Homeowners are delinquent on their mortgage provide an opportunity for investors!
There are still 1.5 million borrowers who are seriously delinquent or have late-stage delinquencies at 90 days or more past due on their home loans, according to the June Mortgage Monitor report from Black Knight.
While the national delinquency rate is at its lowest level since the beginning of the pandemic, about 1 million homeowners are expected to be in serious delinquency as September’s wave of mortgage forbearance program expirations begin, the report showed.
The economic recovery is expected to slow down even more as more Americans fall behind on their mortgage payments, and fewer can afford to purchase homes. The housing recovery will be delayed as banks tighten their lending standards.
What is the difference between default and delinquency?
Delinquency means that you are behind on payments. Once you are delinquent for a certain period of time (usually nine months for federal loans), your lender will declare the loan to be in default. The entire loan balance will become due at that time.
How did we get here?
One of the most difficult things about owning a home is taking care of your financial obligations. If you’re not making your monthly mortgage payments, you’re considered delinquent. In the past decade, this has been a problem for a lot of homeowners. In total, about 1.5 million homeowners are delinquent on their mortgage payments. This is a problem for the investors, as the value of these homes goes down because the homeowners can’t afford to pay their mortgage. It’s a frustrating situation for everyone involved.
Any homeowner who isn’t able to sell their home or modify their loan is likely to face foreclosure or other financially challenging options, such as a short sale, the researchers warned. Whether a homeowner leaves their home by choice or through foreclosure at the end of all this, it will have the effect of adding supply to the market they live in.
“As a result, a buyer’s market could develop in ZIP Codes with heavy exposure to such borrowers,” the researchers wrote, noting that these would be areas with a high concentration of FHA loans in delinquency. So which markets are most at risk?
Atlanta tops the list, with 17.4% of the city’s mortgages in delinquency as of May. The city also has a large share of FHA loans overall, with those loans representing over a fifth of all mortgages in the city.
Many of the metro areas most threatened by such a scenario were located in Texas, including Houston (No. 2), Dallas (No. 4), San Antonio (No. 8) and Ft. Worth (No. 9).
Should you buy a distressed property now?
If you’re planning to buy a distressed property, now may be a good time to buy. Just make sure you’re aware of the risks and understand what you’re getting into. Distressed homes offer a unique buying opportunity for real investors, but the average home buyer should probably look elsewhere.
If you need funding, apply now. I am working online with the rest of you.
Would you ever think to compare diamonds and real estate? At first glance, they seem like two completely different things. However, they are both hard assets that are cost-prohibitive to acquire for the average US worker. However, you can sell both “assets” quickly and not realize their full value in the marketplace. Let’s first compare the similarities and then differences from an investment perspective.
Both Diamonds and Real Estate are Hard Assets similar to other commodities
Negatively correlated with bonds and stocks, so when stocks crash both appreciate in value
Long Term Investments
Suitable for investors who are not looking for fast returns on their investment
Risk losing money if you try to “flip” your investment too early or didn’t acquire at the right price below market value
Provide the investor with enjoyment and value
Diamonds are pretty to look at and make the person or people associated with the diamond have better social value
Real Estate provides rental income and in the case of short-term rentals – owners can enjoy the property and generate revenue when not in use.
As investors, we all know that not all hard assets, such as real estate or diamonds, have the same return on investment. In fact, ROI performance varies greatly even among real estate classes: residential property, commercial real estate, agricultural property, etc. Financial crises prove time and again that real estate is a highly volatile asset. Diamonds are a closed market that is stable and less risky. However, there are still differences among the rate of returns on diamonds such as the colored diamonds are less risky.
Diamonds don’t have a maintenance fee … you’re ROI is based on the price you paid upfront for the diamond
Real Estate requires maintenance and repairs and possibly property management fees. All these factors need to be carefully considered before acquiring property and affect your return on investment.
Several millions of dollars can fit in your fist and transport in a pocket … the irony for not being the rarest stone they have the highest size to value ratio of the natural resource category. This is how historically (since the silk road trail) wealth was transported long distances and across borders.
Real estate can’t be moved. Real estate is not physically portable and the value does not transfer easily either. However, 1031 exchanges are a great way to transfer appreciation as you sell your property.
At REI Capital Resources, we prefer real estate investing to diamonds. In fact, diamond prices are extremely volatile – shooting up 249% from 1978 to 1980 before falling 77% by early 1986 – but the value of diamonds has also long been propped up by a number of artificial sources. Real estate can be utilized and provide rental income. As the number of cloud and work from home startups rise, commercial real estate is increasingly valuable to investors to provide “server farms” to meet bandwidth demands.
We are not saying diamonds aren’t valuable or important – especially as emergency currency and making your future or current spouse a little happier this valentine’s day. We’re saying don’t buy a diamond as an investment with the idea of retained value. If you look at diamond prices since the 1970s, there has been “Too Much Price Volatility & Demand Uncertainty To Be Considered Investable” by numerous sources. Also, the use of diamonds as a symbol of a woman to be married is only about a 100-year-old custom. There are numerous other stones considered rarer. Thank you, Madison Avenue for making weddings a thing to save money for and cause the intelligent investor to consider generating a new stream of revenue.
We love this quote by Milton Friedman, “The speculator is looking for hidden weak spots in the market,” and acts as “the advance agent of the investor, seeking always to bring market prices into line with investment values.” Diamonds don’t provide an adequate hedge against inflation, and most people would be better off with more practical financial planning, than investing for catastrophe purposes. The diamond while a modern symbol of one’s love and commitment to another is expensive and ranks low when compared to value stability.
Diamonds vs. Gold vs. S&P 500
Gold ROI %
Diamond ROI %
S&P500 ROI %
*Data courtesy of the Rappaport Diamond Index, Kitco, the World Gold Council and Yahoo Finance. Diamond prices reflect monthly averages based on a 1-carat diamond. Gold prices are based on average annual London PM fixed prices. S&P 500 prices reflect average monthly adjusted closing prices. ROIs are cumulative.
The chart shows when the stock market suffered historic losses, diamonds at best served as a short-term hedge and very quickly fell behind the returns of alternative investments.
Therefore, I would recommend a 3 bedroom house that generates a positive return on investment that you can set aside the money after a year to buy your sweetie her diamond. If she loves you, she’ll wait a year knowing a diamond is coming.
Property investments potentially have excellent returns and can diversify your portfolio to insulate you from recessions and other adverse economic conditions. There’s no single right answer on the best way to invest in real estate. Are you getting started in Real Estate Investing and wonder how to live in your investment property?
Tip 1: House Hacking
This can mean a few different things. House hacking is essentially a hybrid of buying a home to use as a primary residence and buying a rental property. In general, the term refers to buying a residential property with two to four units or with a Granny Flat/Additional Dwelling Unit in the backyard and living in one of the units while renting the others out. In theory, if you have the money you could purchase an entire duplex or four-plex and rent out any apartment to tenants. Keep your expenses low so you can keep rent affordable to entice prospective tenants. You also could purchase property that you live in while renting out other rooms in the property.
Either way, you’re the landlord. Be a good one, and you’ll be in a much better position to succeed in this investment. Keep the property in great condition, be readily available to your tenants when needed, and if necessary hire someone who can help with repairs.
Let’s say you find a quadruplex (four units) for $200,000. Including taxes and insurance, we’ll say your mortgage payment is $1,500 per month. After you buy the property, you rent out three of the units for $600 each and live in the fourth. Not only do you live for free (the rent covers your entire mortgage payment), but you’re generating a positive cash flow of $300 per month and are building equity in a more valuable property than if you had bought one unit to live in.
House hacking can be an excellent low-cost way to start building a portfolio of rental properties. Because you live in the property, even a multi-unit residential property can qualify for primary residence financing, which comes with lower interest rates and lower down payment requirements than investment property loans. You’re typically required to live in the property for a certain amount of time after you buy it, but once that period expires (usually a year or two), you’re free to repeat the process with another multi-unit property.
The obvious downside is privacy. There’s value in having your own yard, and it can create some awkward situations when you live in the same building as your tenants. Even so, if you’re a new real estate investor and don’t really need your own house, you may want to consider house hacking. This isn’t as much of an investment strategy as it is a side hustle, but it’s still worth mentioning here. With the emergence of platforms like Airbnb, it’s easier than ever to rent out your home when you aren’t around or to rent out a spare room in your home for a few days here and there.
Tip 2: Tax-Free 2 Weeks Income
One interesting aspect of this strategy is that if you rent out your home for fewer than 14 days in a year, you don’t pay tax on the money you collect. If you go out of town for the holidays or take a summer vacation, using your home as an occasional short-term rental can offset your travel expenses with tax-free income.
Landlord Tax benefits:
The mortgage interest deduction for the mortgage interest you pay to buy and/or fix up your properties.
Deductions: insurance premiums, repairs, utilities (that are not paid for by the tenants)
Depreciation: You are allowed an annual deduction for the wear and tear your property experiences over time, spread out over 27.5 years for residential properties. Land cannot be depreciated.
Living with Tenants is Too Much – What is a Traditional Landlord?
Owning rental properties is an excellent way to invest in real estate while building wealth and generating income. The return potential is strong thanks to a combination of income, equity appreciation, and the easy use of leverage when buying real estate.
However, owning rental properties isn’t right for everyone, so consider these drawbacks before you start looking:
Cost barriers: It can be very expensive to buy your first rental property. Most lenders want at least 25% down for an investment property loan and it’s smart to keep several months’ worth of expenses in reserves.
Uncertainty: When it comes to rental properties, vacancies happen and things break. While the overall return potential can be great, rental properties have considerable short-term risk.
Time commitment: Even if you hire a property management company, owning a rental can be a time-consuming form of real estate investing.
Tip 3: Vacation or Short-Term Rentals
A vacation rental tends to bring in more income per rented day than a comparable long-term rental property. However, there are some potential drawbacks to owning a vacation rental. Marketing and managing a vacation rental is more involved than a long-term rental. As such, property management is far more expensive — expect to pay a property manager about 25% of the rent on a vacation rental. That’s more than double the 10% industry standard for properties with long-term tenants. Furthermore, you may need a special license in your preferred locations, which can be very expensive.
On the positive side, you may be able to use the home when it isn’t occupied. It can also be significantly easier to finance a vacation rental, especially if it meets your lender’s definition of a second home and you don’t use the rental income to qualify. There are loans options available for short-term rental funding.
Always buy property for the best possible price. You want to buy those properties that offer specific challenges that match your personal talents so you can use your skills to upgrade and enhance the value of the property and increase the Net Operating Income over time. Obviously, the higher the rents and the lower your total monthly expenses, the greater your net income from the property will be. Costs that affect cash flow include principal & interest payments; property taxes; insurance; maintenance/repair costs.
Although we’re always quick to advise against borrowing too much and overleveraging your real estate investments, you also don’t want to be too conservative and underestimate your cash needs. The cost of refinancing is such that you may be able to refinance the property no more than once every several years, and if you suddenly need cash to overcome some unanticipated problems, the costs of short-term funds can be high. Borrow extra money or have an untapped line of credit available (which some lenders offer at no carrying cost to their best customers) to allow for reserves.
Joint ventures, wholesaling, fix-and-flip, and property management are just a few of the other ways investors can profit from real estate.
If you need funding, apply now. I am working online with the rest of you.
Although real estate agents are seeing increases in inquiries about homes in the suburbs compared to the same period last year and house sales are up slightly in the second-home market, consumers are not applying for as many loans and banks are not lending as much.
Millions of Americans, 29 million, filed for unemployment last week for the first time according to Investopedia.com, slightly more people than expected, but less than the previous week.
As they lost their jobs or were forced to close their businesses, homeowners who could not make their mortgage payments asked their mortgage servicers for permission to pause their payments. Once a rare occurrence, the number of accounts in deferment, forbearance, or some other form of relief rose to 100 million between March 1 and the end of May according to today’s Wall Street Journal article by Anna Maria Andriotis.
For lenders and borrowers, these are difficult times because the coronavirus stimulus package includes a provision that says lenders that allow borrowers to defer their debt payments cannot report these payments as late to the credit reporting companies, making credit scores an unreliable marker of how a borrower is doing paying their loans back.
Banks are pulling back on credit because lenders are having a difficult time determining if applicants’ credit scores and credit reports reflect their true levels of risk. Not only do they not know who to lend to, but they cannot tell how much their loan losses will be if the economy remains a mess.
Across the board, lending standards have been tightened. Even mailed credit card solicitations fell from 316 million in February to 74 million in May. (Wsj.com)
It takes more work to find borrowers who will pay their loans back. A lender will have to sort through more data. Some lenders are asking borrowers for permission to look at their payment history on accounts not appearing in their credit report and to analyze their banking accounts.
If you need funding, apply now. I am working online with the rest of you.
The loan-to-value (LTV) ratio is the amount a borrower can borrow from a lender compared to the appraised value of the property that he or she wants to buy. The LTV determines the amount of a down payment a borrower has to supply from his own pocket to invest in the property.
Loan-to-Value ratio = Mortgage amount ∕Appraised value of the property.
For example, if the lender offers a loan at a 90% loan-to-value ratio, the borrower must supply 10% of the total cost of the purchase. In a fix-n-flip loan the same is true, the lender that supplies up to 90% (for example) of the home purchase price, requires the borrower to provide the other 10% of the price.
The Coronavirus pandemic has changed things rapidly including the market value of homes, thus affecting the LTV ratios lenders depend on. Please call for the most up-to-date loan-to-value ratios on our loans for your upcoming projects. 512-213-2271
If a borrower defaults on a home loan, which is more likely to happen if they do not have much of their own money in the home, the lender takes back the home and sells it to get back the money they lent. Market fluctuations can cause lenders to lose money if the value of a house goes down and the borrower defaults on the loan. The value of the home may be less the amount of the loan. The coronavirus pandemic may make home prices goes down, but that is not certain and may not be true in all locations.
If the borrower had equity in the home and defaults, then the borrower loses the equity they have in the home because the lender takes the property and sells it to recoup their investment and expenses as quickly as possible.
Equity is the amount of money that would be returned to homeowner if the asset is liquidated (sold) and all debts are paid off. It is in a home owner’s best interest to sell a home before they default on a loan and pay the loan off if possible both so they can get their equity out of the home and so that they can keep their credit history in good shape.
FICO Score Requirements
The FICO score required on loans relates to the buyer’s credit history. It reflects how often they have been late or defaulted on loans in the past. Before the coronavirus pandemic set our lives, marketplace, and economy into a spin, REI Capital Resources required a FICO score of 650 on a hard money loan with a term of up to 24 months. Many people have lost their jobs and their credit scores have suffered. Watching the unemployment rate go up, lenders across the country have tightened up their FICO requirements and these requirements are changing daily. Please call me for our latest FICO requirements. 512-213-2271.
Selling to Avoid Foreclosure
Owners in default or facing default will sometimes take less than the market value for a house to avoid foreclosure. They may settle for only getting part of their equity back, reasoning that some is better than none. None is what they will get if they go into foreclosure and the lender takes back the property and sells it for the balance owed on the loan. The borrower may even give up all their equity to sell the house before defaulting to keep their credit history intact and their FICO scores high.
The distressed homeowner’s situation becomes the buyer’s opportunity. The homeowner needs help to retain their high FICO score and some equity, and the fix-n-flip buyer needs to purchase a property for the lowest price. It can be a win-win deal.
As a direct lender, it is my job to help you get a purchase and rehab loan as quickly and as easily as possible. The perfect fit is still out there. Call me though for the most up-to-date information.
Real Estate is waking up. U.S. mortgage applications to purchase a home 🏠 rose 9% last week from the previous week and from a year earlier, according to the Mortgage Bankers Association’s seasonally adjusted index. It was the sixth straight week of gains and a 54% recovery since early April. Investopedia.com.
This is despite the sobering news from the Labor Dept. Weekly pay fell 11% in April from the prior month. That was the biggest drop on record, but it will likely be broken in May. Investopedia.com This, plus historically high unemployment, will be immense hurdles for people buying homes but might be incentive to start a business fixing and flipping homes to add to your own income and to provide homes, maybe small homes, to young and old consumers alike. Both want to get out of community living and out of big mortgages. I have the funds to help you fill this void in housing.
Real estate agents are using more virtual tours to showcase their homes. You might be able to use a video 🎥 to showcase your remodeling experience on a loan application for a private money loan for your next project.
Although many states are exempting building, utility, road, and bridge construction from “stay-at-home” work shutdowns carried out to prevent the spread of the coronavirus, some states are calling for a cessation of all residential construction because it is not defined as “life sustaining” work or “construction of essential infrastructure.” If you read the recent Dallas County Shelter in Place order, you will see that Dallas County has not shut down residential construction. However, some states and counties across the country have. A fix-n-flipper needs to pay attention to the exemptions and inclusions in the work-stoppages orders that are being issued by state or county governments because it may affect your schedule and costs in ways you cannot predict.
Dallas county residents are being ordered to stay in their homes except for crucial work and errands, beginning 11:59P.M. Monday. All businesses that aren’t deemed essential also must stop operating.
Dallas Morning News, Updated 3/22/2020
Your construction loan has or will have terms and limits, usually 24 months for a fix-n-flip loan that will pay 100% of your estimated rehab costs. In an epidemic, you may find that you cannot finish construction in 24 months or within the costs you estimated months ago. If you are faced with a situation like the coronavirus pandemic, something you could neither foresee or prevent, you need to review your contracts for “Force Majeure” and price escalation clauses to understand who bears the risk in the case of work stoppages or rising material costs and shortages that are due to situations that cannot be predicted or avoided.
Be proactive. Start working this out with the organization or lender that lent you the money. Be sure to understand that if the project needs to be stopped and the contract rewritten who calls the stoppage and who and how everyone involved must be informed.
Delays often ripple through a project and can cause you to miss the deadline for your loan to be paid back, increasing your interest and penalties. Perhaps you can’t get a plumbing fixture delivered or a critical subcontractor is quarantined, and the next trades scheduled to work cannot proceed. Jump in and be aggressive about finding local alternative materials and even workers.
Louisiana becomes the ninth state to announce a statewide shelter-in-place order since California did so on Thursday night. Residents in Connecticut, Illinois, New Jersey, New York, Ohio, Oregon and Pennsylvania have begun or are about to begin staying at home for at least two weeks.
The Advocate, March 22, 2020
Below is a list of ways the coronavirus pandemic might affect your fix-n-flip project:
Sick workers who must quarantine for 14 days
Exposed workers who must quarantine for 14 days
Workers required to take off work to care for children when schools close
You have to take off work to care for your children when schools close
Subcontractors or specialty contractors who do not show up
Government permitting offices shutdown
Material shortages caused by epidemic in China or elsewhere
Shipping delays due to port-of-entry quarantines
Construction work stoppages in your area ordered by government to slow the spread of disease.
Material shortages cause prices to rise
Shipping costs rise owing to transportation shutdowns
If you are in the process of negotiating your loan and calculating your expenses, you need to be very careful in estimating your materials. Right now, in the middle of this epidemic, it is for me, or might be for you, impossible to tell how long impacts to business will last. Review your contracts to include appropriate “Force Majeure” and price acceleration provision clauses in your contracts. Look for local alternative suppliers.
A blanket loan is a loan or mortgage used to fund the purchase of 2 or more pieces of real estate (Wikipedia, Investopedia). The real estate is held as collateral for the mortgage, but the individual pieces of property may be sold without retiring the entire mortgage. Builders and developers, investors in multiple apartment communities, or investors in more than on single family rental property use blanket loans to buy a large tract of land to subdivide or multiple properties to manage as a business. The rental investor may sell one property without redoing the mortgage on the other properties. The developer can create many individual parcels to be sold one at a time without securing a new mortgage each time the sale of a parcel is made.
The blanket loan has a release clause that allows the owner to sell a portion of the secured property and make a corresponding payment on the loan. The outstanding balance on the loan is adjusted accordingly without being completely redone or retired. Most single-house traditional mortgages contain a “due-on-sale clause,” which means the entire outstanding debt is due when the securing property is sold. If this is the type of mortgage a developer or an investor with multiple rental properties has, then each time they sell a property they have to redo all the paperwork to remake the mortgage.
The financial benefits for an investor include
Only have to pay the fees and costs of one loan rather than applying for and closing multiple mortgages.
Negotiated terms, such as the monthly payment may be better under the blanket mortgage, freeing up capital for further investment.
Acquiring more than one house to fix-n-flip under one loan when several come on the market at the same time would allow a flipper to take advantage of the opportunity to buy multiple properties all at once (saving time and fees) while still being able to sell them one at a time after they are refurbished.
The danger to the owner is that if he or she defaults on the mortgage, the lender may seek control of all the properties secured by the loan.
A cloud on title is something odd about a deed for real property that has been recorded that might invalidate or impair the title. It usually stems from unresolved issues with the property. Buyers should proceed with caution because there is something about the deed that requires closer attention.
Some examples of a cloud on a title include:
A wrong spelling of the property’s address in a deed conveying title.
Foreclosure proceedings underway by mortgager in response to a borrower defaulting on payment.
Failure to transfer certain property rights to the former owner, such as mineral rights.
A mortgage lien whose repayment has not been officially recorded with a local record office.
Covenants are rules, conditions, or restrictions place on a property by a subdivider or other landowner to create uniformity of building and uses within tracts of land or groups of lots.
Probate matters that involve estates and inheritance can create a cloud on title. If a property owner dies without a will defining who gains control of their estate, the property title may become in doubt as heirs challenge each other in court.
A fraudulent title recorded would create legal confusion and a cloud on the title.
An encumbrance is a claim or right held by some party other than the owner or a claim that is not a lien that limits the ownership of the property such as conditions, restrictions, easements, reservations, etc.
A mechanics lien placed on the property for construction work contracted. The lien remains on the property and does not follow the owner, forcing a buyer to assume responsibility for repayment.
Any pending lawsuit before a court of law over ownership of the property.
Title insurance protects the insured and their heirs from loss or damage due to defects, liens, or encumbrances in the title or actual ownership of the property as of the date of the policy.
A Clear Title
A clear title is one without any kind of impairment, lien, or levy from other parties and poses no question of legal ownership.
In most cases problems with a title
can be cleared up when proper documents are submitted to the local record
office. This lifts the cloud on the
title. This is not complete legal advice.
Please be sure to consult your real estate agent and attorney.
One thing is sure: a cloud on the title will slow down the paperwork associated with buying and selling property.
Patience may be a virtue, but it is one that is often tested when you are eager to close a loan and get on with your project. To save your dream and your nerves, Clean up the title ASAP.
REI Capital Resources
REI Capital Resources built its
reputation on finding private funding for investors for quick turn purchases
and difficult situations. This is still true today.
Give me a call or send an e-mail and share with me
your plans and needs, and I’ll see what lending solution I can generate for
a hand an
I know a banker and his partner who recently purchased and remodeled a building that was once a doctor’s office. They turned the space into 7 small suites, a conference room and a kitchenette. They advertised for occupants with an ad looking for entrepreneurs with ideas for a business who needed some space in which to grow and offered seed loans for the startups. His motive is multifaceted, to rebuild the downtown business section of the town he lives in and to put some of his money to work for his community. He also wants his hometown to be vibrant and is offended when someone says, there is nothing going on in that downtown. Like all good investors, the partners are also interested in putting their money to work to make more money in the form of income.
These partners specialize in fix-n-rent business investments. Most recently the duo closed on a property that they will remodel from a Victorian house on the corner of a small downtown into a used bookstore, bar, and coffee shop with an outdoor patio area. The purchaser? A publisher who still loves physical books more than online articles.
What else has these small town fix-n-flip investors been up to? They remodeled a ballet studio into a financial investment office with a family psychologist renting a back office with a separate entrance, turned an insurance office into a yoga studio, turned a paint store into a gift and DIY furniture rehab shop, and helped a daughter purchase her mother’s restaurant business lock, stock, and liquor license.
If you are interested in putting your money to good work in your community, become a private lender and work with me. I am focused on funding success, both yours, and the buyers.
Competition for good rental properties is stiff, and in order to buy a property in a climate of competition a buyer need funds fast. As a broker, I help people find funds for their fix-n-flip and fix-n-rent project. Be a private lender with me and put your money to work for you.