Group Q & A
Promo Announcement – Male Speaker:
It is time to get smart Atlanta, Street Smart that is. Street Smart with Lou Brown. The show where you do not just learn to save the real estates you own, you learn how to prosper for pennies, beat the declining real estate market and make it your own. Turn a troubled economy into a prosperous present for those you love. Make your days worth living by investing for less in only the best, land. The one thing God only made so much of. So, tune in now for the only show where you can get the whole enchilada in real estate insight, Street Smart with Lou Brown. There is no other show on TV or radio where you can invest your time and come from behind. So, tune in Atlanta for the whole enchilada of real estate insight every Monday through Friday, from 12:15 to 12:30 and get this, next, sit down with a pen and pad for your call in session on Saturdays at 2:30 p.m. when the Master himself is in, Lou Brown. That is Monday through Friday from 12:15 to 12:30 p.m. and again on Saturdays from 2:30 to 3:30 p.m. Come on Atlanta, get Street Smart, only from the big gun, WGUN
Lou Brown:
Hey everybody. Did you hear that opening? That is the promo that they are doing for my upcoming radio show that is starting next week in the Atlanta market. I thought you might enjoy what they have been saying on the radio to get people interested in that show. We will see how it goes. I think it is going to be very exciting. It is a 50,000-watt station, so we will find out what my forte into the radio arena is starting next week. I will keep you updated on that.
We have an upcoming Millionaire Jumpstart April 4th and 5th in Orlando and I definitely want to see you there. If you have not registered already, call the office at 1-800-578-8580 and by all means do not miss later in the month, we have the Millionaire Deal Maker four-day in-depth training on how to structure and craft deals in today’s market. I am going to pull the curtain back. I am going to reveal our entire operation. I am going to show you exactly how we are buying the properties these days, the numbers, the paperwork, the formulas, the forms, the spreadsheets, every aspect of what I am doing in today’s market. It is absolutely critical for you to learn. In this great economy that we are in right now, it is great for us real estate investors, I got to admit. I want you to get on board and take advantage of it the way I am. So, let us get together for sure, for sure, April 23rd through the 26th at the Millionaire Deal Maker.
Now, this has been an exciting couple of weeks. We have acquired a few more properties, I think since the last time we talked. We have picked up at least two more and many more in the hopper. We signed six more proof of funds letters today so we will see what happens with that group of properties. Again, I want to remind everyone that now is the time for you to be out looking for these bank REO’s and for money to fund these bank REO’s. This is a critical opportunity in your career and you are going to mark Lou Brown’s words that I told you this was the time to do this. Whether you do it or not, I cannot make you do this. I can only lead you to the water, but I cannot make you drink. If you will make the connection with the realtor, someone in your area that will do the legwork and bring you these opportunities, you will find incredible benefits. Again, I want you to look at things from the viewpoint of how much rent can I get in this particular area for this particular home. Then, compare that to the price that you are paying. You are going to find an inversion, hopefully of prices. Now, what I have found is that in the inner city areas, the prices are much lower than when I go out to the suburbs. The inversion is there, it is just not as deep in the suburban areas as it is in the inner city. Why am I interested in buying any properties in the inner city? Only because I have a buyers list. So, this is another aspect for you to work on. If you were to have buyers and they were to have down payment money, and they definitely have bad credit, that is almost a given these days, then you have got the nucleus for having a great business plan. There are lots of folks out there that simply cannot afford. Let us face it, there are a lot of folks that have lost their homes to foreclosure, to bankruptcy, and to job loss. They are good people. They are good people that had a bad thing happen. I like to give opportunities to people and give them a chance to be able to win and get that property. That is what I am excited about for all of you. Take advantage of this time. Do not get stuck on the minutia. Let us put in place what is necessary to make this happen.
What are the steps? First of all, I need you to get access to the MLS. Whether you get access by chumming up with a realtor and them giving you their code to go online and check the MLS yourself, or they pull listings for you. Either way, I want you totally focused on pulling properties to look at. Now, second, if you have the time, you can go out and look at these properties. You will need the access codes, the lockbox codes, many REO’s have a separate lockbox that is not a realtor lockbox that allows access for workers, and the public to be able to get into the home and view it. So, this gives you a chance to get out there and look. If you have a blackberry, you could be at the property and literally sending an e-mail right back to the listing agent or to your buying agent to get that offer to the listing agent. This gives you a chance to get these offers in quickly. What we are finding is we do have competition out there folks. This is not like everybody is waiting for Lou to put an offer in. I am putting in low offers. I am bottom fishing. You have to look at what the bottom is in your market. What Bruce?
Yes, Bruce was just reminding me of one we put just put an offer in Stone Mountain, Georgia. The list price was $9,900.00 and our offer price was $6,000.00 dollars. Now, you might think $6,000.00 dollars, that has got to be a real piece of work. Well, in some ways it is not in great shape, but in other ways, it was built in 1984. So, if you think about it, yes, it is a 25-year-old home and it was built with Louisiana Pacific siding. So, that Louisiana Pacific siding, over time, turns into paper and it disintegrates. In this case, we would have to take off all the siding and put on brand new Hardy Plank siding. Probably underneath we would also find that water has seeped through the siding and probably rotted out some of the 2 x 4’s the siding is attached to.
So, we are prepared for that and possibly replacing some of the windows. There is probably some rotting around the window, but let us review. It is a three bedroom, 2-1/2 bath home with a single car garage in not so bad of a neighborhood that you could buy potentially for $6,000.00 dollars. Now, are they going to counter back? Maybe, maybe not. I mean, heck, they only ask for $9,900.00 dollars, so we will see what they say. There is likely going to be multiple offers and I might not get that one. But, you know what, I do not care because there is a lot of work ahead with that house. If I take my money and my resources to work on that property, then those resources are not available to work on another property that may not need as much work. This one is going to need a significant amount of work. Probably about $25,000.00 dollars for the work. So, you have to budget that.
Now, you look at it, okay, now Lou, now you are getting down to it. We are actually $31,000.00 on this house. That is exactly right. So, one of the things we are looking at is that we are paying a little bit higher then that. We just got a contract accepted today on a property, in fact, let me look on my Blackberry here. The list price was $33,900.00 dollars. Our accepted offer was $26,000.00 dollars. Now, let me just tell you a little bit about this house. This is on a ½ acre of land. It was built in 1970. It is in an okay school district. There are five bedrooms. There is three on the main level and two in the lower level. There are two baths on the main level and a full bath on the lower level, as well. It says it is sold in “as is” condition, excellent opportunity for the smart bargain hunter. It gives us the REO info on it and who has the property details. It says it is a brick-in-frame with stone exterior. It has central air, a deck, a patio, and gas forced air heating. It has a breakfast area and less than a ½-acre of property. It is right at a ½ acre. The parking is a parking pad. There is a living room and dining room combo, a family room, and it says it is a split-level. It really is a split foyer. The old list price was $69,900.00 dollars. So, they have had it listed. They have tried to sell it. Now, they are bailing on it.
So, not only did they drop it from $69,900.00, they dropped it o $33,900.00 and we got it for $26,000.00. So, folks, pay attention. Whatever they are asking for these properties, many times they will accept far less. But remember, there is competition out there so, keep that in mind if you care. We are making so many offers, we really do not care. If someone beats us out on one, that is okay because we have got enough offers out there to make up for any losses that we do not get.
Okay. Now, let us talk about your questions.
Q: We have got a purchasing property question from Brian Mussa who says, “What would change on my offer, if anything, for a free and clear property? ARV is $250,000.00 dollars. It needs about $20,000.00 to $30,000.00 dollars in updates. I told the owner I would give him $200,000.00 dollars paid at $556.00 dollars per month until paid. He did not decline the offer. I kept following up and hoped to get back in front of him soon.”
A: Well, I think you put your finger on it Brain. The ARV is $250,000.00 dollars, but it needs $20,000.00 to $30,000.00 dollars in updates to make it $250,000.00. So, when you offered him $200,000.00, you actually made a very good offer. What I would say is that I would really sit down with him and show him the cost to sell worksheet and in the area where it says repairs, I would put in that $30,000.00 dollars in updates. You are bringing your offer way down below what the number that you offered is. When you come back and actually offer more, that is very powerful, if you can really spend the time to prove your numbers. Your numbers are what they are and they are legitimate. So, you just want to spend some time really proving that and making the seller feel comfortable with it. Say, “Now, Mr. Jones there is another way that I can buy your property today. Our cost of funds as you can see here on the cost of sell worksheet are 15% and 5 points, but we found that many folks just like you who have properties without a loan on them can actually work with us and receive an income. Does that make sense to you? Would not it be great if you could a monthly income off this property? We can offer that to you and here is how I would like to do that. I will give you $500.00 dollars per month until paid and I can actually afford to add back in the points and the high interest that I would have to pay as a real estate investor to get a short-term loan.
Your loan, by the way Mr. Seller is an inheritance to your estate. So, if anything ever happens to you, that payment continues right on, every month, month after month, to your heirs. Now, would not it be great if every month they open that envelope and there they say, thank you daddy. That is another $500.00 dollars to help pay my bills, to help buy my groceries. If it was not for daddy, I would not be getting this. As opposed to Mr. Jones, if I go ahead and write you a check for $200,000.00 dollars and you put that in the bank and God forbid something happens to you then guess what, that money is going to be blown. You and I both know it so quickly, and they will never see or remember what you did for them, because it will be gone. In this case, I am giving you an opportunity to really give a benefit to your family and yourself because you are going to have this monthly income, month after month, to supplement your other income and would not that help?” That is what I would do Brian. I would focus on the cost to sell. I would back the number down and then I would give it back to show that you really are including interest in it, essentially because you are paying more for the property.
Q: Now, Janice LaBroad says, “Hi, Lou. Would you be able to give me an idea of what to pay, one, a realtor for a referral to a home that turns into a subject to owner financing deal for me. No listing agent, just a referral.”
A: Well, Janice, I would probably pay that realtor a finder’s fee of say $500.00 dollars. There is no agent; it is a referral, so they really do not have anything. Now, the other thing you can do is you can offer them some now and the rest later. For example, if a typical commission is 3%, then you could say, “Okay, today because I am not going to make my money today either and I am not going to be able to sell the property right away, I can pay you $500.00 now and the balance when the property sells. So, essentially, the realtor takes back a note for the balance and holds that note until you do sell the property.
Q: “Number two, a realtor that has a listing, but cannot sell traditionally and works with me to get a nontraditional style sell, I am a buyer.”
A: Again, I would look at it from the viewpoint of they helped you find the buyer, so they are the listing agent and they are going to help you find a buyer. So, they are the listing agent and they are going to help you find a buyer. What I typically do there is pay 20% of the cash at the table. So, for example, they help me get a buyer that wants to come in on my rent-to-own, or owner-financing program and that new buyer has $10,000.00 dollars to put down, I would give $2000.00 to the realtor and then the balance when the property sells. So, in your question number one, that was based on the property where they did not help you find a buyer. In this example, they are helping you to find the buyer, so whenever they help you get some cash to the table, then I am willing to share that cash with them.
Q: Third scenario, what do we pay a birddog who finds a deal and passes it along, i.e., empty home, distressed homeowner, etc., and I am able to purchase the home.
A: Well, Janice, here it depends on the amount of handling that is going to be necessary for that birddog. If it is someone that does have a single clue, no background, no experience, no knowledge, and nothing to bring to the table, then I like to start them out with $250.00 dollars. Then, give them an incentive say after the first three that you bring me that we actually close on, then it jumps to $500.00, and then, after the next three, it jumps to $1,000.00. You can do a stepped plan like that for ones that are going to need some handle.
But, on the other hand, if somebody is coming to you and maybe they really are savvy, they know what they are doing, they know how to run the streets, they are going to be working hard and bringing you a lot of leads and I would definitely move the numbers up to say $1,000.00 dollars. Just to contrast that for you, right now, I am paying a realtor who is out reviewing properties for me. First of all, he looks at the MLS and he finds all the leads. He goes out and looks at them, eyeballs the properties and evaluates them based on the criteria that we have set down. He puts all that together, sends it to me, and I approve it or change it.
My only changes are based on numbers of bedrooms, bathrooms, age of property, whether it has a garage or not, and whether it has a basement or not. I look at the actual quality addition to my inventory when I am evaluating the offer that he is looking at. So let us say that he is suggesting an offer of $30,000.00, but when I look at it, I am seeing that it is an older home. It has no garage. It has no basement. So, I am probably going to back that off for now to say $25,000.00 dollars.
Again, I am looking at it from a rental standpoint. He is looking at it from the bricks, sticks standpoint. I finally come to that number, we submit that, and that becomes the offer that is sent to the REO agent. When we finally buy that property, when it closes, he collects $2,500.00 dollars at closing for each one of those that we buy. So, that means I have no weekly paycheck going out. I have no gas expenses. I have nothing. He is going to cover all of his expenses and I am at risk for making sure that I close. I owe him a commission whether I close it or not. That is working out very well for me.
Okay, your fourth scenario is a referral for a buyer for one of the rent-to-own or owner financing properties. Well, that comes back to the 20% of the cash that comes to the table, up to, by the way, there is a limit, up to 3%. So, you do not agree to just…what if somebody had a $100,000.00 dollars to put down. I do not want to give them $20,000.00 dollars, you see. It is up to a limit of the 3% that they would have gotten as a realtor.
Your fifth scenario is what to pay if a finders fee for a property I flip to another investor. Well, you can go back to the cash scenario. Let us say that you purchased it for $40,000.00, you are going to flip it for $50,000.00 to the new investor. That is a $10,000.00 differential, alright. Again, back to the 20% rule. You can pay them $2,000.00 of that $10,000.00 for the finder’s fee for bringing it to you in the first place. It really does depend on your negotiation with this realtor and how hard this realtor is really going to work for you. If they are going to bring you one on an occasional basis, probably would not give them as high of a commission. On the other hand, if they are really going to be working “for you,” then I am willing to pay more.
Your sixth scenario is any other fee types that are not coming to mind right now. No, Janice, I think that is everything that I would come up with. Again, keep in mind that these are negotiable. The example I gave you earlier where the guy who is going out and beating the bushes and everything finding the MLS, going out and looking at the properties, I am paying him over and above the commission, so in other words, we actually have another member of our team who is a realtor who is actually making all the offers and managing all the back and forth with the offers, the counteroffers, all the paperwork, all the follow ups, proof of funds letters, the cashier checks, and all the other aspects of it. He does not get involved in that piece of it. So, she is making the 3% or in some cases, there is a $2,500.00 dollar realtors commission on the selling side, she makes that and he makes an over and above commission. Over and above what the bank is paying out as the seller on the real estate commission.
Okay. Thanks so much and see you in April. Janice. Well, Janice, I am looking forward to seeing you, as well.
We are doing something a bit unique, in fact, a lot unique for our April Millionaire Deal Maker. As always, I create Deal Maker and teach and train based on today’s market. So, in today’s market right now, of course, I am more heavily focused on the REO world. So, we are going to focus a lot more on raising money and buying REO’s. We are also going to cover the owner financing as Brian’s questions was earlier on the free and clear property with the owner carrying that financing. We are going to do that, because in today’s market, that makes a lot of sense.
We are going to talk about out of town owners and how to approach them. I have got a few nifty new approaches to the private money side of things, as well as techniques and tools that you can use for out of town owners. I want to show those to you, as well. So, we are going to do that at this Spring’s Millionaire Deal Maker, but on top of that, we are going to skip a day for our platinum students after the event ends on the 26th and then we are going to go into our Platinum Mastermind for a two-day event after the Millionaire Deal Maker. So, if you want to join Mastermind, you could actually kill two birds with one stone. You could get personal coaching to advance your business, as well as the in-depth training that we give at the Millionaire Deal Maker.
Q: Now, we have a short-sell question from Milan Chalupa who says, “Hi, Lou. Just a quick one to ask. When the homeowner is foreclosed, then they are not having the mortgage balance they owed as an income on their taxes, but is it the same as with a short-sell? Thank-you.”
A: Well, Milan, good news. According to the IRS, when you actually read the rules of how they charge for the gain from a taxpayer, there are some exceptions. So, let us back up and talk about how this works. First of all, on a short-sell situation, the way the IRS looks at it is if someone borrowed a $100,000.00 dollars and then the property sells for $50,000.00 dollars, essentially, the borrower got a forgiveness of debt of $50,000.00 dollars, which also can be construed as an income of $50,000.00 dollars, which yes indeed, that could be taxable, but what the IRS agent may not know and what you do know because I am going to teach it to you is that when you read the IRS guidelines on the sell of property, it says, “The sell or other disposition of property.”
Now, a short-sell or a foreclosure can be a disposition of property and you are forgiven. So, what happens in the IRS eyes is that you are taking your exemption, $250,000.00 for a single person or $500,000.00 for a married couple. So, then, if you had a $50,000.00 dollar gain because of the forgiveness of debt, it is actually under the rules where you are given the exemption, because it is the sell or other disposition of property. That should solve the problem for any seller who is in a short-sell situation.
Q: Brian has a lease option selling property question. “Hi Lou. Hope all is well. I just filled a vacancy after four months. The good news is that my wife Ivey will qualify as a real estate professional for 2008 so we should be able to offset more of our passive losses.”
A: Very good. So, what you are saying is Ivey is qualifying for the 751 hours of management in 2008 last year and therefore, that will allow you now to offset passive losses that have exceeded the cap that the IRS puts for people that have jobs, so that’s very good news. By the way, for those real estate professionals, it is an unlimited loss. So, you can have $150,000.00 dollars in losses and write it all off because you are a real estate professional. However, if you both have jobs, then there is a cap of $25,000.00 dollars in losses. So, it really pays for most of us to be real estate professionals. Those of you who are listening to this want to aspire to that. If you have the opportunity to leave your job, and be able to build this into a full-time business, there are other benefits for those folks out there.
Now, Brian, a couple of important points that I want to make sure you do not miss. Number one, the 751 hours has to be more than 50% of the working time of that person. So, in other words, if they have another job, it has to be more than 50% of their total working time in the year. Secondly, you have to take a Section 469 election of all your rental properties and elect to conglomerate them into a single holding, essentially that allows you to conglomerate all the interest deductions, all the property taxes, all the insurances, all the expenses for repairs, and all the other write-offs that relate to Schedule E. When you take the 469 election, that pulls everything together. Many of you know Bruce Beasley and one of the challenges that the IRS put to him is they wanted to actually have him spending 751 hours on each property. Now, how dumb is that? But, if you elect the 469 election, then its 751 hours applied to the entire compilation of properties, far better. Very, very, very, very, very, very, important information for all of you listening to this and I bet you are really glad you listened to this session today. Not only that, most tax professionals do not even know this. They do not even know about the 469 election. They do not even know that they should suggest it to you. So, it is important that you kind of step outside of listening to the doctor. You know, sometimes we go to the doctor and we just say, “Whatever you say doc. Whatever you say.” Well, maybe, maybe not, maybe there is more to the story. So, pay attention to the risks that can come with the mistakes that others can cause you to make, as well.
Q: Brian goes on to say, “As I just filled one vacancy, another lease-option, then it came to me, where I had to play counselor. He wants to divorce his wife and asked me what his options were with the lease. I told him I would work with him, but terminating the lease was not an option, as I would be expecting future lease payments to be paid, which is about $18,000.00 dollars. I cannot afford another extended vacancy if he moves out. How would you handle it?
A: Well, Brian, I would say everything is negotiable. I would say I want to keep your wife on the lease and the option, however, when it comes time for you to exercise your option, I will be glad to look at the circumstances then. That means, if you keep your nose clean, take good care of the property and keep us paid on time, then I am very willing to consider not having both incomes for you to be able to convert to our owner-financing program or go to the bank and qualify for a loan. Very happy to look at that at that time, but it is really going to be contingent on how you conduct yourself. The truth of the matter is we entered into a contract with both of you and we were dependent upon both of your incomes to qualify you. So, now you are looking at moving to one income and being able to keep the property. Well, let us make sure that is going to actually work out. If it does, fine, we have no problems at all. If it does not, then you Brian still have the options to go after her for any portion of the unpaid lease on that property.
Q: Now, Kadri Egbeyemi has a question and he is in Los Angeles County, California. Kadri says, “Hi, Lou. What is a homestead? What is a homestead exemption? How does a homeowner qualify for this benefit and how can this benefit be lost, as well. What affect does placing a house into a trust have on this homestead and can it be claimed back from the county office? Thanks. Kadri.”
A: Okay, Kadri, very good questions, all of them. First, let us start with what is a homestead. In many counties across the country, they do a little bribe act for voters and they give an additional tax deduction for homeowners in that county. Those additional tax deductions are in the form of a homestead exemption. So, for example, if a property is valued at $100,000.00 dollars, in many counties they give a $25,000.00 dollar exemption. That brings the value “for tax purposes” down to $75,000.00, which then they apply the millage rate to the $75,000.00 or some percentage of that. That becomes exactly what the taxes are.
The homestead exemption then, is the thing that is applied for once you buy the property. If you are going to live in it as your primary residence and you are the owner of the property, you can apply for one homestead exemption. If you live in New York 50% of your time and in Florida 50% of your time, you are only entitled to one homestead exemption. So, you choose. Is it Florida or is it New York? Rental property does not get a homestead exemption. Now, that sucks doesn’t it?
That is terrible because now it actually is a hidden tax on the tenant because your expenses are higher on property taxes because it is a rental property rather than a residence. So, I really think that is not a good program and it is not very fair, certainly for tenants. It is your job to tell all your tenants that they are actually paying higher taxes as a result of the county not considering them as good of quality citizens as people who live in homes and own the home. I just cannot wait to get that stirred up. I think there should be a tenant rebellion in this country to get the county commissioners to pay attention to the fact that they really should not be discriminating against renters. That is exactly what they are doing. They are discriminating against landlords and they are discriminating against renters by giving this special homestead exemption only to homeowners.
Now, you go on to say, “How does a homeowner qualify for this benefit, and how can this benefit be lost, as well?” Well, Kadri, in most parts of the country, you have to file for your homestead exemption and any property tax protest by April 1 of that year. In some cases, it is March 1. In our area, we have two counties that I have to file by March 1 and all the others are by April 1. So, you want to definitely get online, check with your county tax commissioner’s office and find out when the deadline is. Also, you may be able to find the form to do this with online, as well at the county tax commissioner’s website.
Now, a few notes for all of you listening. We are protesting about 90% of our property taxes this year. We literally took the time to print out a CompWiz report on every one of our properties. We took a look at a couple of things, quite a few things actually. One thing is here is what the county says the property is valued at. Now, I am taking the square footage of the property that is on the property record card. All of this is available on you CompWiz. By the way, if you are not a user of the CompWiz, I highly recommend it and suggest that you call our office, 1-800-578-8580 and get this turned on your Street Smart websites because this is a wonderful product that is giving us the opportunity to do exactly what I am describing to you. So, we take the value that the county has assigned to that property, we divide it by the square footage that they say the property is and that gets me the dollars per square foot that they are charging me in taxes. Now, I go to all the comps and I look to see what things are selling for and what dollars per square foot they are going for.
Then, I look at the final page of the CompWiz report and that gives me a list of all the other comparable properties on that same street or very close by. I look at things like the bedrooms and bathrooms and square footage. I try to find the closest matches. Then, I look at what the county has valued those at. I am looking for ones that are valued lower than mine. So, if I find something that is the same square footage as mine, but yet is valued lower, eureka. I have the granules, the opportunity for a property tax protest. Why? Because the property tax assessor is supposed to value all properties evenly so there is supposed to be a fairness doctrine in the assessment of the values in that neighborhood. Now, if I find a property that is larger than mine, I also look at those.
I’m looking at, okay, well here is one, they valued mine at $55,000.00 at let us say they valued mine at $55,000.00 for 1,000 square feet and then here is another one that is 1,300 square feet, but this one is valued at $53,000.00 dollars. Well, my goodness, that is not fair because when I divide $53,000.00 by the 1,300 square feet that is that size, the dollars per square foot are significantly lower than they are charging me. So, I am going to argue that that is not fair. There is a combination of things that I am looking for. I am looking for the comparables that are lower. I am also looking at the dollars per square foot that are lower. I am going to use those two arguments to argue that the price should be a lower number. So, I kind of look at what the sales have been because that is going to my first argument. Let us say that the county, in that example, I was giving the county has valued it at $50,000.00 dollars for tax purposes, then I am going to find those lower numbers on the comps and go for the lower numbers.
So, if I found stuff selling at $40.00 dollars per square foot, I am going to go back with evaluation of $40.00 times the 1,000 square feet that they say the size of my property is and I am going to report back $40,000.00 dollars as the target price. Now, what does that do for me? Well, it reduced my property taxes by one quarter. Well, not quite one quarter, one fifth right there. So, if I was paying a $1,000.00 dollars in property taxes, suddenly I have saved a couple of hundred dollars right off the bat. Now, it might not sound so much for one property, but you multiply that times multiple properties and we have created ourselves a beautiful profit center.
Not only that, but you say, “Okay, in our area when you protest a property tax and win, then your valuation is fixed for three years. Essentially, it is to spank the tax assessor for making a mistake. So, they cannot now suddenly jerk me around, go up again next year, and make me have to protest again. So, I will never have to protest that one again for essentially four years. So, this could be a very good exercise for everyone on this call in these hard economic times. You have got a very short window, a very small window to get this done. I have a special report on this if you want it. Just e-mail streetsmartlouis@louisbrown.com and I will send you this special report about property taxes. Understand this, you have only in your area maybe up until April 1 to protest the taxes or to file the homestead exemption Kadri is asking about.
Q: Now, the next question Kadri is asking is what effect does placing a house into trust have on this homestead and can it be claimed back from the county office?
A: Well, you see, when you move a property out of your name as the owner into a new name, for all intense and purposes, the tax commissioner looks at it as a sell. So, all bets are off, all discounts are off, and all exemptions are off. You must reapply for it in the year following the year that you transferred. So, Kadri if you transferred a property last year, this year you have to reapply for the tax exemption on your own home. On any others, it does not apply any way.
So, for example, all the REO’s I am buying, if they were foreclosed this year from the homeowner, and the homeowner did have a homestead exemption on that property, then I am going to loose it next January. I will have to pay higher taxes on all those properties next year because they did not have a homestead exemption. Now, what am I going to watch for? Next January, the new acquisitions for this year, we will be looking to protest those taxes because obviously we bought it for a much lower price. I will be able to argue a much lower valuation for that area, for my property, and for my dollars per square foot. Therefore, I should be able to lower the valuation, which in turn will lower my property taxes next year. All great questions. Wow, you guys have really been putting your thinking caps on.
Q: Now, we have a personal property trust question from John. If I should choose Phoenix Management Trust for example, for a bank account trust, do I need to be concerned there is another Phoenix Management Trust?
A: Well, no John because Phoenix Management Trust for you is unique in that you are the trustee of that trust. So, if there were another Phoenix Management Trust, it would have a different trustee than you and therefore, a different person to control it, a different account, a different account number, and on, and on, and on. So, you can see that theses various trusts really do have a fingerprint on them. It is the uniqueness of having the different trustee in that case. Hope that made that clear for you John.
Q: Now, we have Anne asking, “When a seller is in default and the bank allows the seller to continue to occupy the house, how motivated will the seller be to try to sell their house as soon as possible?
A: Well, that is a great question Anne, but we get contacted from folks all the time who are sitting in their houses occupying it, but knowing there is a clock ticking somewhere and knowing that they are not just going to not expect that to be paid. But, let me tell you this too Anne, I just heard this story day before yesterday. One of my platinum clients told me that one of the deals that we have been working on, Fannie Mae went back to the seller and offered to essentially loan the seller the $12,000.00 dollars in back payments on a “0” interest loan payable over five years. Essentially, they have been behind. I think they are 12 months behind, in fact.
That is about $12,000.00 dollars behind and Fannie Mae is coming along and saying, “Look, we are going to basically grant you a loan for this arrearage and spread it out over the next five years, can you handle that?” Well, fortunately, the seller had already moved out of the house and my platinum client was actually working on a loan modification. So, the answer is, wow, yes. So, he is getting a modification on the existing loan. He is getting this extra loan to pay the arrearage, and he has already got the deed to the property. So, that really is a win, win, win, win, win, win because the seller also, who had already moved out of the home is winning because they are not going to go through foreclosure. They are not going to go through bankruptcy, and in 12 months of on time payments, their credit will look really good to Fannie Mae, FHA, or anybody else who wants to give them a loan sometime in the future. Now, is not that win, win, win, win, win. That is a great thing.
Q: Alright. Jeddy asks, “How do we take over loans subject to or purchase on a lease option if the loan is on for first time home buyers requires the owner to be the occupant states that the owner is not permitted to rent or lease the property. Situation is these homeowners have transferred current ARM payments and living at no charge with a relative, they do not want to break the rules stated in the mortgage note and want to sell so they can qualify for a new loan and buy a new house. They feel if they sold subject to, rented, or sold on lease option, the lender would find out when they qualify for a new loan.”
A: Well, Jeddy, you are absolutely right. That could be a question that would come up. Absolutely. No doubt about it that somebody could argue that point. What you want to say to them is, “Look, do you want to get out of this property now, or do you want to wait nine months, twelve months, however long it takes to get out of this property. We have an opportunity for you to be able to be done with this today, if you choose. It is completely up to you, completely your choice. Here is what we can do for you. We will go ahead, take over payments for you, and transfer the deed. We are going to transfer the deed from your name into the trust name. When you go to qualify or a new loan, we will be glad, in fact, have your mortgage broker contact us and we will send them over a copy of the deed to the property showing that it has been recorded and that you have sold the property. In that case, they will ignore your entry under your credit report, even thought it is staring them right in the face, they will ignore it as a mistake. They will mark that one as assumed by another party and that is the good news for them being able to qualify for a new loan.
So, that may work. If it does not work, then you will just have to explain to them that that is the best you can do on this particular case. You could work with getting a new loan on the property, but you could not buy it at anywhere near this price and they would have to pay the difference. So, let us say that the property is $100,000.00 dollars and you are going to have to go out and get a new loan. Then, you are going to have to use that cost to sell worksheet and show them that you have to got to come up with all this points, interest, cost, caring, and all these sorts of things that could be avoided if you were to take over their loan. So, they have two choices. Sometimes, Jeddy, if you will just do the Ben Franklin close, I do not know if you have ever seen this done before, but you get out a clean piece of paper, like a legal pad and you split that page into two. You draw a line down the middle and on the left hand side you put pros and on the right hand side you put cons. The pro to accepting your offer is, they get to move out today, or they get to sell the property today.
A pro is no more headaches. A pro is no more worries. A pro is no more payments to pay after whatever payment you negotiate with them. A pro is that they will be able to get a new loan when they go to qualify for another loan. A pro is that they can move into a new house or across town or whatever they were trying to accomplish when they called you in the first place. A pro is that they do not have to fix up the property. Another pro is they do not have to wait until the property sells, six, nine, or twelve months. They got the property sold today. So, you can state the same benefit in several different ways when you are doing all your pros.
The cons, what are the cons? The lender might call the loan due. Well, if they do, then, you will have to go get a new loan. So, that is a con, but that is the truth. A con could be that you did not make the payments. Well, you are not going to buy it in the first place if you cannot see a profit. As long as it fits within the guidelines of the cost to sell worksheet, you could show them that you will be able to make a profit. Good stuff. Good stuff. Any other cons you want to come up with, but I usually cannot come up with many cons. I make them do all the con stuff. I help them a lot with the pro side and I do not help them much with the con side. So, they have reasons to see that this will absolutely work.
Q: Alright, John asks, “Please review any strategy to do assignments for no money and tactics to control property.
A: Alright, strategy to do assignments, I think what you are asking here is how do I get the property under control in order to assign it. What you would do is simply use my purchase and sell agreement in Volume 1 that is form 1301 because right in there, there is an assignment clause granting you the right to assign that contract to anyone you choose. So, what you would do is sign the contract, you, as agent, as the buyer and then you would put the sellers name in. Then, because of the right to assign that contract, you would just merely when the time comes assign it over to the new buyer. Another little side note John is that the reason we have assignment in there also is because we are not going to be the one to close that transaction. In fact, the buyer is actually going to be a trust. So, I want to have the right in the contract to assign it to the trust at the closing so that the trust will close on the transaction. Does that make sense John? I hope so. That is a great question to ask because hopefully, a lot of people are doing that very technique right now in the market place.
Q: Now, Miguel Garcia asks, “I recently worked with a property owner with a property in pre-foreclosure. She agreed to proceed with a short-sell because she was upside down on her property. The seller was going through a divorce and had split from her husband. The process was stopped because the husband would not cooperate by signing the trust agreement or limited power of attorney. Is there any way to proceed with this property, even though the husband is not liable on the mortgage, but is on the warranty deed. By the way, this seller has two more properties that will also go into foreclosure.
A: Well, Miguel, this is a really sad answer. The truth is, without a lawsuit, or without a judgment from a court granting the right for the lady to sell the house without the signature, there is no title company that is going to accept a deed without the husband’s signature. About the only thing you could do is if there is plenty of equity in the property, is take a risk.
At some point, the husband is going to calm down, maybe, I cannot guarantee it in a divorce situation, but at some point, if you were to get the deed from the wife, go forward, and put a tenant in the property. You noticed I did not say lease option or agreement for deed. I said tenant, just a renter and you go ahead and collect, make the payments on the mortgage if it is going to be a subject to situation, and then make the spread on the difference. Over time, contact the ex-husband and get a quitclaim deed from the husband. Maybe you pay the ex-husband a $100.00 dollars to $500.00 dollars, maybe even a $1,000.00 dollars and they are going to cooperate because they are getting cash in hand they would not have gotten otherwise. Highly unlikely they will try to sue or pursue you because you actually control the other half of the deed. The bad news is though Miguel, you essentially have a partner. You control one side of the deed; you do not control the other side. So, keep that in mind as you do this because that could be a risk for you.
Now, if there is a sizeable equity, it might be worth the risk. Just go in with your eyes wide open that that is the downside that could happen later, the guy does not ever give you the deed. Well, if he never comes after you on the rents, or his half of the rents, and you make all of the cash flow, that could work out too. Again, do not go the next mile. Do not put somebody in under a lease option or an owner finance situation, because you are not going to be able to deliver the deed to them and that would be a terrible situation to be in. Miguel, I hope that helps.
Q: Now, I have a question from Doug Jones who asks, “What percent discount on average are you or your students finding that they can get on a short-sell?”
A: Well, that is a great question Doug. I would say last year it was completely different then it is now. It really depends on the lender is the answer. Some lenders are absolutely sitting on things not making any discounts at all. Others are taking enormous discounts. So, I would say that it is on case-by-case basis. A general rule is the BPO less 20%. On a HUD, for example, they will take 82% of BPO’s. So, that is a HUD foreclosure. VA is about the same. When it gets to conventional loans, then, you may see a much deeper discount. More in the 50 to 60% range. So, you really have some opportunity out there these days on short sells. I will tell you that I have changed my opinion completely in today’s market. Now, again, you may hear me say some different things six months from now than I am saying right now. It is likely you will.
The market will change. But, right now, why in the world would you go through the pain and suffering of a short sell when you can completely avoid it just by doing a REO property. That means the deed has already been sanitized. The tenant is already gone. The property is already owned by the bank. They can do anything they want to. Very interesting stories that I am getting from platinum level coaching students lately is that deals, in fact, Janice LaBroad was telling me about one today where they had offered $190,000.00 dollars on a short sell and the bank turned around, after the foreclosesure and immediately listed it for $150,000.00 dollars. So, you can see that there is such a huge swing of stupidity in the bank. I was explaining to her on her private coaching call that one of the challenges is they are in completely separate departments. What can be true in the short sell department and lost mitigation is completely a different story when it comes in the bank as an REO (real estate owned) by the bank. The distinctions, the formulas, the considerations all are different between those two departments. Once it becomes REO, they have got other incentives, as well. This is something to keep in mind. The banks are actually incented by the lender and when we say the banks, I should say the servicers of the loans are incented to do more in certain circumstances to keep a customer. So, for example, a loan modification, they get paid more for a loan modification then they do for a short sell. They get paid even less to handle and REO. So, there are various incentives on the servicer’s side for handling these situations.
Well, folks, it has been my great pleasure to train you for another session of the Street Smart Group Q&A. I look forward to talking to you in the next session and seeing what has happened in your life, as well. From time to time, drop me an e-mail. Let me know what is happening. Keep me posted on what you are doing in your real estate career and I hope to see you soon.
