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Junior Liens Who Choose to Foreclose

By Edward Brown

Many lenders opt to only fund first mortgages because they believe that second mortgages are too risky, but is that always the case? Not always. Not all second mortgages are equal.

Many private lenders may choose to fund a junior lien where the first mortgage is relatively small in comparison to the second. For example, a $200,000 second behind a first of only $40,000 on a property worth $500,000 would be an attractive loan to fund for many lenders, especially if they can command a higher interest rate due to the fact that the loan is in second position. However, if there is a foreclosure in the future, the second will somehow have to deal with the first mortgage. This can be troublesome if the first is very large; especially if the second is relatively small in comparison to the first. Why?

In looking at a foreclosure, a lender has to strategize. In the case of the second mortgage, it is imperative that the first does not foreclose out the second as there is usually nothing left over from the foreclosure to pay the second. In California, the foreclosing party gets to “credit bid” its loan. This means that it can simply bid [at the auction/trustee sale] what it is owed. Non foreclosing parties need to come up with cashier’s checks in order to bid. This can be a potential hardship for the second mortgage if the first is the foreclosing party.

For example, if we look at a situation where the property has a value of $1,400,000, the first is $800,000 and the second is $200,000 and the first is the foreclosing party, the first would most likely credit bid its entire $800,000 [it does have the right to bid less than what it is owed, but, if the value is reasonably higher than what is owed to the first, it will normally credit bid what it is entirely owed. The times where the lender bids lower than its entire principal balance is when the lender does not want to own the property and is willing to take a loss just to get the loan off of its books, or the value of the property does not substantially exceed the balance of the first mortgage].

Any bidder at the auction/trustee sale would need to come up with $800,000 at the auction itself or more should any bid exceed $800,000 if the bidder wants to be the highest bidder. In this instance [where the first mortgage is the foreclosing party], the second is not allowed to credit bid its $200,000 balance. It would need to come up with the $800,000 to pay off the first and its $200,000 second mortgage in order to be made whole. True, the second would just get its $200,000 back because that is what it is owed, but, unfortunately, in this case, since it was not the foreclosing party, it has to come up with cash just as any other bidder. Only the foreclosing party is allowed to credit bid.

For this reason, it is important for the second to have a strategy in place. The second wants to be the foreclosing party in most instances, driving the bus, so to speak. Borrowers usually go into default for two main reasons. First, they stop making payments to the lender. Second, the lender’s loan is due, and the borrower has not refinanced or sold the property. In the case where payments have not been paid, junior lien holders have the right to “cure” the first. One can usually do that simply by making the payments to the first. Since foreclosure in California normally takes three months and 21 days, one strategy is for the second to cure the first and start its own foreclosure.

However, this may be cost prohibitive, especially if the first is large and the arrearages on the first are a few months. When the first files for foreclosure, junior lien holders are to be notified. This gives them notice, so they can have the opportunity to cure the first. The second then files its own foreclosure [either because the borrower has probably also not made payments to the second mortgage or because most loan documents state that if a borrower is in default on any mortgage associated with the property, its loan is also in default whether or not the borrower has kept the second current with payments].

One strategy for the second lien holder is to cure the first as soon as possible to allow the second to be the foreclosing party. That way, the second would be allowed to credit bid its loan, but would not eliminate the first; it would have to take the property subject to the first and have to deal with them post foreclosure. However, what happens in the case where the second pays just enough to get the first to stop its foreclosure for the time being, the second starts its own foreclosure, and then does not any more payments to the first and allow the first to start its own foreclosure?

Let’s look at an example and see how this might play out; in our previous example, the property was worth $1,400,000, the first was $800,000, and the second was $200,000. Let’s presume that the borrower stopped making payments on both the first and second mortgages. Both loans have a maturity date five years in the future. If the first files foreclosure, the second could cure the first by making only one mortgage payment to them. Now it is true that most lenders will not immediately file a notice of default after 30 days, but the point here is for the second to make the first mortgage cancel or delay [even temporarily] its foreclosure, so the second mortgage can start its own foreclosure for two main reasons; it puts the second in a situation where in the first does not foreclose out the second, and it allows the second to credit bid its loan at the time of the trustee sale.

Now it is true that, if the second does not make any more payments to the first [other than the one to get the first to stop its foreclosure], the first may start a foreclosure again, but, the first’s foreclosure will be after the second mortgage has completed its foreclosure, buying time for the second to deal with the first [or sell or refinance the property] if the second is ultimately the high bidder at auction. If another bidder outbids the second, the first would get paid, the second would get paid, and the owner [borrower who defaulted] would pocket the difference.

If there is enough equity in the property, either the property will receive a high enough bid to pay off all of the liens, or the second [the foreclosing party in our example] should be able to flip the property fairly quickly or decide to keep the property, as they would be the new owner. If they choose not sell the property, they should very quickly discuss with the first some sort of agreement to either refinance [a new loan to the second who is now the owner] or make payments for a period that will allow time for a new lender. The above information is for discussion purposes only and, as always, one is advised to discuss real estate related issues with a qualified real estate attorney prior to any legal action.


Edward Brown

Edward Brown currently hosts two radio shows, The Best of Investing and Sports Econ 101. He is also in the Investor Relations department for Pacific Private Money, a private real estate lending company. Edward has published many articles in various financial magazines as well as been an expert on CNN, in addition to appearing as an expert witness and consultant in cases involving investments and analysis of financial statements and tax returns.

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BUILDING WEALTH IN REAL ESTATE: HOW LONG DOES IT TAKE?

By Glenn Mananeng

This is a question on the mind of investors. There is no definite answer for this. This topic is always up to debate no matter how you look at it, as wealth is measured differently by every individual. Here are a few factors you need to know when building wealth – allow us here at Unique Wealth Education to teach you some important pointers to consider:

#1 Wholesaling

This is the easiest point of entry for the majority of the investors, as it requires the least amount of capital. You find a seller who wants to put their property for sale and find a buyer for that property on “as is” condition without the fixing part to try and get the market value higher. After the property has been sold, you’ll get a cut on the sale. Basically you are the intermediary that builds a buyers list to locate undervalued properties using a multi-pronged approach. This relies heavily on how good and how broad your real estate network is.

#2 Fix and flip

You don’t have to be an avid real estate investor to know what fix and flip is. Anyone who has cable and passed by HGTV has a basic idea of what it is. You buy a house below the average market value, renovate it, sell them for a profit! This is one of the most widely used real estate investment strategies used around the county.

Keys to fix and flip investing success:

· Preparing yourself by understanding how to locate undermarket valued properties in the right locations
· Understand values (make sure you are comparing apples to apples and going with the highest comp when doing our due diligence as a conservative approach)
· Aligning yourself with multiple capable and competitively priced renovation contractors to not only give you a bid prior to purchasing the home, but also to deliver as agreed on
· Understanding how far to go with finishes and layout changes to keep within the budget and comps in the area
· Stay away from potential losers such as foundation issues and bad layouts
· Having a sales strategy in place prior to the purchase that accounts for commissions, closing costs, holding costs, etc…
Contrary to “reality” real estate shows, getting rich doesn’t happen overnight. The longer it takes to flip the property, the more expenses you would incur for maintaining it while waiting for a buyer. Working with getting coached by or partnering with a seasoned investor is a huge advantage, as you learn best practices and pitfalls to avoid, which only years of experience can provide.

#3 Rentals

Mortgage Paydown

Let’s use a rental property as an example. In a normal scenario, you have a tenant who is essentially paying the rent in exchange for living privileges. If you bought the rental property with a mortgage, your loan will eventually cancel itself out over time. Why? The rent you receive from your tenant is basically used to pay the loan, which is increasing your equity in the property. The money left over is your cash flow divided by the amount you put down to come up with your CAP rate. This is a GREAT way to build long term wealth.

Cash Flow

We can all agree that this is very important. For those who are new in the game, cash flow is basically the income you get from your investment property (usually rental properties). This is a major factor in generating a high return for your investments and savings. Once you increase cash flow by accumulating properties, this allows you to plan your income and determine the course of future investments.

Taxes

If taken into account optimistically, you’ll see a lot of tax benefits when it comes to real estate investments. Consult your CPA to see how you can depreciate properties that you are holding onto for rental income and also discuss with them acceleration methods used to front load depreciation to give you more capital to buy more and keep building your portfolio.

The answer to how long it’s going to take, as you might’ve guessed already, is up to you. Your real estate skillset, determination, experience, and risk management are major players in this ballgame. it’s all about how smart you invest in the industry. If you make due diligence and play your cards right, you’ll one day realize that you’ve gained a considerable amount of wealth already. Unique Wealth Education can help you in your real estate career in helping you avoid common mistakes & pitfalls, is something that we take to heart very seriously. Contact us at(734) 224-5454 or email us at info@uniquewealtheducation.comto learn more.

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What’s Triggering Non-Performing Mortgage Loans In 2020

By Fuquan Bilal

Deals on non-performing mortgage loans are in high demand. So, with the economy and housing market reportedly so strong, what might trigger mortgage defaults, and give note investors more assets to buy?

Being alert to these causes of default can give you the edge to see where things are headed, be able to get ahead of the competition, and work out notes, obtain deeds in lieu of foreclosure, or grant profitable short sales.

Rent Controls

Rent controls have long proven to be counterproductive. New sweeping rent controls in California and New York are only likely to prove the same. Investors have been buying up record amounts of property in the anticipation of bumping up rents, or flipping them to institutional investors for yields. Now those profits have been cut off. Lenders don’t want to loan on such deals, and those with commercial loans that are maturing could find themselves in trouble.

Consumer Debt

When regulators cut off the appeal and safety of making mortgage loans to retail home buyers, those with the capital found new ways to deploy their money. Consumer debt has been one of the biggest buckets. They have few rules in this space, and can charge so much more interest and fees. Then as usual, when people begin using these credit lines, creditors cut them off, sending credit scores diving and these borrowers into a downward spiral. That can also cut many homeowners off from home equity lines and prevent them from refinancing and tapping equity, even though they may have recently invested a lot of this credit in improving their homes.

Taxes

Some areas have been experiencing a whole new spree in taxes over the past few years. Look at NY. Following the cap on state and local tax deductions, they’ve been hit with online sales taxes, mansion taxes, new real estate transfer tax hikes, and higher annual property taxes. That could be just the tip of the iceberg depending on which way the election goes in November. Many people haven’t been prepared for all these tax hits.

Destruction Of The New Remote Working Economy

A new California law may have just put an end to the new freelance and remote working economy. The new law has given businesses the choice between treating freelance talent as full time in house employees, with all the risk and cost that brings, or to conduct mass layoffs. Most seem to be choosing the latter. Thousands of truck drivers could be out of work. Media companies are laying off hundreds of workers. Much of the California economy and tech industry have been relying on this type of talent to operate and make profits. Should this roll out to other states the impact will be even worse. Freelancing platform Upwork alone has some 12 million freelancers. As many as 60% of all workers in places like Brooklyn are believed to be remote workers. These workers have made unemployment numbers look low for years. If that type of employment is gone, what’s going to happen with a 60% unemployment rate? How about even a 16% unemployment rate? How are all of these people going to be able to pay their mortgages?

Failed New Construction Projects

In the long term we may still be far under the level of housing we need. Yet, builders have been focused on high end luxury product and smaller and smaller units. Thousands and thousands of these units squeezed into small urban areas are going unsold. Some have remained on the market for four years already. They are too expensive or just don’t fit what buyers are looking for. Sooner or later more of these developers are going to be foreclosed on.

Failed Investors

It’s been great to see the thousands of investors who have been inspired to get into real estate and mortgage debt over the past decade. Yet, many have been purely speculating. They are trying wholesaling, are bankrupting themselves on house flips without knowing what they are doing, or have bought into the pitch that it is only about cash flow. Many are only weeks away from broke. A couple of stalled closings and they are going to be in trouble.

As a forward thinking note investor, these are all huge opportunities to help others and make some great profits in the process.

Investment Opportunities

Find out more about investing in secured debt and real estate, go to NNG Capital Fund


Fuquan Bilal

Fuquan Bilal founded NNG in 2012 with the principal mission of capitalizing on the growing supply of mortgage notes in the interbank marketplace. Mr .Bilal utilizes his 17 years of residential and commercial real estate success to identify real estate opportunities and capitalize on them. To date, he has successfully managed three private mortgage note funds that primarily invest in singlefamily performing and non­performing mortgage notes. His financial acumen and proprietary set of investment criteria enable him to purchase underperforming real estate assets at a deep discount of face and market values, thereby increasing the value of the assets. This, coupled with his ability to maximize the use of leverage, enables him to build strong, secured portfolios with solid passive income flows.

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Where The Mortgage Notes Are Now

By Fuquan Bilal

Where are the mortgage notes for investors now?

The last few years saw some compression of yields and increased challenges in finding profitable notes and attractive returns for investors. There are deals out there, and there could be many more coming up, if you know where to look.

Biggest Multifamily Servicers

Multifamily loan originations have been setting new records over the past few years. For those seeking to tap into bulk pools of notes, these are the largest commercial loan services in the multifamily space now.

  1. Wells Fargo $682B
  2. PNC $655B
  3. Keybank $273B
  4. Berkadia $268B
  5. CBRE $208B

New York

Every real estate market in America is unique. Each is at its own phase in the larger cycle and has its own dynamics. New York unfortunately, appears to have fallen over a cliff into a new mess.

In the long run people from all over the world will always want to live in NY. Yet, whether it is crazy new mansion taxes, transfer taxes, sky high and rising property taxes, and taking away tax breaks, or overbuilding and lack of fit for the market, certain segments of the Empire State’s real estate market seem to be in free fall mode.

Retail vacancies are turning once popular shopping strips into apocalyptic looking ghost towns. 25% or more of new condos built since 2013 still aren’t sold. Median residential sales prices have fallen 17% year over year.

Some very big dealmakers have recently lost properties worth tens of millions of dollars to foreclosure. There may be more individuals who decide it is easier to walk away than to stomach owing far more on their homes than they are worth. So, from commercial mortgage notes to residential ones, there is plenty of opportunity to grab assets and debt at a discount.

Hot Flipping Cities

Watch the cities which have been among the hottest for flipping houses over the past few years. In some cases property prices tripled since 2008, with modest homes going from $50k to being flipped for $150k. There may be some substantial roll back in those prices coming. Those stuck with inventory may present prime opportunities for acquiring the property or debt at a discount.

Many new investors have tried to jump on the house flipping bandwagon inspired by ‘reality’ TV shows. Most new investors struggle with the big learning curve, and make way less than expected. They don’t have the expertise, teams, and systems to do it efficiently and are getting stuck. There will be plenty of private money loans up for sale that are backed by these properties.

The economy we live in is changing rapidly too. We are going through one of the most massive shifts in history. 80% of jobs are changing. Many property owners and buyers have over leveraged themselves in the past few years, and have been relying on outdated industries and jobs to pay the bills. Those who don’t adapt fast enough will lose their homes, unless they are fortunate enough for a new note holder to come along and provide a reasonable and attractive workout.

Investment Opportunities

Find out more about investing in secured debt and real estate, go to NNG Capital Fund


Fuquan Bilal

Fuquan Bilal founded NNG in 2012 with the principal mission of capitalizing on the growing supply of mortgage notes in the interbank marketplace. Mr .Bilal utilizes his 17 years of residential and commercial real estate success to identify real estate opportunities and capitalize on them. To date, he has successfully managed three private mortgage note funds that primarily invest in singlefamily performing and non­performing mortgage notes. His financial acumen and proprietary set of investment criteria enable him to purchase underperforming real estate assets at a deep discount of face and market values, thereby increasing the value of the assets. This, coupled with his ability to maximize the use of leverage, enables him to build strong, secured portfolios with solid passive income flows.

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Can You Micro Flip Mortgage Notes?

By Fuquan Bilal

There’s a lot of talk about micro-flipping real estate out there. But can you micro-flip mortgage notes?

The Micro-Flipping Craze

If you’ve Googled anything to do with real estate lately, you’ve probably been inundated with ads for micro-flipping. Almost every podcast, email and social post out there is talking about the same micro-flipping stories.

It’s a great twist of phrase on a very old strategy. Some people have been doing extremely well at it for years. So, what is it? What are the pros and cons? Can you apply it to notes instead? If so, why should you?

What Is Micro-Flipping?

Micro-flipping is the new term for wholesaling real estate. Wholesaling means buying or contracting to buy a property, and then assigning your contract or flipping it as-is, without doing any rehab work. If you have a good buyers list and connections, or can do this effectively online, you can be in, out and paid fast. It’s a high volume sport.

This has been made a lot easier thanks to all the access to data and software and online platforms we have today.

This form of real estate investing is made to sound super easy. That may be luring in a lot of people who think it is a lot easier than it really is. Not everyone is going to get the results they were sold on. Some will find it the easiest and fastest money they’ve ever made.

The real con of this strategy is that everyone is being sold on trying it. At least tens of thousands of people are sold on using the same software, data and marketing to do this. So, what you get is a lot of people bidding on the same deals, trying to sell them to the same buyers, and engaging in long broker chains. You don’t make money when you are running with the herd.

How To Flip Mortgage Notes

So, what if you could apply the same benefits of micro-flipping houses to the less crowded mortgage note space?

There are at least four ways to try this:

  1. Acquire individual mortgage notes and flip them as-is for a reasonable markup
  2. Buy pools of mortgage notes at deeper discounts than others can, and sell the individuals notes for more
  3. Acquire non-performing loan notes, work them out, resell them as more valuable reperforming notes
  4. Use non-performing notes as an avenue to acquire the collateral property and wholesale that to all of these new micro-flippers

Investment Opportunities

Find out more about investing in secured debt and real estate, go to NNG Capital Fund


Fuquan Bilal

Fuquan Bilal founded NNG in 2012 with the principal mission of capitalizing on the growing supply of mortgage notes in the interbank marketplace. Mr .Bilal utilizes his 17 years of residential and commercial real estate success to identify real estate opportunities and capitalize on them. To date, he has successfully managed three private mortgage note funds that primarily invest in singlefamily performing and non­performing mortgage notes. His financial acumen and proprietary set of investment criteria enable him to purchase underperforming real estate assets at a deep discount of face and market values, thereby increasing the value of the assets. This, coupled with his ability to maximize the use of leverage, enables him to build strong, secured portfolios with solid passive income flows.

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Mortgage Free Real Estate

Matthew Pillmore

Disclaimer: I am not a lawyer or an accountant. Nothing here should be construed as professional advice. I suggest that you always retain the services of a competent professional to provide advice on your transactions.

If you have a loan on your primary residence and/or rentals, you may have considered whether it would be worthwhile to pay it off ahead of schedule. And if so, you’re not alone.

The debate over whether to prepay your mortgage is perpetual in the personal finance world.

Pay Off Your Mortgage or Invest? The Math Says…

On one side, some experts argue you should NOT prepay your mortgage if you are locked in at a low interest rate. Their reasoning: You would be better off INVESTING your money where a reasonably diversified stock portfolio can expect to earn at a higher rate of return on average over the long run.

Add in the home mortgage interest deduction you can take on your federal taxes and, they say, you would be silly to prepay your mortgage and miss out on those perks.

To this group, the question is just about math. After all, why would you prepay a loan at 3% or 4% and lose out on part of a valuable tax deduction when you could invest that money instead and earn considerably more?

But There’s a VERY Important Side to Prepaying Your Mortgage, Too

Still, there are plenty of experts who forge ahead with their mortgage prepayment plans. My parents (including a CPA father) fell squarely in that category. Instead of taking the standard 30 years to pay off their mortgage, they paid it off in well under 10 years.

Ask him if he cares about the tax deduction they missed out on, and he’ll probably look at you like a crazy person. Why? Because the decision to prepay was never JUST about the math to them; it was about their financial freedom. And math aside, they have never regretted their decision to pay off their home and become entirely debt-free.

Most people agree with that sentiment, eventually. Most, just don’t like debt. It’s as simple as that.

But others prefer a deeper analysis.

Analyzing the Pros and Cons

For starters, let’s take a look at what the home mortgage interest deduction really means.

The easiest way to figure out your home mortgage interest deduction is to look at your effective tax rate. Say your overall tax rate is 22%, for example. On average, the home mortgage interest deduction reduces your taxes by $22 for every $100 you pay in mortgage interest.

That’s a nice perk, but there’s a caveat. Your home mortgage interest deduction is only valid for the amount you deduct over and above the standard deduction, which is available to taxpayers who don’t itemize their returns. The standard deduction for married spouses filing jointly was $12,400 in 2014.

So what does that mean? Simply put, if you don’t itemize your taxes, your home mortgage interest deduction is worth nothing. And even if you do, it’s only worth what it helps you save over the standard deduction that anyone can take. In many cases, this drastically reduces the value of the home mortgage interest deduction to the point where it’s barely worth considering.

But what about those lost investing returns? When you ask people whether or not they prepay their mortgage and why, you’ll find plenty of skeptics who balk at the idea of carrying long-term debt in favor of investing their extra dollars in the stock market. And when it comes to who is “wrong” or “right,” there are several ways to look at it.

The interest you save by prepaying your mortgage is a “sure thing.” Many people are happy prepaying and banking the extra money they save on interest, even if it’s less than they may have earned by investing their extra dollars instead.

A Balanced Approach

As someone who loves leverage but despises (ALL) debt, I see both sides of the issue. And that’s why I personally take (and teach) others to consider a balanced approach.

My only debt includes what is used to advance the assets and income growth of my plan, but is paid back strategically to $0 as quickly and safely as possible. I don’t see the reason to choose between investing extra money OR prepaying my mortgages, so I rely on Debt Weapons™ to do both faster.

What About Debt Weapons™??

Debt Weapons™ are tools that allow any consumer to achieve 1 or more of 7 highly financially beneficial purposes.

1) Maximize Cash Flow
2) Compress Amortization Schedules
3) Replace Inadequate Bank Accounts
4) Invest More Quickly & Safely
5) Minimize Total Interest Costs
6) Enhance & Protect FICO® Credit Scores
7) Quickly Increase Financial Safety and Emergency Reserves

To be clear, VIP Financial Education does not provide or offer Debt Weapons™.

We do the research for our Coaching Members in order to help them decide where to go to get the right Debt Weapons™, at the right time, to accelerate their unique goals.

Just like exercise equipment can injure you when used incorrectly, Debt Weapons™ can also be quite harmful if you access the wrong one or use the right one the wrong way.

Applying for any Debt Weapon™ without knowing the proper questions to ask, can lead to several negative consequences. For example, credit scores can rapidly decline, you could access the wrong Debt Weapon™ for your intended purpose leading to unforeseeable costs and terms, possibly delaying your goals even further.

That seems like a good compromise to me. Still, there is nothing wrong with taking sides on this issue.

When you hate debt, you want to put it behind you once and for all, and that’s understandable. But it’s also understandable for someone to make their decision based solely on the numbers. After all, it’s hard to argue with math. At the end of the day, we all have to do what is best for our families – and what helps us sleep best at night.

So, should you pay off your mortgage quickly? It is, and always has been, up to you, yet by joining us at the upcoming event with Realty 411 you will learn how YOU too can rely on Debt Weapons™ to take a more advanced approach and achieve BOTH simultaneously, far more quickly.   

 

Matthew Pillmore
President
VIP Financial Education

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7 Personal Finance Questions to Ask Yourself Before Getting a Mortgage

By Dr. Teresa R. Martin, Esq.

Are you ready for a mortgage? It’s a big step that requires careful planning. A mortgage will affect your financial future for years to come.

Before you sign that mortgage, consider these finance questions:

  1. What is your credit score? Credit scores affect mortgage rates.
  • Before buying a house, check your credit score. Should you raise your score to get a better interest rate? In general, high scores with no late payments during the last three years are enough to get good rates.
  1. Are you capable of handling maintenance costs? It’s important to consider the cost of maintenance before buying a house.
  • The mortgage is only one part of the total cost of owning a house. Maintenance is another important piece. Will you be able to pay for a new roof or air conditioning system when the current ones wear out?
  • Does your monthly budget include enough savings for maintenance?
  • It’s also important to consider DIY projects and hiring others to complete tasks. House maintenance can involve expensive and ongoing projects. Are you ready to pay for these costs?
  1. How secure is your job? Before signing a loan, evaluate your job security. Will the work last? How will you handle changes?

  • Evaluating your job future is part of planning for a home purchase.
  • Consider emergency funds and savings in your plan. If your job situation changes, will you be able to continue making monthly mortgage payments?
  1. Do you have the necessary financial paperwork? Mortgage applications require a great amount of paperwork. Lenders can ask for old tax statements, check stubs, savings account statements, and other information.
  • If you have a high credit score, you may get a no documentation loan.
  • It’s rare to get a no documentation loan, so it’s better to be prepared by checking your files and collecting the financial papers you may need.
  1. Did you calculate the hidden expenses of owning a home? Home ownership comes with multiple expenses that go beyond appraisal fees, property taxes, mortgage closing costs, and insurance.

  • One of the hidden expenses of moving to a home is more bills. If you’re used to renting, then home ownership can change your monthly bills by adding new ones. You’ll add trash collection, water, recycling and sewage in most locations to the expense list.
  • Home insurance is higher than renter’s insurance. In addition, older homes cost more.
  • Homeowners’ association fees are becoming more common in neighborhoods. You may be aware of condominium association fees, but are you ready to pay homeowners’ fees?
  1. Do you have an emergency fund? Emergencies can vary from broken dryers to flooded patios, so you need to be ready for anything. Is your emergency fund big enough to handle common, unplanned expenses?
  • Emergency funds are a better option than credit cards or loans. Putting enough money aside can help you avoid new debt.

  1. Are you applying for other credit? Mortgage lenders can see applications for other types of loans on your credit report.
  • Applying for other types of credit while trying to get a mortgage can hurt your loan. Mortgage companies view these applications as risks, so it’s better to wait before trying to get another credit card.
  • Applications for new credit lower your credit score and affect interest rates.

A mortgage is a responsibility that affects multiple areas of your financial life. Before you buy a house, consider how your current financial situation will be affected and plan for emergencies.


Dr. Teresa R. Martin, Esq.

Dr. Teresa R. Martin, Esq. is the founder of Real Estate Investors Association of NYC (REIA NYC). REIA NYC (www.reianyc.org) is a premier real estate investment association serving the New York City marketplace. Its primary focus and mission is “helping our members build, preserve, and harvest multi-generational wealth” in the areas of real estate investments, business ownership and personal development.

 

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A New Era Of Zero Interest Rates?

By Fuquan Bilal

We could soon be in a new era of zero interest rates. What will it mean for investors, the markets and you?

Could We Have Negative Interest Rates?

The president has been pushing for lower interest rates. We could even potentially see zero rates and even negative interest rates. The fed already recently cut key rates, and more reductions could come in 2020. This may sound crazy at first, but it has been done around the globe at various times and has worked.

While everyone enjoyed pointing fingers at different parties in the wake of 2008, one of the biggest factors that actually caused the crash was rising interest rates. If they get it right this time, lowering rates could help the economy remain afloat and avoid falling into the abyss again.

The Impact

The most widespread outcome of this is it costing people to have money in the bank. It probably already does when you add up all the fees and charges. Yet, when banks start charging every interest for having money on deposit, there is going to be a massive need to find somewhere else to park money and invest it. Real estate is of course a nice solid alternative. Cutting out the banks as the middleman and directly investing in mortgage notes and funds can also be a smart way to turn those losses into net gains.

Negative interest rates also mean it will cost banks and lenders to make loans. The negative interest is applied to paying down your outstanding balance each month. There are other ways lenders can make up for this money, but clearly they will be pickier about who they loan to.

Perhaps most significantly for investors, a new period of mortgage originations with near zero or negative rates means soaring appeal and demand for older higher rate notes, including nonperforming and re-perfoming loan notes. 8% and even 4% notes will become far more valuable.

Those who acquire those assets early stand to win big as this unfolds.

Investment Opportunities

Find out more about investing in secured debt and real estate, go to NNG Capital Fund

 


Fuquan Bilal

Fuquan Bilal founded NNG in 2012 with the principal mission of capitalizing on the growing supply of mortgage notes in the interbank marketplace. Mr .Bilal utilizes his 17 years of residential and commercial real estate success to identify real estate opportunities and capitalize on them. To date, he has successfully managed three private mortgage note funds that primarily invest in singlefamily performing and non­performing mortgage notes. His financial acumen and proprietary set of investment criteria enable him to purchase underperforming real estate assets at a deep discount of face and market values, thereby increasing the value of the assets. This, coupled with his ability to maximize the use of leverage, enables him to build strong, secured portfolios with solid passive income flows.

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So Many Ways to Buy

By Bruce Kellogg

#1 – Cash Purchase

This is the simplest method: write a check, wire the funds, etc.  But more needs to be known etc.  a) The investor needs to calculate their percent cash return on their cash invested in order to compare with other investment opportunities in front of them.  b) When buying with cash, try for a price discount.  Don’t pay “retail” unless you have to.  c) After buying with cash, take out a credit line on the property for security if times get tough.  Credit unions are good for this.  In tough times, banks often reduce or cancel credit lines, which makes banks unreliable when you need them.

#2 – Assume an Existing Loan

This involves applying to the existing lender to replace the existing borrower.  You will have to qualify as a new borrower, and pay fees.  In this low interest rate environment, it can be preferable to simply assume the loan.  Some commercial and private loans are assumable as well as institutional loans on 1-4 residential units.

#3 – “Subject to” an Existing Loan

Unlike formally assuming an existing loan, this method involves taking title to the property without disturbing the loan, and just start paying on it.  Conceptually, it is simple, but in practice it is not.  Most loans nowadays are “due on sale”, so if the lender finds out the property was transferred, they can “accelerate” the loan and call it “due and payable”.  They have the right to foreclose if they are not paid, or a satisfactory arrangement made.

#4 – Create Financing

When a property is purchased, the numbers have to add up.  If the down payment and the existing or new loans do not equal the purchase price, then financing has to be created.  Often, the seller will agree to “carry back” a created loan for the buyer to complete the purchase.  This “note” can be sold, often at a discount, or borrowed against by the seller, so they are not stuck with it.  Or, they might like it and keep it in their pension fund, for example. The terms of the loan are whatever the parties agree, as long as the terms are legal.

#5 – Create a “Wraparound” Loan

One really useful created loan is called a “Wraparound” or “All-Inclusive” loan.  This is where a loan is created that “wraps” or “Includes,” the existing loan(s), which the buyer executes in favor of the seller.  Usually , the “wrap” includes the part of the purchase price that is unpaid by the down payment.  It’s basically the “carryback” amount due to the seller over time.

There are a couple of benefits to the “wrap”.  First, it is a useful way to work with a “subject to” transaction, described above as being somewhat complicated. 

Second, if the “wrap” is written at a higher interest rate than the loan(s) enclosed in it, the seller will receive excess interest above what he is paying out.  Yields can be high with a “wrap” this way.

#6 – “Creative” Financing

This is where real estate gets “creative”.  By legal definition, personal property is any property that is not real property.  Examples of personal property are cash, corporate stock, gemstones, art, vehicles, promissory notes, and so on.  How about, instead of cash, use other personal property for the down payment?  A 4 carat diamond was used to purchase the Mt. Diablo Hotel in Contra Costa County. A mid – 1930’s 40 foot wooden motor boat (gorgeous woods) was used to acquire a triplex in Redwood City.  How about a travel trailer for a down payment?  Anything goes, sometimes!

#7 – Funds From a Whole Life Policy

In most cases, it is possible to borrow from a “Whole Life”  insurance policy and use the funds to buy real estate.  This can be investigated by reading the terms of the policy, and then discussing this with the company.  Repayment will be required, and reasonable interest will be charged, but it’s a good source of funds.

#8 – Invest Using Your IRA

Now that interest yields have been low for so long, people are moving to invest in real estate using their  Individual Retirement Account (IRA).  Investments can be made in real property or personal property such as notes, coins, paintings, securities, and so on.  Basically, the method is to move your IRA account to a “custodian” and have them buy, manage, and sell your properties at your direction.  Custodians are plentiful on the internet, and they have literature galore.  Leverage by borrowing from banks can be used to enhance the return in your IRA.  Your custodian can steer you to banks that offer to do this.

#9 – Cash to New Loan

The most common method of purchasing real estate involves the buyer putting up a cash down payment, then qualifying for a new, long-term “purchase money” loan from a bank, credit union, or mortgage broker.  Sometimes, the seller will make (i.e., “carry back”) the loan.  Usually an institution will fund the loan and either keep it in their portfolio, or, more often, they will bundle it with others and sell it as a security on Wall Street.  This replenishes their lendable funds.

Down payments vary.  Commercial loans are usually 20 – 40% down, depending upon the lender’s guidelines and risk assessment.  Owner-occupied, residential loans can be as low as 0 – 3.5% with mortgage insurance usually required.  1 – 4 unit investment properties typically require 20 – 25% cash down, but no mortgage insurance.  Lenders’ programs vary widely, including rates and fees, so comparison shopping is recommended.

#10 – Gifting

Purchasing as described in #9, above, many times offers the opportunity for the borrower(s) to receive a gift of money toward some, or all, of the required down payment.  Acceptable donors include “a relative”, defined as a spouse, child, or other dependent, or any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship.  A fiancé, fiancée, or domestic partner can also donate.

Lenders will want a “gift letter” signed by the donor stating that repayment of the gifts is not required.  Many lenders will require proof of the funds being transferred, so it is important to learn the lender’s requirements prior to transferring funds around.

#11 – Buy Defaulting Note, Then Foreclose

This method involves buying notes or mortgages that are in default at a substantial discount, then foreclosing to acquire the property.  Notes can be purchased through advertising on Craigslist, newspaper ads, direct mail to purchased lists, or websites dealing with note transactions.  Searching on the  internet will provide organizations with courses on notes.  This method can be highly profitable, but is quite sophisticated.  Additionally, foreclosing on a note usually does not afford the opportunity to conduct inspections, and a title search is essential.  Some states provide a “right of redemption” for the foreclosed borrower to recover ownership, adding further complexity and risk.

#12 – Tax Liens and Tax Deeds

In order to stay solvent, when  owners fail to pay property taxes, countries will issue tax liens or tax certificates which are sold to investors at a certain yield.  Depending upon the state, yields run from 6% to 36%, with 8 -18% being most common.  Under some circumstances, investors can foreclose and obtain ownership of the property.  Searching the internet under “tax liens” will produce teachings and organizations offering to help investors get involved.  Be advised, however, that this axquisition method is also sophisticated and has the same warnings as #11, above.

#13 – “Trade” or 1031 Exchange

A “trade” of real estate involves swapping one property for another.  An example would be if the owner of a vacant lot traded it with the owner of a mountain cabin, probably with some cash changing hands to even out the values.  One party might obtain financing, or one trader might carry back some “owner financing”.  Noteworthy here is that the trade is not a tax-deferred exchange, but just a swap.  These transactions are advertised on real estate and barter websites from time to time, saying “For Sale or Trade”, or similar.

A tax-deferred exchange is a transaction governed by Section 1031 of the Internal Revenue Code and is designed to defer long-term capital gains taxes for the “exchangor”, the one moving up in property.  The properties have to be “like kind”, such as real estate for real estate.  They do not have to be identical types of real estate.  For example, an airport hangar could be exchanged for a duplex.  However, they do both have to be either an investment property, or a property “used in a trade or business”.  So, a plumber who is retiring could exchange his shop building into a fourplex for retirement income.  However, an investment property CANNOT be exchanged into a property that is promptly turned into a residence after the close.  Capital gains taxes will be due.  The Internal Revenue Service (IRS) has issued “safe harbor” guidelines for a successful exchange, so real estate, accounting, and possibly legal experts need to be used.

#14 – Syndication

When investors get together to buy a property, it is commonly called a “group investment”, which is legally termed a “syndication”.  This is usually done to allow the purchase of a larger property and provide “passive” ownership benefits for the investors.  The common types of syndications are:  1) Limited Partnership 2) Limited-Liability Corporation (LLC), and 3) Tenancy-in-Common (TIC).  Each one has an organizer who usually becomes the manager of the project.  An “offering circular” is prepared describing the project, including financial projections, organizations, management, and risks.  Investors sign a “subscription agreement” and contribute their “share” of the project.  Syndicatiions are a “security” under federal and state laws, so there are regulations to be followed concerning marketing, disclosure, handling of investor funds, management, and reporting.  Larger projects typically require the investors to be “accredited”, which necessitates a substantial income and net worth.  Syndications are easy investments, but investigation of the project and the organizer is essential due to the potential for the promoter to take advantage of the investors through slick marketing.  Additionally, if the organizer is honest yet inexperienced, the project could fail.  Don’t be afraid, but be careful with syndications.

#15 – Equity-Sharing

Another method of investing with lots of potential is “Equity-Sharing”.  This is when an investor and a potential homeowner buy a single-family residence together, and the aspiring homeowner occupies it.  They are called the “resident co-owner” (RCO), and the investor is called the “investor co-owner” (ICO).  Percentage shares are negotiable with the RCO paying the property taxes, insurance, loan payment, and routine repairs, while the ICO puts up the down payment.  There is a “Shared Equity Agreement” or “Joint Ownership Agreement”, which sets the term, allocates the income-tax benefits, and specifies how the arrangement is to be wound-up.  One party could buy out the other, or the property could be sold and the net proceeds divided.

Equity-Sharing works well between relatives.  One Lockheed engineer has seven of these going to help his children, nieces, and nephews become homeowners.  College housing is another application where the son or daughter owns part of the house with the parents then rents bedrooms to other students.

#16 – Joint Venture

A “joint venture” is where two parties undertake a project together, such as a “fix and flip” of a property.  One party usually supplies the funds, while the other supplies the expertise and management.  This is often called a “rich man, poor man partnership” and is a great way to get started.  A “Joint-Venture Agreement” describes the arrangement.  These can be found on the internet.

#17 – Contract-of-Sale

The “Contract-of-Sale”, also called “Contract for Deed”, “Land Sales Contract”, or “Land Contract” is a method of acquisition that defers the buyer’s receipt of the deed (fee ownership) until all of the contract’s terms have been fulfilled.  Meantime, the purchaserhas what is known as an “equitable interest”, an interest under the contract.  It is a security device for the  seller who is financing the transaction.  It’s a good method for selling to a buyer with a low down payment or weak credit that can be improved over time.  Since it is a contract, foreclosure requires an action in court.  Additionally, most states have a “right of redemption” where the foreclosed party has a certain period of time to pay the arrearage plus costs and recover the property.  For a purchaser, it is an easy way to begin ownership of a property.  A good practice is to obtain a quitclaim deed and record it if the contract in not fulfilled.  This cleans up the title.

#18 – Shared-Appreciation Mortgage

When the market is appreciating rapidly it is sometimes difficult to convince a seller to sell on reasonable terms, or to carry back owner-financing.  One approach to this is to create a “Shared-Appreciation Mortgage” which the seller carries back.  Usually, it involves a low interest rate, but then gives the seller a percentage of the profit at the end of the loan term.  This approach also works well in a high interest rate environment because it helps the buyer achieve a reasonable cash flow to sustain the property.  A “standard form” for this type loan is not normally available, so it’s best to have an attorney draw one up, or customize an existing one.

#19 – Option to Purchase

An option confers the right, but not the obligation, to do something.  Real estate examples include the option to purchase, option to lease, option to renew, option to extend, and so on.  Usually, a prospective buyer negotiates an option to purchase when they want the property, but sometime later.  They give the owner some agreed “option consideration” for the right to purchase the property on mutually-agreed terms on or before a specified future date.  Option consideration is frequently cash, but it could be personal property, like a used tractor, or even “personal service” where the future buyer fixes up the property before buying it.  If the option is not exercised, the owner is entitled to keep the consideration.  A good practice is to obtain a quitclaim deed and record it if the option expires without being exercised.  This clean up the title.

Options are particularly useful for reserving properties without appearing on the public record until the options are exercised.  Developers do this to accumulate parcels without “tipping off” other players in the market that they are buying.  An individual can negotiate an option in an appreciating market and exercise the option later without the costs of ownership in the meantime.  It’s an excellent way to speculate, and fortunes have been made this way.

#20 – Lease-Option

A lease-option involves leasing and taking possession of the property being optioned.  Prior to exercising the option, the property can be occupied as a residence, or leased to a subtenant.  This is a way to “tie up” a property to take advantage of an appreciating market.

Another possibility is to enter into a contract-of-sale with an owner, then lease-option the property to a tenant.  If/when the tenant exercises the option, pay off the contract-of-sale, and realize a profit.  Option consideration from the tenant can be used for the down payment on the contract-of-sale, resulting in a (nearly) cashless transaction.  This can be done repeatedly as a business model.

Two cautionary remarks:  1) ALWAYS make sure the option and lease agreements are separate documents so a judge cannot order the refund of the option consideration to the tenant by characterizing it as a rental deposit.  2) Obtain a quitclaim deed any time an option is not exercised in order to maintain a clean title.

#21 – Master Lease-Option

This method applies primarily to commercial rehabilitation projects.  The idea is to find a building that has “gotten away from” its owner and become run-down with vacancies that are not being filled.  A “Master Lease” is negotiated with the owner to take over rehabbing and re-tenanting the building, along with an option to purchase the building before an agreed future date when financing the purchase is more likely to succeed.  Since the present owner is obviously short of funds, the purchaser will have to fund the project and receive a lower price or credit toward the purchase, or both.  It is best to have a real estate attorney draw up these agreements.

 

#22 – Adverse Possession

An interesting way to acquire a property is through what is called, legally, “Adverse Possession”.  It involves taking possession of a property and continuously possessing it for a number of years specified by state law.  The years vary by state from six to thirty, with California being just seven.  Possession has to be “open”, which means coming and going at will.  It has to be “notorious”, which means it can be readily observed.  It has to be continuous, so a break disrupts the timeline.  It also has to be “hostile to the interests of the owner”, which means overstaying an invitation by the owner does not qualify.  California also requires the possessor to pay the property taxes, as well.  If all conditions are met, the possessor will sue the owner in a “quiet title action” to obtain title in their name.  This situation occurs more with rural property, and is not common, but is fun to think about! See wikipedia to learn more.

#23 – Involuntary Methods

The other acquisition methods in this series are all voluntary, except two, which are involuntary.  These are: a) Inheriting a property and, b) receiving a property as a gift.  These are mentioned for completeness, but are too simple to warrant discussion.

#24 – “Leftovers”

There are three additional ways to acquire real estate which are more like techniques that can require no cash down payment.  Here they are:

“P-Note” iivolves giving the seller an unsecured promissory note for the down payment.  This works best if the parties know and trust each-other. But it’s a viable approach.

“Sweat Equity” involves the purchaser convincing the seller to allow them to fix up the property in lieu of a down payment while the seller carries back the financing.  Doing the repairs prepares the property to obtain a new loan and, at the same time, it secures the seller’s loan more as the repairs are accomplished.

“Personal Service Contract” Involves a purchaser providing some service to the seller in lieu of a cash down payment.  Examples include a plumber re-piping the seller’s residence, or a dentist providing dental implants to the seller.

These three techniques should probably be used with the help of a real estate attorney.

Conclusion

In many parts of the country, markets are tightening, and inventory is dropping.  Investors are finding it harder to make a deal.  While the 24 acquisition techniques presented here cannot increase the supply of properties, they can open up alternative ways to capture more properties that are available.


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Bruce Kellogg

Bruce Kellogg has been a Realtor® and investor for 36 years. He has transacted about 500 properties for clients, and about 300 properties for himself in 12 California counties. These include 1-4 units, 5+ apartments, offices, mixed-use buildings, land, lots, mobile homes, cabins, and churches. He is available for listing, selling, consulting, mentoring, and partnering. Reach him at brucekellogg10@gmail.com, or (408) 489-0131.

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Seller-Carryback Note Terms

By Bruce Kellogg

Introduction

It is well known among real estate investors that some of the best deals occur when the seller is persuaded to carry some, or all, of the financing. This article introduces the seller-carryback note, and provides a menu of terms that can be negotiated into the note. So far as drawing up the note is concerned, most closing agents ( i.e., escrow offices and attorneys) have what they call a “cookbook” of legally-correct note terms, so buyers and sellers need not be concerned with such details.

For reference, a sample installment note is attached. Additional terms can be added off the menu as desired.

Installment Note

1)        “Request for Notice of Delinquency” – This is actually not a term in the note. It is prepared in escrow and recorded, instead. Its purpose is for the senior lienholder(s) to notify the carryback seller in the event the owner is not paying them. It protects the seller by allowing them to jump in early to protect their interest.

2)        “Unsecured” – This also is not a term of the note. It should be inserted at the top of the note to indicate that there is no security instrument (i.e., mortgage or deed-of-trust) securing the note to the property. Its use is not recommended!

3)        “Late Charge” – Most notes have a “late charge”, such as 3% of the payment after 10 days past due. Some states have regulations for owner-occupied properties. Most investment transactions are not regulated in this way.

4)        “Due on Sale or Transfer” (“Alienation”) Clause

This term is included to protect the seller from the property being sold or transferred to a party other than the original buyer. After all, the secondary buyer might not be creditworthy.

This term has an enforcement feature wherein the seller can force a payoff or foreclose to recover the property. However, in order to be enforceable, this term must also be included in the security instrument (mortgage or deed-of-trust). Other note terms do not need to be included in the security instrument, but this one does.

5)        “Assumption” – If the parties desire for the note to be assumable, this can be included in the note. Usually, some criteria are included to protect the seller. Often, the note says that the seller’s approval “cannot be unreasonably with-held” when there are protections included.

6)        “Balloon Payment” – When a note is not “fully-amortized” such that a balance remains at maturity, this is called a “balloon payment”. If this applies, the note should be written to clearly include this feature to protect both parties from misunderstanding.

balloon payment

7)        “Option to Extend” – If a “balloon payment” is involved, writing an “option to extend” into the note could prevent a rough ending if refinancing or selling conditions are unfavorable. It could extend for a year or two with a fee paid to the seller, or a “partial-paydown” made.

8)        “Interest-Only” – describes the arrangement where the payments consist only of interest, and a “balloon payment” occurs at maturity.

9)        “Zero Interest” – involves payments of principal only, with no interest being charged. This term is a sweetie for buyers!

zero interest

10)    “Deferred Interest” – involves interest accruing to maturity, when both principal and interest are due. Although this helps cash flow, unlike zero interest it is very risky. Rapid appreciation will be essential for this to succeed, and losing the property is a realistic possibility!

11)    “Skip a Payment” – Sometimes, if the parties are relating well, it is possible to include a term allowing the borrower to skip a payment in the event of job loss, rental vacancy, or other misfortune. This can be made part of the note, or dealt with at the time. Including it ahead of time is preferable for a more stable transaction.

12)    “Substitution of Collateral” – Sometimes, an enterprising buyer will negotiate with the seller the right to move the note and secure it to a different property. This is usually done to sell, exchange, or refinance the property. There should be criteria stated to protect the note-holder, but approval “should not be unreasonably with-held” if the criteria are met.

13)    “Right of First Refusal” –Sometimes, an enterprising buyer will realize that the seller might decide to sell the note at a discount to raise cash in the future. Including this term gives the buyer first shot at buying their own debt back at a discount, effectively lowering the purchase price.

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14)    “Graduated Payment Mortgage (GPM)” – is a note engineered such that interest and/or payments start low, then increase gradually over the years. It makes for easier ownership but can become a trap in the later years. For this reason, the Dodd-Frank legislation prohibits this type of loan on 1-4 unit owner-occupied properties, but it is still legal for investment property transactions of all kinds.

15)    “Shared Appreciation Mortgage (SAM)” – is a popular note term when prices are high and still rapidly rising, or when interest rates are high. The note is written so that the seller receives payments that are “sub-market”, but also receives a percentage of the property’s appreciation upon sale or maturation of the note. It is useful, but not very common.

Conclusion

Clearly, these note terms are not appropriate for every transaction, nor would sellers agree to all of them. The objective is for buyers to negotiate as many that are advantageous as they can!

Good luck!


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Bruce Kellogg

Bruce Kellogg has been a Realtor® and investor for 36 years. He has transacted about 500 properties for clients, and about 300 properties for himself in 12 California counties. These include 1-4 units, 5+ apartments, offices, mixed-use buildings, land, lots, mobile homes, cabins, and churches. He is available for listing, selling, consulting, mentoring, and partnering. Reach him at brucekellogg10@gmail.com, or (408) 489-0131.