Commercial Real Estate Lapse, Rebound, Relapse: Sunday Morning Thoughts 02 June 2013

What caused the lapse in the commercial real estate market?   

Many would think sub-prime lending, but that is not the cause.  Commercial lending is based on the income of the property.  The lapse has been caused by easy lending.  Similar to sub-prime lending in that it was easier to get a loan and purchase a commercial property, without regard for knowing how to manage a commercial property.

Many people had never learned about managing commercial real estate but entered into the arena believing they could handle the demands of commercial property.  Many of the properties were multifamily apartments.  Although many of the investors sold off items from the apartments, such as , microwaves, refrigerators, washing machines, dyers, etc. and then skipped out on their loans, and leaving in their wake the rubble of what was once a viable housing community.

Many of these properties were left in a horrible state, but was it really that horrible?

Not necessarily so.

It had been noticed that many once viable properties, in thriving rental areas, had fallen into low occupancy, disrepair, and higher than normal expenses due to mismanagement; with many units in a community becoming uninhabitable from some type of damage such as fire, or property destruction such as knocking holes in the walls.

The lapse was a time of finding a plethora of value-add properties, which are still present at this time and many more like type properties entering the commercial market weekly, if not daily for lucrative rental areas.

Next Sunday’s post the Rebound part II.

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Residential and Commercial Real Estate Investing: Sunday Morning Thoughts 5 August 2012

Loan (Photo credit: Philip Taylor PT)

In our previous posts we shared an overview of the A, B, C’s of commercial and residential real estate investing, and the pitfalls of alligator investments.

Our next look is residential and commercial real estate investing, not versus each other, which means a real estate holdings portfolio would be more stable in any market, buyer, seller, or flat if both types of investments are included.

Currently residential real estate, in certain markets, is seeing some improvement, but with more foreclosures on the horizon, that may change in the very near future.

Commercial real estate is also seeing fluctuations which will benefit commercial investors.  The factors are, but not limited to:

Maturing loans

Mismanagement of the asset and its negative effects on NOI

Insolvency

An underwater mortgage, owing more than 100% of property value

So how does a private lender take advantage of all these factors?

By investing in purchase loans, bridge loans, rehab loans, construction loans new and completion, and/ or become a second mortgage holder, or investing non-performing and performing notes.

Whichever strategy is your preference being the lender in today’s real estate market is a safe bet to increase the rate of return on your investment.

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Private Lending Tips: Sunday Morning Thoughts 15 May 2011

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So you have decided to become a private lender.  You have considered many options on the types of deals you will choose to provide lending.  You understand that private lending is not a REIT, but is more like being the bank.  There are things you should keep in mind when private lending.  This is a short list given in a series of posts.  As you become more familiar with lending you will without a doubt make a few additions to the list for yourself.

Cost of Money

Level of Risk

What to do when a loan goes bad

Profit/ Return on your investment

Cost of Money:  How much is money costing you as a borrower?

You should not use your life savings.  This should not even be considered as a viable option.  Keeping a reserve is even a strategy Warren Buffett utilizes.  Answer a basic question-how much can you afford to lend and at what cost?

Borrowing to lend is a viable strategy; many people use the leverage of other people’s money to make money.  An example, a homeowner buys a house then takes out a second mortgage to pay off credit cards, cars, and to free up currency.  They are making payments on the second mortgage but are saving money in interest and possibly receiving tax advantages.

You can use a line of credit if you own something which can be used as collateral, such as a house, property, etc.

Using your IRA is also an option.  When using your IRA the profit goes back to the IRA aiding in the building of your future savings.  With an IRA you are using the money in the IRA versus borrowing against the IRA.   For more on IRA account usage please read our past post.

What is important to remember, how much interest you are paying on the money you are borrowing, and then subtract that from the interest you will gain from the lending.

For example you are the private lender, and are looking to earn passive money.  You do not wish to own the property but would like an investment with a decent return, something better than a CD.  You find an Investor who has a deal which needs funding.  The investor offers you 8% interest on terms for the use of your money to quickly close a profitable deal.

For arguments sake, let’s say you as the private lender decide to use a line of credit from your property to fund the deal.  Always remember you will be responsible for the repayment of the line of credit.  The investor as a borrower from you is responsible to repay the loan you are extending to fund the deal. If the bank gives you a line of credit with 4% interest and you loan the money to the investor at 8% interest you will have made a 4% earning on the difference in loans.

In short borrow for less interest than you loan.

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The Robo-Foreclosure mess and the effects on Private Lending: Sunday Morning Thoughts 16 January 2011

If you read last Sunday’s post then you will understand that the robo signing scandal has become the bane of most Banks.  Judicial foreclosures have been thrown out by Judges.  The reason, there was not enough proof on the lender’s part of owning the note; seems as though the process of foreclosure is going to take even longer.

With all the shoddy paperwork, what type of impact will this have on the real estate market?

A slowing effect on foreclosures, so basically property values should see an increase in markets that are considered desirable and a leveling in values for harder hit areas where every other house is a lender owned vacancy.  The future, the harder hit areas will become popular again as home values begin improving in the desirable areas, against the lower priced harder hit areas.  New inventory will also begin to pick up but not just yet that’s on the horizon.

How will this effect private lending?

Well not the same as it is affecting large banks.  Aside [If you buy paper from any institution then you better scrutinize the paperwork to make sure they are the current note holders among a myriad of other important things.]

The upside to the robo-signing  scandal, banks maybe a little easier to work with for short sales and loan modifications.

Private lenders will find themselves in a better investment in a shorter period of time, due to the slowing of foreclosures and the appreciation of various types of property. Even the DOW is showing appreciation in the REIT’s being offered.  In the coming months and years private lending will prove it self to be a very lucrative investment strategy in this weak yet improving real estate market.

Take advantage of the wave of our near future.

Will the Real Estate Market continue to Decline?

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We are currently in the eye of the storm of impending foreclosures.  The foreclosure pace has seen a slowing in the past few weeks and will slow even more in the coming weeks.

For November the decline was caused by the robo-signing scandal which forced lenders to slow the roll of foreclosures until they made sure all of the blank spaces were filled and all sentences made sense.  The triple checking of paperwork caused a slow down in foreclosures.  Many people on the chopping block were given a temporary reprieve.

Starting on the 20^th of December banks will get into the holiday spirit, and halt foreclosures for the last two weeks of the year.  But then promptly restart foreclosures on the 3^rd of January.  These factors contribute to what will look like a slowing in foreclosures for the end of the year, then January will see a hard spike in foreclosures due to the catching up by the banks.

What impact will this have on property values?

Property values for the end of December will flat line then in January; there will be a decline due to a housing surplus from lenders proceeding with foreclosures.  The robo-signing scandal did have a positive impact on property values.  With lenders going at a slower pace, making it appear that the overall inventory was shrinking.

Once the banks begin to pick up the foreclosure pace again we will see another decline in property values.

This is great for buyers but sellers in areas where pre-foreclosures and foreclosures are on the rise, the value of the property may suffer.

How can this benefit a private lender??

Even with a decline in property values a private lender may still make a profit in a real estate venture.  Lending on commercial property– people who have been foreclosed on will need to rent a place- or lending on a single family residence then taking quarterly, monthly, or a one time payment depending on the situation of a particular property.  So even in a down market you can still realize a return.  Visit our website to learn and possibly earn more  http://www.BackedByRealEstate.com

Invest in American Real Estate: Sunday Morning Thoughts 31 October 2010

In the not so distant past American real estate was hitting all time highs in almost every area.  Today we are seeing all time low’s in those same areas that once had great appreciation.

 

What caused the shift you may ask?

 

Well, unless you have not been living in the country nor have an affinity for American news you would be clueless to the opportunity which awaits you.  With so many foreclosures on the horizon, housing in most American communities has before affordable and profitable again.

 

Buying a foreclosure or pre-foreclosure is one way to make money in this recovering economy.  If you were to consider purchasing a short sale, consider purchasing it all cash which gives you the ability to purchase at a lower price.   Once purchased you could either sell it for a profit to another buyer, or rent it out and gain equity while waiting out the recovery.

 

So let’s say you have a home with equity of $250,000, you could use the equity to purchase a home in pre-foreclosure or a foreclosure.  The equity usage could be in the form of refinancing to cash out or a line of credit.

 

What if you did not intend to own the property but want to still make a profit from this American recovery?

 

You could use a line of credit or the cash out to become a private lender.  Being a private lender gives all the benefits without the headaches.  You lend money; receive interest without ever having to own the property.  Being a private lender is less of a liability position.

 

But also keep in mind when becoming a private lender the money does not go in the hand of the buyer.  The money goes to escrow for a specific property.  This way, you can have your cake and eat it too, without losing in the end.

Weak New Homes Sales

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Most people would not understand that this news is good from an investor’s standpoint.  With new home sales being at all time lows, new home construction will also be at all time lows.  In fact the August sales were the third lowest level since the Commerce Department started tracking new home sales in 1963.

 

What this means foe investor’s, homes going into foreclosure or already foreclosed in strong markets will be sought after investments.  Banks are making the rules of lending more stringent than in the recent past and now people who would have once qualified will have a hard time qualifying for conventional financing.

 

In other words, this is the time to be a private lender.  The interest rates on other investments are low to almost non existent, CD’s, money markets, even tried and true stocks are having issues of less than stellar returns.  Diversifying a portfolio with real estate investments is a great option to the weak gains in other investments.

 

At this time the most viable real estate can be purchased far below fair market value.  So when considering investments and how to diversify your portfolio let us help you better understand the advantages of being a private lender.

Flip Flop with no Collateral

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Well the real estate schemes continue, even in this depressed real estate atmosphere.  Different individuals who call themselves investors are actually charlatans.  The latest foreclosure scheme is a type of mortgage fraud.

The real estate pump and dump is similar to what is perpetuated in the stock market.

Buy a property at a foreclosure auction for a very low price then mortgage the property for the median value, but making the claim to do much needed renovations to the property.  Then reselling the property for market or higher than market value.  When all along the purchaser and buyer are the same entities or persons.  In the end, walking away from the over inflated mortgage, never paying one red cent, causing the property to go into foreclosure.

Not only is this tactic mortgage fraud, schemes like these are also making our national recovery and banking reform lag.  These schemes hurt neighborhoods by causing an abnormal amount of foreclosures in an area, making their home values drop.  This type of mortgage fraud can also make lenders scrutinize all mortgage applications with even more stringent rules, fearing backlash from rampant foreclosures or the FDIC.

From an investors point of view, you should care because this type of activity can cause one to think an area is improving or going through regentification when in actuality it is not.  This is another reason for doing due diligence when considering an investment.

This reinvented scam along with the defrauding of consumers dealing with foreclosure is only going to make the national recovery take longer.

Don’t get me wrong, there are many real estate investors and limited liability companies who are out to help improve the current real estate conditions.

These are the companies that do not give guarantees of stopping a foreclosure nor do they charge fees to help those in foreclosure.  They are the companies that will tell a home owner facing foreclosure their options to stop or avoid their foreclosure.  Some times those options are not what the home owner would like to hear, but it’s better than a foreclosure.

As far as mortgage fraud goes one would think the banks would be able to run a demographic profile to find out the median income in an area, and if the median income can support the house payment then the deal presented has a better chance of not being a scam.  I would think the banks would also look at the comparable homes within the same neighborhood before allowing a disproportionate loan on a specific property.

A Closer Look at Using a Self Directed IRA to invest in Real Estate

For many investors using a self directed IRA to invest in real estate seems a little scary.  People may think to themselves what about my retirement?  What if the deal goes south?  If the deal goes south how can I get my money back?

Those questions are perfectly normal to ask, especially since the stock market beat up many IRAs, 401ks, annuities, and other investments.  In addition to the stock market taking a negative toll on investments in general, people wonder if real estate is a viable option for their nest egg; since many once thriving markets and sub markets are presently plagued with upside down mortgages, causing negative equity, and resales selling for a considerable amount less than the once high asking price.

One thing most new investors learn quickly is buy low sell high.  Or maybe if you buy high you can short the stock.  Well the same type of thought can be applied to real estate.

When the market was high many free and clear owners sold their properties for the highest possible price.  Just when they thought the price had gone much higher than they expected, the purchase price went a little higher.  Sub prime lending was also a factor, people were able to buy more house than they could afford in the future reset to principal and interest payments.

The then buyers and lenders did not think the bubble would rupture, but it did.

Now with a housing glut in many prime areas, plus commercial real estate to soon take a tumble due to stricter lending practices, this would be the time to implement the strategy of buying low and hold for appreciation.

Shorting is an option as well in real estate; this practice is known as a short sale.  Although you did not purchase the property when it was a high price or market peak, some one else did.

In a short sale the lender would accept less than owed provided the property is sold to an uninvolved third party.

Meaning the seller may not keep the property nor have a relative or friend purchase the property for them.  The original purchaser must server all ties to the property.  Many lenders are now coming to the negotiation table of short sale a little easier now this could be due to being overwhelmed with foreclosures and more foreclosures on the horizon.

In a real estate buyers market the strategy of holding for appreciation is a very good option.  So if you lend on a current income producing property now then in 3-5years the property would be worth more than now, provided the area is a stable, or stable and emerging area.  A property is considered income producing if after all debt service and maintenance is subtract from the gross income does the property have a brisk cash flow.

So if the deal goes south the property is your collateral.  You have the option to sell the note, sell the property or hold the investment.  Remember you need to receive detailed information on any venture if you decide to invest.

Please subscribe so you many receive the eBook about cycles (it’s only 6pages but is packed with a lot of information) it may help you in your understanding of events to come.