Bill Bronchick on 9News Denver talking about the real estate market

Realty Times – Investors are Getting Loan Mods

Loan modifications and principal reductions are big news for homeowners, but what about real estate investors who own apartment buildings, strip shopping centers, and small office buildings?

Are loan “mods” possible for them?

Absolutely, says Jonathan Hornik, executive vice president and general counsel for Kennedy Funding, Inc., a New Jersey-based lender who not only helps investment property owners negotiate debt restructurings with their creditors, but provides the take-out financing to make the deals happen.

In fact, according to Hornik, far more loan modifications involving writeoffs of portions of existing mortgage debts are needed in commercial real estate right now.

Many income properties carry loans that must be rolled over — refinanced — in 2009, 2010 and 2011. But with declining property values, owners may not be able to come up with the financing needed to pay off what they owe.

The solution, said Hornik in an interview with Realty Times, is to negotiate a reduction in the principal balance owed to the lender, and pay that off with new replacement financing.

But you might ask: Are banks really willing to do that when borrowers are current on their payments? Hornik says large numbers of them “are more than willing to negotiate to less than the existing balance on a current mortgage. It all depends on the situation the bank is in.”

Many lenders are themselves under stress because of the economic downturn. They need to bolster their own capital bases, and may be willing to write off some of the debt an income property owner owes them in exchange for a single lump sum payoff.

How much might a bank reduce an investment property loan balance that’s current? Hornik says the reductions his firm helps negotiate can range from 20 to 40 percent.

Kennedy Funding’s role, said Hornik, is “to be the catalyst. We call your lender and negotiate the terms” of the writedown, if it’s at all possible. If there’s flexibility on the bank’s end, Kennedy then offers to either buy the existing note at a discount, providing cash to the bank. Or it provides the refinancing takeout cash to retire the debt at a lowered principal amount.

None of this comes cheaply, however. Kennedy Funding is a “hard money” lender, so interest rates on the new, smaller loan amount for the investment property owner can range from 9 percent and up, with at least three points. Loan to value ratios tend to be low, generally 65 percent or less.

At the end of the process, however, said Hornik, property owners generally owe less on the real estate and pay less per month, even with higher rates.

Foreclosure rate hits all time high

A record 12 percent of homeowners with a mortgage are behind on their payments or in foreclosure according to the Associate Press. This presents some tremendous opportunities to buy foreclosure properties if you have the cash or know how to leverage through owner financing or partners.

Short sales are the name of the game these days, and learning the tricks of the trade will help you beat out your competition in the market.

Learn more at the upcoming Foreclosure Investing Boot Camp.

Can Foreclosure Investing Be Criminal?

I recently attended a “free” seminar on how to “get rich quick” in foreclosures. The speaker had a different angle than the usual “steal it from the homeowner” method.

The speaker suggested that you approach the homeowner with the following plan:

1. Tell the homeowner you will make up his back payments and give him some cash.
2. Take title to the property.
3. Lease it back to the former owner with an option to buy it back for one year.

The speaker suggested that after one year, the house would be yours if the former owner didn’t exercise his option. Sounds great doesn’t it? You could beat out all your competition who are trying to “steal” the same house.

Well, here’s the catch. The poor homeowner in foreclosure will be your best friend when you make up his back payments. However, when the year is up and he can’t get his house back, the trouble will begin.

In a number of cases, these homeowners will go to court and claim that the “sale/leaseback” was really just a disguised loan. He or his attorney will ask the court to “re-characterize” the transaction as a loan and place title to the property back in his name. If the court agrees, the loan is illegal, since it is usurious.

Here’s how it works: Let’s say that you find a house in foreclosure worth $100k. The balance of the loan $50k, and the homeowner is behind $5k. You agree to make up the back payments of $5k and take title. You then lease it back to the homeowner with an option to buy it back for $100k, its fair market value. What’s the problem?

The problem is that if the court re-characterizes the transaction from a sale/leaseback to a loan, you have loaned the homeowner $5k at 1000% interest! Think about it… you give him $5k, and he has to pay $50k ($100k option price minus the $50k loan balance) to get his equity back. 1000% interest is usury, and the court will set aside the loan. You will lose the house AND your $5k.

If you’re not familiar with the word “usury,” it means charging more interest than permitted by law. The consequences of a usurious loan are usually civil; the court will declare the loan void and the borrower won’t have to pay it back. If you get caught making usurious loans on a regular basis, you’ll be hearing the words “loan-sharking” and “racketeering.” These are CRIMINAL acts that will get you in jail. Many foreclosure real estate investors have been indicted on racketeering charges for doing exactly what I described above.

Many states have recently passed foreclosure legislation that restricts the type of transactions you can do with a homeowner in foreclosure, as well as require certain disclosure in contracts. Review your state law with a qualified attorney before buying a foreclosure property.

7 Reasons to Use Land Trusts

The land trust is a very powerful tool for the savvy real estate investor.  A land trust is a revocable, living trust used specifically for holding title to real estate.  Each property is titled in a separate trust, affording maximum privacy and protection.

Here are seven reasons to use land trust for titling property to real estate.

1. Privacy. In today’s information age, anyone with an internet connection can look up your ownership of real estate.  Privacy is extremely important to most people who don’t want others knowing what they own.  For example, if you own several properties within a city that has strict code enforcement, you could end up being hauled into court for too many violations, even minor ones.  Having your real estate titled in land trusts makes it difficult for city code enforcement to find who the owner is, since the trust agreement is not public record for everyone to see.

2. Protection from liens. Real estate titled in a trust name is not subject to liens against the beneficiary of the trust.  For example, if you are dealing with a seller in foreclosure, a judgment holder or the IRS can file a claim against the property in the name of the seller.  If the property is titled into trust, the personal judgments or liens of the seller will not attach to the property.

3. Protection from title claims.  If you sign a warranty deed in your own name, you are subject to potential title claims against you if there is a problem with title to the property.  For example, a lien filed without your knowledge could result in liability against you, even if you purchased title insurance.  A land trust in your place as seller will protect you personally against many types of title claims because the claim will be limited to the trust.  If the trust already sold the property, it has no assets and thus limits your exposure to title claims.

4. Discouraging Litigation. Let’s face it, people tend to only sue others who appear to have money.  Attorneys who work on contingency are only likely to take cases which they can not only win, but collect, since their fee is based on collection.  If your properties are hard to find, you will appear “broke” and less worth suing.  Even if a potential plaintiff thinks you  have assets, the difficult prospect of finding and attaching these assets will discourage litigtation against you.

5. Protection from HOA Claims When you take title to a property in a homeowner’s association (HOA), you become personally liable for all dues and assessments.  This means if you buy a condo in your own name and the association asseses an amount due, they can place a lien on the property and/or sue you PERSONALLY for the obligation!  Don’t take title in your name in an HOA, but instead take title in a land trust so that the trust itself (and thus the property) will be the sole recourse for the homeowner’s association’s debts.

6. Making contracts assignable.  The ownership of a land trust (called the “beneficial interest”) is assignable, similar to the way stock in a corporation is assignable.  Once property is title in trust, the beneficiary of the trust can be changed without changing title to the property.  This can be very advantageous in the case of a real estate contract that is non-assignable, such as in the case of a bank-owned or HUD property.  Instead of making your offer in your own name, make the offer in the name of a land trust, then assign your itnerest in the land trust to a third party.

7. Making Loans “Assumable”. A non-assumable loan can become effectively assumed by using a land trust.  The seller transfers title into a land trust, with himself as beneficiary.  This transfer does not trigger the due-on-sale clause of the mortgage.  After the fact, he transfers his beneficial interest to you.  This latter transaction does trigger the due-on-sale, but such transfer does not come to the attention of the lender because it is not recorded anywhere in public records.  This effectively makes a non-assumable loan “assumable”.

As you can see there are many creative and effective uses for the land trust, limited only by your imagination!

For more information on land trusts, get
William Bronchick’s Land Trust Home Study Program

Building a Buyer’s List – “It’s Magic”

Building an investor list is the key to success in real estate investing.  The concept is simple – find a list of investors who buy properties, then go out and find the inventory to flip to such investors.  Also, let these investors know that you buy houses, too.  The more people who are in your network, the easier it becomes to buy and sell houses.

Building a list is easy, in fact, “ITS MAGIC”.  Here’s how the acronym plays out:

I – Have an Identity

Superman has an identity.  Batman has an identity.  Do you have an identity?  When you go to meetings like your local real estate investors club, people need to remember you.  Wear the same pink tie, yellow shirt, or red hat so people always remember you.  You want people to identify you with something they can remember so they will always call you when they want to buy houses from you or when you call them to sell them houses.

T – Title Records

Sophisticated investors who buy and sell a lot of houses will show up over and over again on the title records.  Get access to local records through your friendly real estate broker or title company.  Make note of the names that come up over and over again.  Put these people on your list.

S – Street Signs

You see them everywhere – “We Buy Houses” signs stapled to a telephone pole or stuck in the ground.  Call them.  If they really buy houses, you want these people on your buyer’s list.  And, if they come across deals that they don’t want, make sure they know to call you.

M – Marketing

Do some good marketing to generate a list.  Start with a good business card and brochure, and pass it out to everyone you know.  Ask your title company rep if you can leave brochures in their office so when other investors close deals they can be introduced to you.  Your goal should be to pass out 500 business cards a month or more.

A – Auctions

Auctions attract lots of investors.  Go to local foreclosure auctions and pass out your card.  Also, collect the cards of others you meet to generate your investor list.

G – Groups

Join every business group that has luncheons or meetings.  Investors or potential investors can come in every walk of life.  And, people who are not investors will call you when they come across a house in foreclosure or a couple in divorce.  Everyone within your influence should know what kind of business you are in so they can refer business to you.

I – Internet

The Internet is loaded with real estate chat boards and discussion groups where investors congregate.  Even if people you meet on these boards are located in other states, keep them on your list.  You never know when you will come across someone who has moved to their city or when they will come across someone who is moving to your city.

C – Real Estate CLUBS

Real estate clubs are your best local source of building an investor list.  Frequent these clubs often, passing our your business cards and flaunting your IDENTITY.  For a good list of local clubs, try http://creonline.com/real-estate-clubs.

Scripting common objections from foreclosure sellers

Foreclosure lists are a great resource for finding motivated sellers, but the competition for these deals is substantial.  People in foreclosure are inundated with mailers and calls, so the investor who can answer the seller’s questions and make him feel good will likely get the seller’s trust and ultimately the deal.

Every investor needs a script, that is, a pre-defined set of words to respond to a seller’s common objections.  All good sales people work from scripts, and everyone has a script already in their head.  Remember, a script is nothing other than a predefined set of words in response to a question or situation.  So, if you don’t refine your script, the default one in your head will take over, and often lead to saying the WRONG things!

Here are some of the things from our script we teach at the Foreclosure Investing Boot Camp:

OBJECTION:  ANOTHER INVESTOR SAID THAT THEY WOULD GIVE US $5,000.00

COUNTER OBJECTION:  “Really?  I’d take that offer in a heartbeat if I were you!  But, here’s the thing… based on my experience, I’m not sure how another investor can promise you $5,000.00 if they haven’t spoken with the bank and haven’t received a commitment letter from your lender yet, so that tells me that this other investor may be just telling you what you want to hear.  Is that possible, Mr. Seller? Here’s a tip, Mr. Seller – ask the other investor to sign a $5,000 promissory note for the money, due at closing.  If he won’t sign the promissory note, then you will be able to know how trustworthy he is, does this make sense?  I can’t promise you any money right now because I honestly don’t know what I can work out on this until we meet, review your details and I speak with your lender. Regardless of whether or not you’d want to work with us, do you think you should be working with someone who will be honest with you and not ‘sugarcoat’ it?  Are you with me?”

OBJECTION:  I WANT TO BE ABLE TO STAY IN THE HOUSE

COUNTER OBJECTION:  “I understand you don’t want to move, it’s a very difficult thing.  Unfortunately, if we purchase the house, we can’t rent the house back to you and I would be careful of an investor that says they will do that because there have been some shady practices where that’s concerned.  The good news is that virtually every seller we’ve worked with is actually really relieved when they get out from under the house.  For the amount of mortgage payments you are making each month, you can practically rent a palace for that!  It is such a renters market, that I think you’ll be really pleased to see the great houses/condos available to you at a fraction of what you’re paying now.  I can give you a website where you can find great rentals in your area at a price you can afford.  The bottom line is that I think you’ll feel a lot better just putting this whole situation behind you and getting a fresh start in another home.  Does this make sense?”

OBJECTION:  I HAVE A FRIEND WHO IS A REALTOR WHO MAY HELP ME

COUNTER OBJECTION:  “Basically most realtors don’t do short sales which can be a real detriment to you and the most importantly the realtor has to wait until an offer comes in to submit to the lender, (if that offer comes in) whereas we put the offer in immediately and start negotiating with your lender right away”.

OBJECTION:  HOW CAN I TRUST YOU?

COUNTER OBJECTION:  “You are smart to be skeptical, Mr. Seller, and I would be if someone I didn’t know was knocking on my door or calling me on the phone.  Unfortunately, nothing is 100% guaranteed and, but I can tell you that I’ve worked with (dozens/hundreds) of people just like you who are really glad that they had someone like me to work on their situation.  The bottom line is you are going to have to ultimately choose someone who you can trust, right?  You don’t have many options right now; if you don’t trust someone, your house will go into foreclosure and there won’t be any option left. So, let’s just go with the assumption for now that you trust me, and I trust you, then we’ll go forward, does this sound good?”

Do you want to learn a lot more and practice putting this into action?

Enroll in the upcoming Foreclosure Investing Boot Camp.

From Contract through Closing – “ATM”

Once you have your property under contract, you can proceed towards closing.  Three things need to happen before you can close. First, the buyer’s lender must produce the funds. Second, your mortgage, or any other lien on the title, needs to be paid off. Third, once the title is clear, you can take the final step and sign it over to the buyer. Then you’ve closed on your house. So is it that simple? Not really. You need to understand what happens between contract and closing, often referred to as “escrow”.

Basically, there are three things that happen between contract and closing, which can be remembered by the acronym, “ATM”.  This should be easy to remember because it is like going to the ATM machine when you close and get your money.

• All contract contingencies must be met

• Title searches and title commitment prepared

• Mortgage must be paid off, and a new one must be approved for your buyer

All Contract Contingencies Met

If the contract calls for an inspection by the buyer, this should happen immediately, especially if there is an inspection deadline.  The buyer will probably employ a professional house inspector.  For about $350 in most areas, a house inspection service will prepare a detailed report and a list of things wrong with the property.  A home inspector will check the complete exterior of the house – the chimney, roof, flashings, gutters, and downspouts. He will also check the foundation and the grading of the lot to be sure it is pitched away from the house. A buyer may also require an engineer’s inspection of the property, particularly if the initial inspection reveals problems with the foundation or any other major issues with the property.

The inspector will then write a complete report with photos and a narrative of all of these items, as well as a punch list of things that need work. The buyer will likely use this list to her advantage to negotiate a lower price or cash back at closing (called a “concession”). The buyer can also use the inspection clause to kill a deal that turned out to be buyer’s remorse on her part. If the seller will not agree to make the necessary repairs or adjustments to the price, the buyer can cancel the contract and receive her earnest money back.

You must anticipate these issues, but don’t be in a rush to fix everything that is wrong the property.  For example, if you know the furnace is 20 years old and has an average life span of 20 years, your buyer will likely insist on some credit for a new furnace.  In my part of the Country, a forced-air furnace costs about $2,500.  If it is replaced before closing, the total cost is $2,500.  But, if the furnace is in working order and otherwise safe, the buyer may accept a $1,500 concession at closing.  The point is, don’t rush to fix EVERYTHING before you put the house on the market, but rather consider the cost of doing so versus the cost of a concession.  Fix the items that relate to safety that won’t scare off a potential buyer.  In addition, fix the things that are the cheapest ways to create visual appeal and will sell the house.

In some parts of the country, a separate inspection will be done for termites and other pests.  If you suspect that there is termite damage in your property, take the step of having it inspected before you place the property on the market.  Take a screwdriver in the basement and poke around to see if there are any problems. Use a sharp pick or screwdriver to test for damaged beams, joists, and sills.  If you see what you think are termites, make sure they are not just ants. Ants have elbowed antennae and narrow waists while termites have straight antennae and thick waists.

Title Search & Commitment

The contract will usually provide that it is contingent upon proof of a marketable title by a certain date. The seller is usually required to provide the buyer a copy of a title report or a title commitment showing that the title is insurable. Even if the title report shows problems with the title, the contract is still in force if the seller can cure the problems before the closing and deliver a marketable title.  For example, the existence of an existing mortgage lien or judgment is not fatal, because it can be satisfied by the seller from the proceeds at the closing.

Paying off Your Existing Mortgage

Before closing, you have to pay off your existing mortgage, unless you are doing an owner financed transaction or a lease/option.  You can use the buyer’s funds from the sale of the property to pay off the existing mortgage and release the mortgage lien (or deed of trust) from the property before you deed it to the buyer.  Contact your lender (or lenders if you have a second mortgage or home equity line) and ask them to fax a payoff statement for the loan.  You’ll want to make sure the payoff statement is good through at least the closing date, with per diem (daily) interest listed on the statement in case your closing date gets postponed.

Buyer Getting a New Mortgage

The one contingency that usually makes or breaks a deal is the loan approval.  The way a typical contract is written, a buyer may cancel the agreement and receive his earnest money back if his lender does not approve his loan.  A buyer must make all reasonable attempts to obtain financing, but his lender can find 100 reasons not to fund his loan.

While getting a loan is primarily the responsibility of the buyer, it is also your problem, too.  What if they can’t qualify for the loan and don’t have another lender lined up as a backup plan?  In other words, you have to take charge of the situation to make sure the loan gets closed.  Have a provision in your contract that gives you the right to communicate with the buyer’s mortgage lender during the process so you can keep tabs on what is going on and what documents or lender requirements have to be taken care of.  The appraisal is one of the things that always seems to get held up, so get that scheduled as soon as possible.

The Closing

At the closing, the buyer tenders the balance of the purchase price for the property (less a credit for his earnest money).  If the seller is taking back any owner financing, the buyer will sign a note and mortgage or deed of trust as collateral.  The buyer will also sign his loan documents for his new lender.  The seller and buyer will sign a variety of other disclosures and closing forms, as well as a settlement statement called a “HUD-1” form (HUD stands for U.S. Department of Housing and Urban Development, a federal housing agency).  The HUD-1 form spells out all of the math for both the seller and buyer.  A sample form is shown in the back of this manual.

Once the paperwork is complete, you walk out of closing with your check (hopefully a big one), and the buyer walks out with the keys.  It is customary for the buyer to do a final walkthrough of the property the day of closing or the day before closing to make sure the condition of the property has not changed and that the seller has vacated the property and left it clean.  If you are planning on moving out, make sure the property is in “broom clean” condition and that everything is still in good and working order.

Summary

Understand the complete process from contract to closing and stay in control of the transaction so it goes as smoothly as possible.  Consider owner financing or lease/option as a backup plan if the buyer is not able to get his loan financed.

Where to incorporate? The answer may surprise you!

A question often asked when incorporating is, “where do I incorporate?”  There are many promoters of various jurisdictions, such as Delaware and Nevada and even offshore.

Nevada and Delaware have favorable corporate laws which limited the liability of Directors.  As you may know, corporate directors are often sued for breach of fiduciary duty.  Since the law applied in the case of a lawsuit involving the internal workings of a corporation is the state of formation, DE and NV offer maximum protection from director liability. Nevada is a particularly favorable jurisdiction because it has no personal or corporate state income tax.  Shareholder privacy is protected in NV because there are no state corporate income tax returns filed and no information sharing with the IRS.

In most cases, the benefits described above will not apply to your decision to incorporate, since you will be doing in business in your own state.  If your corporation does business in your own state, it must register as a “foreign” corporation with your Secretary of State.  This involves paying an annual fee in both the state of incorporation and your home state.  In some states, such as Texas, the filing fee for a foreign entity is substantially higher than a domestic corporation.

In addition, income earned in your home state is taxable and the corporation must file a tax return. You cannot earn income in a foreign state with a Nevada corporation and expect to avoid paying income tax there.  And, once you file a tax return there, this will require revealing the identity of the shareholders.

The only remaining benefit will be limited director liability, which is little consequence if your corporation is made up of you, yourself and you. Thus, in most cases, your best choice for incorporating your small business is your home state.

So why do radio advertisements push Nevada and Delaware corporations as the place for everyone to incorporate?

Take a wild guess!

Legal and Illegal Flipping and Lender Seasoning

There has been a lot of negative press and misinformation lately about double–closings. Many people have been indicted recently under what the press has labeled “Property Flipping Scams.” Misinformed lenders, real estate agents and title companies will tell you that double–closings are now illegal. In fact, they are nothing of the sort. A double closing is simply two back–to–back closings wherein the proceeds from the second closing is used to fund the first closing. Both closings are done in escrow so that the “middleman” can buy and resell a property for profit without using any of his own cash. The middleman profits because he buys the property below market and resells it for market price. This process has been done tens of thousands of times over the last 100 years – legally, ethically and PROFITABLY! The so–called “illegal property–flipping schemes” work as follows: unscrupulous investors buy cheap, run–down properties in mostly low–income neighborhoods. They do shoddy renovations to the properties and sell them to unsophisticated buyers at inflated prices. In most cases, the investor, appraiser and mortgage broker conspire by submitting fraudulent loan documents and a bogus appraisal. The end result is a buyer that paid too much for a house and cannot afford the loan. Since many of these loans are insured by the Federal Housing Authority (FHA), the government authorities have investigated this practice and arrested many of the parties involved. Despite the negative press, neither flipping nor double–closings are illegal. The activities described above simply amount to loan fraud, nothing more. Newspapers have inappropriately reported the activity as illegal “property flipping,” rather than simply “loan fraud.” So, whenever you hear a real estate agent or mortgage broker say, “flipping is illegal”, you know they are misinformed. The misunderstanding of the flipping business has not been without consequence. Many title and escrow companies simply will not do a double–closing. Fortunately, there’s many that still do double closings, but they are also keeping a close eye on potential fraud (as they should). Some lenders have placed “seasoning” requirements on the seller’s ownership. If the seller has not owned the property for at least six months, the lender will assume that the deal is fishy and refuse to fund the buyer’s loan. This may be a problem if you bought a property cheap and are reselling it quickly for a profit (the good, old American way!). This should not be confused with LAW – it is simply an underwriting guideline for some lenders. Of course, guidelines are just that – by going up the chain of command, you can generally get approval from loan underwriting by showing the property is being resold for a higher price because either it was purchased in a distress situation (e.g., foreclosure) or that substantial repairs were made. Keep good records of your repairs to show to the lender. If the buyer is getting an FHA insured loan, there is no way around the “seasoning” issue. FHA regulations prohibit the funding of a purchase where the seller has not owned the property for at least 90 days, NO EXCEPTIONS. This generally should not be a problem in a fix–and–flip situation, since it will likely take you 90 days by the time you acquire, rehab and sell. But, if you are planning on buying the property and reselling it in a double–closing, the end–buyer CANNOT go with an FHA loan.

BRONCHICK’S RULE: ALWAYS REMAIN IN CONTROL OF YOUR DEALS! A smart investor should stay on top of the process and anticipate these issues. If you are buying a property and reselling it quickly, particularly in a double closing situation, you must anticipate this problem and deal with it. Let the buyer, his real estate agent and his lender know that there may be a seasoning issue. If you stay in control of the loan process and steer your buyers to a mortgage company that doesn’t have a hang–up with double–closings, then seasoning won’t become an issue. Generally speaking, only FHA and subprime lenders have the “seasoning hang up” – FNMA underwriting guidelines do not prohibit funding a purchase money loan where the seller has not owned the property for a minimum period of time. If you do get into a last–minute jam in a double–closing situation, there is a solution, which is called a “reverse assignment.” You simply assign your contract with the end–buyer back to the owner and step out of the deal. Your “consideration” for doing so, is the profit you would have otherwise made. This consideration can be documented in writing and secured by a lien on the owner’s property to be paid to you at closing.