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Buying with Cash and Ignoring ARV

Filed Under : Real Estate by admin

Mar.14,2012

I don’t ever remember a time when so many investment properties were being purchased with cash. With today’s unbelievable real estate prices, many investors are simply forgoing traditional financing as well as hard money financing in favor of cash purchases. In fact, many investors are simply converting their retirement accounts to self-directed accounts and paying cash for investment properties through their IRAs, 401Ks, etc.

One of the reasons cash purchases have become the norm for many investors is because the price-point of many investment properties doesn’t warrant the headache of trying to get financing. Many investors would rather shell out 40K for an acquisition and rehab and let their money earn a solid return – typically much higher than in a traditional investment vehicle like stocks, bonds, etc.

However, I think there are a number of investors who probably prefer to get financing for an inexpensive property, but some of the constraints associated with conventional financing make it too difficult. As crazy as it sounds, many of these properties, selling for less than a third of what they sold for just a few years ago, can’t get financed in the current environment. Sometimes it’s the fact that appraisals are just so bad as a result of heavy foreclosure activity. Other times it’s because lenders aren’t willing to lend under a certain price threshold. Whatever the case, lower priced investment properties just aren’t great candidates for financing right now and investors have responded by buying with cash in record numbers.

Interestingly, with all of the buying activity that is taking place, investors are paying less and less attention to ARV (after repaired value). It’s interesting to me because it’s been pounded into our heads for so many years that a property purchased and rehabbed well below market value was the primary distinction of a good real estate investment. Now, with prices and comparables in the toilet, investors care more about the kind of cashflow that a property will produce and less about the amount of equity (if any) a property may have. Understandably, if a property can be purchased and renovated for 40% of what it would cost to build new while also producing double digit yearly yields … does it really matter if you’re buying at market value? For a cash buyer that doesn’t have to worry about an appraisal, it probably doesn’t. The cash buyer is probably more interested in cashflow and any equity that develops as a result of recovering prices is icing on the cake.

I think most investors realize that the opportunity to buy at these insanely low prices will not last forever. Prices will recover at some point – it’s simply not possible to maintain values in markets that are adding jobs and people. For investors that have cash sitting in bank accounts earning less than 1%, don’t get scared away by depressed prices. The opportunity to put that cash to work in this real estate market is unprecedented.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Buying with Cash and Ignoring ARV

Real Estate Investing For Real | A BiggerPockets Investment Property Blog

Tags : Buying, Cash, Ignoring

Real Estate Notes: Buying, Selling, Discounts, Partial Notes and More

Filed Under : Real Estate by admin

Oct.14,2011

In last week’s blog, I covered some of the main elements of creating and potentially selling a real estate note. In this segment, we’ll go over six other key areas that you should be aware of, particularly if you are considering owner financing.

1. When I called an investor about selling my note, he had questions about the condition of the property and about the neighborhood. Why?

When a mortgage note buyer is evaluating a note, he or she always has the worst-case scenario in the back of their mind. Because the property is the only collateral for the note, the investor is thinking about what happens if the payer defaults. So, we are going to price a note collateralized by a nice house in a good neighborhood much better than a beaten-down home in a bad part of town. Somewhat related to this is that we like it better if the property is owner-occupied. We ask this to assess our risk, as owner-occupied properties on average default less often than others.

2. I don’t understand how an investor calculates the discount on a note. Is there a set percentage?

No, investors decide on a needed yield (rate of return) and then plug that into their calculator. For example, on a note of an owner-occupied single family house where the payer has good credit, the investor may decide that a 9% yield is appropriate. Conversely, for a vacant land parcel with utilities but no other improvements, the investor may demand a 12% yield. This is because vacant land is much more risky and the investor will want to be compensated for taking that risk. The investor will also want to make sure that their purchase price provides a good equity buffer.

3. Is there a minimum balance that has to be on a note for an investor to consider buying it?

Note buyers can be all over the map on this requirement, but most want a starting note balance of at least $ 30,000, with some having a minimum of $ 50,000 or more. As far as maximums, only a few large investors will accept notes with balance greater than $ 1 million.

4. I sold a property to my brother using owner financing. Would you buy that note?

Some investors require an arms-length transaction and will not consider buying notes in which the payer is in any way related to the seller. For others, like us, we will consider such an arrangement but might only be willing to buy part of the note.

5. What do you mean when you say that you‘ll buy part of the note? I thought that this was an all or nothing.

Actually, there are multiple ways for you to sell a mortgage note, though most note holders initially think only about selling the full note. The other most common way to sell a note is with what we call a partial.

For example, let’s assume that you have a mediocre note with 14 more years of payments due. If an investor were to buy the full note, the discount on the note might be too severe. You could have a $ 100,000 note on which the investor will only pay $ 65,000 due to risk considerations. Instead, the note buyer could offer you $ 30,000 for just the next 5 years’ worth of payments, with you receiving everything after that terms ends. That way, the investor feels more protected and, because you are sharing some of the risk, you won’t get hit with such a big discount. There are other advantages to partials including different treatment of capital gains and the option to sell another piece of the note at a later date.

6. I am in the process of selling my business along with the property on which it resides. How should I set up my note with the buyer?

For this situation, it is best to create two notes if you think that you might ever want to sell them. You should create one note covering only the business and its assets, and another for the real property. The primary purpose of this is because most companies that buy real estate notes don’t buy business notes and vice versa. So, a real estate note investor would put zero value on the business, meaning that you would not get a good price on a combined note. If the notes were separate, you can sell one note to the business note investor and the other to a real estate note investor, thus maximizing your proceeds.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Real Estate Notes: Buying, Selling, Discounts, Partial Notes and More

Real Estate Investing For Real | A BiggerPockets Investment Property Blog

Tags : Buying, Discounts, Estate, More, Notes, Partial, Real, Selling

The Advantages & Disadvantages of Buying Mortgage Notes

Filed Under : Real Estate by admin

Sep.25,2011

Real estate just can’t seem to catch a break. Every time that a nugget of good news about property values or sales appears, it seems to be offset with dismal news about some other part of real estate. One analyst predicted that ten million mortgages will default (1 in 5) if Congress doesn’t take action. Of course, my opinion would be that all of the “action” that the politicians have taken so far has done little more than waste billions of dollars.

In this environment, we as investors must calibrate future risks relative to the potential rewards. Whether you are a pure property investor, a mortgage note buyer, or have another role in real estate, the risks are bigger than ever.

In the past, I’ve written extensively about the ins and outs of investing in mortgage notes (also called real estate notes). A knowledgeable note buyer will have a good understanding of a property’s value, the payer’s credit and pay history, the details on all of the documents, and the likely scenario in case of a default. Contrary to the opinions of some people who have sold a property and carried a note, a mortgage note is not risk-free and certainly is nothing like a CD or savings account.

Clearly, there are many advantages of being a note buyer/investor. As a professional who has personally bought dozens of notes and brokered hundreds more, I’m a believer in notes.

A note buyer enjoys much higher yields (rate of return) than one can get at a bank or most any other place and, in my opinion, at less risk than with the stock market. A creative and smart note buyer can even buy notes in cases where the payer has weak credit or where the property has challenges, by ensuring that there is a sufficient equity buffer.

For instance, a couple of years ago, I bought a deed of trust note on a mobile home with land in central California. Beyond those high risk characteristics, the property was outside of a small town, the payer was on disability with less than great credit, and the pay history was brief. Here were the basics of the original transaction:

            Sales Price: $ 120,000
            Down Payment: $ 10,000
            Original Note Amount: $ 110,000, 6% interest, balloon in 5 years

The note had additional issues that made it even less desirable, but I was able to make it work by understanding the note holder’s needs, and offering to buy just the remaining monthly payments and part of the balloon. To date, the payer has made all of their payments on time and the original note holder has come back to me twice to buy additional small pieces of the balloon. Even after all of that, my investment-tovalue ratio is still only about 50%. So far, so good.

If you’re thinking about investing in real estate notes, ignore the late night infomercials. Study up on the subject and then get yourself hooked up with someone who is knowledgeable and has actually bought notes. Unless you’re bringing viable notes to the investor, you’ll need to pay him or her a few hundred dollars for their time and expertise. I always recommend that new investors broker their first few notes before putting their own money at risk. That way, you can learn while you earn and build a good knowledge foundation. Once you feel comfortable with the business, buy a few small notes and build up to a bigger portfolio. In time, you’ll be a full-fledged note buyer and enjoy all of the fun and rewards that go with that.

REAL ESTATE NEWS FROM THE WEEK
* Nationwide, average loans that completed foreclosure in July had no payments for 599 days, up 25% from 478 days in August 2010 (Wall St. Journal, 9/19/11)
* Default notices in California spiked 55% in August (Housing Wire, 9/19/11)
* Home prices expected to drop 2.5% this year and rise 1.1% annually through 2015 according to a survey of 100 economists (WSJ, 9/21/11)
* The government owns about 1/2 of the REO inventory in the country (WSJ, 9/22/11)