Category Archives: The Journey

How we came to where we are now

Why would I buy Sub2 from you?

I got into a conversation with one of my friends why would someone buy a house from me Sub2. Let’s look at the deal like this: $5,327 down and take over payments of$1,307 per month, you will buy $14k worth of equity. Which in essence means, that you are taking over payments on a mortgage which stays in seller’s name, you paying $5k out of pocket for a house worth $163k with the loan balance of $144k.

So what other ways can you purchase this house? The conventional way would be to go to the bank and get a loan. But wait, there is more. With current situation in lending industry the best deal you will get will require you to put at least 10% down and your interest will be somewhere in 9-10% range. So you will need about $15k to put down and you monthly payment will be $1,140 just for principal and interest. Add taxes and insurance and you are looking at $1,400+ per month. So the conventional way you need more money to put down and your payment is higher.

Also you can go and borrow hard money. Hard money is called hard money, because there are hard rules. You will have to pay about 5 points which is 5% of the loan amount and you will be able to borrow about 70% LTV. LTV stand for loan to value. So if in this case the value is $163k, so LTV comes to about $115k. So you need to buy properties way bellow market value and it will cost you about $6k to get this loan. So in this case you need money up front and the payments are high and LTV is low.

So considering the 3 ways you can buy houses, the Sub2 way looks pretty darn good. You do not need to go to the bank and apply for a mortgage and you do not need to borrow hard money. Plus the monthly payment is usually lower and the mortgage is not showing up on your credit report. Once you get about 10 loans in your name you will see that it is very hard to get more.

So the moral of the story is that in current market, at least in Atlanta area, there are so many houses for sale that we do not buy any other way, but subject to existing loans.

Chain of Title, Title Seasoning and Land Trusts

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

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

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

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

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

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

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

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

3 Most common mistakes in finding motivated sellers

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

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

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

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

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

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

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

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

Be creative!

Wholesaling

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

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

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

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

Don’t let the banks spoil the party.

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

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

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

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

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

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

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

I want houses with 0 down and take over payments

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

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

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

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

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

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

A little history or how it all began

The most important thing is to take action. Stop wining and looking for excuses, get off your but and do it. If you put your mind to it you can achieve anything you dream up.

I came to USA in November 1998. I had one suitcase full of my earthly possessions and $200 in my pocket. I came from a small country on the Baltic Sea called Lithuania (Lietuva). Long story short I was not born with a silver spoon in my mouth. Everything I have I had to work for. Life was hard in the beginning, no job, no car (and you need to have a car in Atlanta to drive to work) no credit history, new country and new language.

About one year later my wife joined me here. In 2002 we bought our first home in which we still live. Sometime in 2004 I picked up a book by Rober Kiyosaki called “Rich Dad, Poor Dad” and our journey into real estate investing began.

Being a curious person I started reading everything I can find about real estate investing. I found tons and tons of information. I found out that there is million and one way to make money in real estate, but I was not able to find any single source of information which would outline all steps. There was no step by step guide to real estate investing. People who wrote books never did it in practice and the infomercial gurus did it so long ago that it did not matter anymore. So you have to create your own step by step manual on how to invest form all the bits of information you learn.

One thing is clear by now – there is no get rich quick way, even real estate investing is hard work. It is hard work but the pay is good too. Anyhow after about a year of reading books, internet sites and message boards we bought our first rental property.

The best thing about it was that we did it. We took action, we started on our path of financial freedom, but we never stopped learning. I constantly talk to people about investing, listen to their advice, buy books and tapes, read and post on message boards. So education is a good thing, but it all comes down to one thing – can you actually do it? Can you sign on the dotted line?

Choosing where to start investing

So you decided to become an investor. Or to be more precise you want your money to work for you instead of the other way around. Great! So you think that real estate is the way to go, and I would agree with you. You see, population grows, but the continents don’t. So we have a situation where supply is limited and demand is growing constantly, which means that over time all real estate will appreciate which means that no matter what you do, you will come on top, if you wait long enough.

Now that we agree that the real estate is definitely worth investing into, let’s pick which path in real estate investing YOU want to choose. There is uncountable number of wait to invest, each with different rewards, involvement levels and activities required. You have to ask yourself what are your investing goals and how much time you can dedicate for your investment carrier.

If your goal is to quit your day job and to support you and your family form real estate investing you must choose different path then if your goal is to accumulate enough for your retirement and cut down on the amount of taxes you pay Uncle Sam each year. Buying and renting a house or two a year will not produce enough income to support you first five to ten years and buying and selling will do nothing but increase your tax footprint. Buying and renting homes will require less time and day to day involvement from you the buying and selling homes.

So think about your goals for a moment and write them down. Those must be concrete and achievable goals like “I want o have 10 rental houses in 10 years free and clear” or “I want to become a full time real estate investor in 1 year”. If you do not write down you goals the are just thoughts, so write them down and work on the plan how to achieve those goals.

You have chosen your path. Now you have to walk it.