All Forum Posts by: Karl V.

I agree with Bill and Bryan.

I think that a lot of the so-called recovery we're seeing is election-year hype. Certainly in the housing market, the expiration of the tax credits has stalled the market and allowed prices to start falling again in many areas.

What really concerns me is the ever larger backlog of defaulted loans. To me, that is the key to this whole mess. Those houses need to be foreclosed and resold.

Seems to me that banks will start lending again once they have a stable portfolio. Once they start lending, there will be more buyers with financing and the housing recovery will begin.

Karl

From your question, it sounds like you have done flips before, so you probably have a going rate for private investors. Your dilemma is if you should pay your friend more than you would anyone else. Is that correct?

If so, then you also need to be clear on another thing: If you're paying 8% or more, then investing with your flips is a good investment, period. Friend or not, you are always giving your investors good return. So don't feel like you need to boost the rate for a friend.

If this friend is looking to invest with you for years to come, you'd better give him the same rate as everyone else. The worst thing you could do is give him a high rate the first deal, then cut it on the next deal. That leads to hurt feelings and ends friendships.

Hope this helps.

Karl

Hi

I assume that you've got a business model that has this company turning a profit so that investors can earn competitive returns.

This might be a gross generalization, but here goes: Real estate investors are a stingy bunch, and the altruistic urge isn't strong with most of us. Sure, benefitting society is a great thing, and we'd be willing to take a slightly lower return. But that lower return is probably fractional.

Not sure what you mean by "adequate return on investment", but most investors won't be interested at less than 8% annual return on investments secured by property. Helping a non-profit might get them down to 7.5%. There are just so many opportunities out there that pay >8% that you might have a hard time.

That expected return goes way up if these investments are unsecured business loans because of the risk.

Hope this helps

Karl

Hi

Eric is right, and TX is one of the states that requires that originators be sponsored by a mortgage broker.

Oh, and you can't apply to be a mortgage broker unless you have years of experience in the mortgage business.

Yep, it's a private club and you can't just get in without drinking their kool-aid.

Also, because this is a relatively new and untested law, what transactions are exempt is still open to wide interpretation by those who enforce it. I've talked to closing attorneys that have refused to work on a deal because they are avoiding the issue until court cases clarify it.

The safe thing to do is to pay a licensed originator to do your work for you, if you can find one that will do it without screwing up the deal, and if you can get one at a fair price.

BTW, if there's anyone out there using a licensed MLO, what are you paying for their services?

Karl
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Hi

Great questions and answers all around.

My first advice is to read, read, read. There is a lot of wisdom in these forums, and getting at it is a bit like drinking from a firehose, but stick with it. Use the forum search to research specific topics.

As others have questioned, I worry that developing properties might not be the best approach right now. In many markets, it is cheaper to buy square footage than it is to build it. Check if your area is like most before you jump in.

With your experience in construction, you may want to think about rehabs or additions. Robyn Thompson is pretty smart, and if you pick up one of her packages on ebay for less than $50. You probably don't need the estimating part too much, but the buying & selling bits might be useful.

Another key point is the relationship between market rents and the purchase price. In some markets, you can buy houses for $50k that rent for $800 a month. In other markets, a property that rents for $800 a month sells for $300k. In the first market, renting the property works great, in the second it doesn't.

I also agree that your first properties should not be bought with your own money. Borrow the money and pay the interest, use your cash for repairs and holding costs. I'd also argue against ever using your own money to fund your deals. Build up a list of investors, and you can have nearly unlimited cash to fund your deals without putting a pinch on your own finances.

Also make sure to structure your business to protect yourself. Use LLC's or corp's to insulate you personally, and don't put all of your properties into the same business. I've hear horror stories about people who had 400 properties in one business, and lost it all when the business got sued when a worker had a fatal accident. Spread out your holdings.

One last bit of advice: Don't go into a deal without having multiple exit strategies planned out. Things change, and your plan to sell a property in 60 days might not pan out. So have a plan-b that has you renting it. Make sure that all of your exit strategies will make money or don't do the deal.

Keep reading, keep asking questions, and good luck!

Karl

I think that we've all overlooked a giant obstacle that makes this whole discussion nearly moot: The Safe Mortgage Lending Act.

If you invest in real estate, you'd better read up on it, because it COMPLETELY changes the rules if you seller finance.

Because of the whole mortgage mess, the government is going to step in and pile on a whole bunch of regulations. But the mortgage industry had a big part in defining those regulations, and one of the things that they're trying to do is kill the private lending industry, making them the only game in town. Under the Safe Act, you can only seller finance an owner-occupied property. That means that investors that own multiple properties will not be able to seller finance them when they sell them.

In it's current form, the states are allowed to define their own rules, as long as HUD approves of them. In North Carolina, they have a rule that you can seller finance up to 5 properties a year even if you don't live in them. Ohio only requires that you pass a mortgage originator certification to do as many as you want.

HUD is getting ready to issue national standards, which will replace all of the states' current rules. Those rules could be released as early as July 1, 2010, but they don't seem ready for that date. I suspect that it may be another year before the federal standards are defined. Until then, the state rules are in force.

But the point is that these rules are already in effect. Ignoring them can result in hefty fines (more than $20K per violation if I remember), and I also wonder if the mortgage couldn't be invalidated, and you lose the whole investment. Ugly.

Hope this helps.

Karl