Wet Feet - Online Marketing and Real Estate Investing Blog

These three strange concepts are tightly related and may make or break your deal.

Chain of Title is the real estate property ownership history. You may think that only current state of title is important, but in reality last couple years of ownership are important because of two words: mortgage fraud.

Here is the most common scenario of mortgage fraud. A scammer, mortgage broker and crooked appraiser work together to pull this off. Let’s say a scammer buys a house worth 100k, appraisal is done to show that house is worth 150k, mortgage broker falsifies documents and buyer from behind the interstate overpass is brought to the closing to sign the papers. The homeless buyer gets his $100 for troubles and $50k get split up by the 3 scammers. New mortgage never gets a single payment made and the house goes into foreclosure.

Banks are not dumb, after couple hundred cases like this they instituted a new requirement – Title Seasoning. What they saw is when house gets sold 2-3 times in a short time period the loan goes bad in much higher number of cases versus the cases where houses where sold only once every 2-3 years. So if the buyer wants to get a loan to buy a home the present owner has to own the home for at least 12 month in most cases.

So if you just bought the home for 100k, put in 20k worth of renovations and now are trying to sell this same home 2 month later will you have a title seasoning issue? To the bank this looks very similar to the mortgage fraud. House was bought for 100k and being sold for 150k in 2 month period – red flag goes up.

So how can you overcome this little issue? The answer is Land Trust. Land trust in essence is just a bunch of papers. It is designed to own real property. For the Land Trust to exist there has to be 3 ingredients: Land (we have a piece of dirt with everything stuck to it in semi permanent way), trustee and the beneficiary. Beneficiary is the entity who will benefit from this trust and trustee acts on behalf of beneficiary. Conveying the property into a land trust does not break the chain of title. If you own the property for 2 month and the previous owner owned for 4 years, when the new lender will request a title binder from the closing attorney title seasoning will show 4 years and 2 months. The event of conveying property to the land trust will show, but not break the chain of title.

Here you have it. We buy all our properties now into a land trust. This has too very good side effects: limited privacy and limited liability. I will not go into details, but if you will be dragged into a courtroom that is where that limit will end.

And one quick note. Never, ever buy property on Quick Claim Deed. Always go the real estate attorney’s office (title company, escrow agent), order title, pay closing and get title insurance. To close on 200k home here in GA costs me around $700 and title insurance another $700. Considering how much money is at stake this is a small price to pay.

I wan to start with a little rant. How much do you think it costs to run a classified ad in a major newspaper like AJC? The ones we run set us back about $200 for two weekends. From such ads we get quite a number of “investors” calling us, wanting a free house…. Go and read my old post I want houses with 0 down and take over payments. Someone would think that a desperate homeowner would spend $200 to say to all metro Atlanta: “TAKE MY HOME”. Get real!

Ok. I am done ranting. Now really think, would a desperate person spend $200 to place a classified ad in the newspaper to give away their house? I do not think so. Here we have the very first mistake that most of real estate investors make - calling on classified ads in a newspaper where you need to pay for classified ads.

Second most common mistake I think is placing an ad “We buy houses” in the local newspaper. Have you looked how many these type of ads you see there. Last time I checked, I counted 13 “We buy houses” and 19 others with a different wording, but meaning exactly the same. Stop following the herd. Do something different.

Third most common mistake I see beginner real estate investors making is wrong approach to direct mail marketing. They either

1. select a very small area and mail them constantly
2. they mail the whole city one time.

In the first case investor would mail only to 1000 homes in a subdivision where about 10 homes get sold every month and they will continue mailing these same homeowners every month. This approach can not produce enough leads to have a deal to recoup marketing expenses.

In second case the area is too big and repetition too small. You need to mail at least 3 times to the same person to produce results.

So my advise would be select a big enough area and target your prospect sellers. Targeting means that you are looking for something specific. It can be landlords who just evicted their tenant, homeowners who can not make their mortgage payments or someone who listed their home 3 times and could not sell it. There are ways to get your hands on the list of such homes, you just have to spend some time or cash.

Be creative!

What is wholesaling? In short wholesaling is selling to a reseller, not an end user. So wholesaling real estate means that you are selling the property to someone else who will be selling it to the end user. Wholesaling can be done with deals for all cash, subject-to (sub2) or with financing.
Let’s look at some examples.
We went out and put a nice 4 bedroom home under contract to buy it subject to the existing loans with no money coming to the seller at closing. House is worth $230k on a bad day, existing loan balance is $202k. We marketed it as take over payments deal for only $6k plus closing costs, which makes purchase price $208k and leaves $22k in equity for whoever buys it. So you need $6,000 to get it and you make $22,000 profit at the closing table. That makes 366% return on investment (ROI) on this deal.

All three parties benefit in this situation. Obviously we benefited by 6k, the seller benefited, since they got rid of the house they did not want or can afford to keep and the buyer benefited by purchasing 22k of equity with 6k.

On one hand wholesaling is the great way to make a quick couple thousand, without taking possession of the property. All you need to do is to market to attract sellers, prescreen sellers, go out construct and present offers, negotiate, sign the contract and do the due diligence. Once you have the contract signed with the seller you must market to attract buyers, show them the property, etc.

On the other hand wholesaling is the great way to buy properties. You do not have to do any of the above! All you have to do is bring 6k to the closing and you own property without signing for debt or borrowing hard money and you made 22k. This is a great way to buy your rental properties, since now the lending industry is in big turmoil and it is almost impossible to get 100% financing for investment loans. Think about is, on the home worth 230k the bank will ask you to put down at least 10% which is 29k. You can buy 4-5 subject to wholesales with that kind of money.

Let’s be hones, the current lending situation sucks. Sub prime lending industry disappeared literally overnight, banks stopped giving out loans to everyone and their sister. The situation is such that if your credit is less then perfect, no bank will lend you money to buy your own home. So the only option is to rent? Not exactly. There are still couple ways to make your dreams come true. Those creative solutions are: lease option, take over payments and owner financing.

Today we will take a closer look at the Lease Option, also called Lease Purchase or Rent to Own. Like name implies there are two ingredients in this cocktail.

First ingredient is the lease. You are renting your dream home and get to enjoy almost all of the benefits that home ownership offers. You can try out the schools, shopping and dining in the neighborhood and the home itself. This lease period gives you time to improve you credit situation to be able to qualify for an excellent loan.

Second ingredient is the Option. An option give you an exclusive option to buy the home for a set period of time – the seller is obligated to sell but you are not obligated to buy. So if after living in the home for 6 months you realize that this is not the home for you can walk away and not buy this home. The downside of doing this is that you loose your option fee which is non refundable.
The only difference between Lease purchase/rent to own and the lease option is that you are obligated to buy at the end of the lease period in lease purchase case.

To get into your dream home on a lease option program require a little bit of capital up front. Option fee is from $3,000 to $10,000 and largely depends on the price of the home. Expect to pay $3,000 for a home around $150,000 and closer to $7,000 for a home worth $300,000. Do not forget that the rent is paid in advance, so you will have to come up with first month’s leas payment at the time of move in also. If you do not have full option payment amount, part of can be spread out in terms of monthly payments.

As far as monthly lease payments, expect to pay market rent with no money going towards purchase price, but you may elect to pay extra to accumulate bigger down payment for the purchase day.

Next time we will tackle how to buy the home by taking over payments on existing financing.

From time to time i bump into investors who want deals on a silver platter, zero down and no need to borrow money.

I would like a dozen of those too, but I have to disappoint you - buying a home with no money down and without getting the loan is impossible.

You either:
A. Buy with no money down by getting a loan and including closing and acquisition cost into the loan or
B. Buy by taking over payments and do not get the loan, but pay the closing and acquisition costs.

To buy a home you will have to close and that means attorney fees, recording fees, transfer tax, title search, title insurance and other misc. fees have to be paid by someone. You would like the seller to shell out couple grand to give you their house, would you? I would, btu have not met such owner yet.

And to acquire the property you have to market to attract sellers, go out research the property, make offers, negotiate with sellers, sign the contract, do due diligence on the property and the loan. All this takes time and money. even if you do it all yourself you will have to spend money. If you go with the real estate agent it will cost you even more, 3-6% of the sales price.

So when I say I will bring you a deal on a silver platter, but you have to choose… either it is A or B - you can not eat your cake and have it too.