the property and pull the cash we need to repair the property and holding costs while we repair and market the property.

How do you get these deals – is there any magic formula or method – no.  It takes good old American hard work and asking for it.  Be prepared to hear a lot of NOs.  Because not everyone will take a deal like that.  You are asking the seller to wait to get their money.  Some people like the idea of payments of time and some don’t.  If you find a property that is owned by another investor, they are more likely to deal than someone who has lived in the property for 30 years.

Building rapport with the seller helps a great deal.  You need to spend some time with the seller, getting to know them and the property.  Frequently they have owned the property for decades and they have a story they want to tell you.  Let them.  This the part of the business that is a major hurdle for real estate investors.  You have to leave your office and the comfort of your computer and go and press the flesh as they say.  But as we can atest to – it works.  We have purchased a 3 bed 2 bath property in Riverbank, CA for $130k for $500 per month for 15 years not bad for just asking and this seller called us first.  I will go into more details about how we purchased the property in a future post.