Bill O'Rafferty's daily info of importance

Bill,

Thanks for sharing all your knowledge on REI strategies. Great!!

I am not a lawyer or CPA and do not give tax advice. Having said that, I want to post some general info regarding tax issues with 'subject to' properties about which you should be aware and for which you should get tax advice when doing these deals.

When you pay payments to a lender for a loan that is in someone else's name, they cannot take the deduction even though they will get the 1098from the lender (misc interest form) and you can take the deduction, even though you do not get the form from the lender - why? - you paid the interest. If you need to know how much of the payment is interest and deductable, your accounting person should be able to create for you, an amortization schedule for the type of loan you have taken over. If the former owner takes the deduction because they got the 1098 form, that is their issue with the IRS, you can deduct the interest you paid, given some exceptions, and they cannot deduct interest paid by you even it has been reported by the lender to the IRS as their loan. It is their loan, but not their deduction.

There are a number of tax issues with short sales that are just a significant, yet completely different that the issues with 'subject to' takeover properties.

Have a good week. IF I can think of something worth while or receive a question that may apply to many folks, I will write again tomorrow.

I was asked this question today and here is the deal. Assignments are fine in California when there is a regular seller involved that has equity (equity sale). Most sales in California right now (as high as 85% in some markets) are reo properties. Banks have a policy that does not allow assignments because of the concept not the money (if this has to be logical to you then do not even try to work with a bank). Their concept is that the home should sell for fair market value (FMV). If the home sells for FMV, then there is no money in assignments. If there is money in assignments, then it must not be selling for FMV. Now we all know many bank owned properties (reo) sell for less than FMV and there is some good money in assigning these but the banks do not want it to LOOK like they are not getting FMV, so they just do not allow assignments for the sake of appearance - it really has nothing to do with money, it is all appearances because 90 plus percent of the time the bank selling the property does not own the note and it is not their property. They fund the loan initially, sell it to a hedge fund, mutual fund or whatever and they, as originator, retian the right to service the loan (accept payments, retian impounds, foreclose, etc). When they foreclose, they make even more money as the agent for the investor (hedge fund, mutual fund) that actually owns the note. If it looks like they did not get FMV for the investor that actually owns the note, they have not been competent in their fiduciary duty to the investor that bought the note they made years earlier. I know I am going around in circles, but that is why they will not allow assignments on reo properties in California - they do not want it to look like they are not getting the most for the property that is possible.

On Fannie Mae reo properties there are restrictions on the deed when you purchase an reo from them that does not allow you to sell it for more than 20% above what you paid for it no matter how much improvement you do, for a perior of 90 days and longer in some circumstances. This is more of what they want things to look like and less about what the property is worth.

Assignments in California can work on double closings when the second buyer is paying cash or hard money. More on that later.

Best Wishes on Wednesday.

Bill, I'm not sure if you can speak to this or not, but I have heard/read that once you notify the bank that you are making the payments and that all information regarding the loan should come to you and they don't call the due at that time, they can't turn around 6months from now and say "By the way we are calling the note" I think that their lack of doing anything initially would be considered acceptance, so they can't change their mind later.

Bill, thanks for having these blogs. The great thing here is that I can go back and re-read. At the Edge event, man did I have to comprehend quickly. I am curremtly looking for my investor friendly agent here in NJ.

regards,
Joe

x

No - the note and deed of trust were written by the lawyers for the bank and they protect their clients. Banks can ignore you have taken the property subject to and call it due after the home appreciates - unless there is case law in your state to the contrary and I am not aware of any cases in which courts have determied banks have waived their rights to call the loan due.

First - thank you for all you shared at the EDGE! I'm still running on adrenaline high from that weekend!
Second - thank you for taking your precious time to post here. Its fabulous info, and I've been soaking it up without posting. So I wanted to acknowledge your generosity and encourage anyone else who is learning from this but not letting Bill know - POST!
Lets keep him here - what a fountain of knowledge!!!
Again - thanks a million!

I second that Laura! I have posted here once but still am taking in all the knowledge Bill has so generously donated to us all.

Thanks again Bill.
Richie.

Thanks for the positive comments about my posts - I will continue to send out info as long as it is helpful. Feel free to ask questions which I can research and share like I am doing today - either through a private email or blog.

I have referenced cost of constructions as a major point in assumptions (hostile takeovers). The point is this - even if your housing market is terribly depressed and banks are giving away properties, as soon as the glut of homes is gone, prices will very quickly recover to within 10% of the cost of building new homes. Then builders will begin building again and new homes will sell at slightly more than older ones. Relative to questions, here are general costs of construction in various parts of the country:

California - $115 to 125 per square foot not counting the cost of the land

Northwest - 95-100 per square foot

Texas and southern midwest - 85-90 per square foot (cheap labor and low worker's comp costs)

northern midwest 120-135 per sq foot (colder here)

Southern east coast 100-110 per square foot (good weather for building)

northern east coast 120-130 per square foot.

If you live in a state or area of the state where populations are exiting (like Detroit), be careful and do not assume prices will recover quickly as there is more housing than need for housing. Be cautions of higher priced homes and I generally recommend you stay in the entry home or just a bit better as these homes will have the largest resale population of buyers.

Condos will do really well in the next decade as baby boomers start to retire and give up the ranch style home for the conveneince of condos where they can leave for 3 hours or 3 months and everything is ok in their absence. When investing, watch out for HOA fees and special assessments so you will know if the property will cash flow.

Building permits vary from area to area and in my city, it is about $46,000 for a permit to build a home and in South Dakota where I have some property, the permit is less than $1,000. This will greatly impact the price per square foot.

Land prices vary greatly as well, but if you are thinking of purchasing land, remember it cannot exceed 25% of the cost of your finished home (lot costs 50K then complete home on that lot will not sell above 200K). IF you pay 100K for a lot, you will need to build and sell a home on that lot for at least 400K and you might price yourself out of the market.

Lastly, if you are renting out a property you own and have a vacancy for a period of time, call the lender and ask for forbearance on a payment or two, often they will allow you to skip a payment of make just the interest portion and add the rest on the back end of the loan - it makes the payoff a bit more when you sell but saves you a few bucks as you move out one tenant and advertise to move in another. You will be surprised how often this will work.

If we are always honest and make a profit legitimately, we will sleep better, help ourselves and others and be blessed in the process.

thanks for your generosity of time and information.

This information is invaluable...maybe you should write a book??? Hmmmmm now there's an idea.

Thanks Bill, We're soaking it all in down in Southern Californa trying to make heads or tails of it all and your postings are helping tremendously. Keep it up and we'll keep reading.

Rick & Peggy
Eagles Crest Properties

Subject to is what I do.I have a letter that I send to the mortgage company with the power of attorney so I have all the info sent to me. That way I know what is payed to taxes, insurance and interest. I set up a property management company that this is sent threw. that way i don't throw up ant red flags due to the due-on sale clauses. have had no problems yet and have purchased over 20 homes this way.

Randy

Thanks Bill for sharing your knowledge with us.
I appreciate all the information and time you
have generously given, we have all been blessed
Thank you very much.
May GOD richly Bless you and your Family

George41

I typed a nice little deal yesterday in the early AM and perhaps forgot to post it, but I do not know where it went. I will try again.

Everyone know purchasing with cash is better than any other offer. When you purchase with hard money, you get a letter from your hard money source and it is just like doing a deal with cash. Some hard money (hm) lenders ask 3.5% up front and some as low as 2% but they all want money up front. Some charge 10% interest rate but 12-18% is common. I never care what the rate is if the deal makes sense, it makes sense - if it does not make sense, it does not make sense, financially of course. Most hm guys will loan 65% of the after repair value. If you can purchase at 40% of after repair value, use hm for the repairs such that after repairs you have 35% equity, now that is a deal with no money out of your pocket.

Here is how it works. Scrounge around and find that dog of a property no one wants and if the after repair value will be 100K, then subtract from 65% of that (65K) the cost of repair. Let's say it will cost 25K to be repaired. Offer 40K for the property and the hm will finance 100% of the purchase price and repairs. Hm will pay for the purchase, give you draws of the repair costs in 5-10K increments as you get work done - when you are done, you have 65K invested, all hm and you have 35K in equity.

Now the hm guy wants his 3.5% and interest off the top, so that is about $1800 in points (up front cost) and maybe $1200 in interest - if the project was done in 60 days. You can either finance the property with a bank to keep it (it was not eligible for financing up front because it was a dog, but now it is beautiful) or sell the thing for 100K, less 68K to the hard money guy (1800 up front cost plus 1200 in interest plus the 65K he has invested) you have 33K left over, less some sales cost. If you spend one month, 40 hours per week, looking for the property, sit around eating bon bons on the couch while the contractor does the rehab for 60 days, sell it while you look for the new one, you could do 3-4 of these per year and make between 100-130K per year and only work 3-4 months out of the year. You might need to join a gym to work off the bon bons but there is a profit out there for the folks that will put in the effort - and with none of their own money.

How do you find hm lenders - ask any decent realtor and they will have long lists of hm guys that email them every week looking for investment deals.

Best wishes.

This is exactly what I plan on doing Bill! Thanks for the details!

i'm all about eating those bon-bons and making money. i'm gonna have to work on the gym part. thanks for the great info.

Great piece Bill, I love your knowledge in RE. I wish I was closer to you so I can sit and talk to you every day lol. I love learning things.
take care and enjoy the little ones.
Richie.

We are very new to this and need to get the terminology and meanings right. To that end, I've heard of Sheriff's Sales, and Auctions, what is the differece, and what is the disposition of the property afterwards? I know I'll cover this in the Academy, but I have a desire to know it now.

Rick & Peggy
Eagles Crest Properties

Each county, relative to the state law, designates an entity to carry out the legal process of foreclosure (trustee sales) on behalf of the court ordering the sale when a party breaches the contract of sale, promissory note, deed of trust or whatever. In California, it is the clerk of the court, in your state, the Sheriff's office, and it can be a private contractor as we see in California as well. These sales are for cash and the buyer is buying the note for which a notice of default has been posted. Be careful, it can be the 2nd trust deed you are buying and there is still a first mortgage or lien against the property. These trustee sales are carried out like auctions on the court house steps or a published location.

Auctions are selling processes where the owner puts the property up for sale through an auctioneer. Banks sell reo properties like this but anyone can do so. Auctions may be absolute (highest bid takes it) or they can be reserve (no sale unless it meets a minimum bid, or the auction house can put false bidders in the auction to continue to raise the bid until the desired outcome is achieved.) Often you will see the same home come up for bid 2,3 or 4 times in an auction session and this is one of the reasons for that. There are other reasons as well, like the high bidder cannot qualify for a loan on the property.

Auction buying is generally not for cash and lenders are on hand to help with financing, both regular and hard money.

If you want to purchase at a trustee sale, you MUST have a relationship with a title company so you know that the property you ar bidding on has no liens that are superior to your bid - junior liens are OK because they have to pay you off before they can try to seek a process to secure their equity.

One again, great information!

When you obtain a property that needs work, you can call a licensed contractor who will hire the appropriate sub contractors and you will be paying someone to make calls you can make. If you are going to do this business, you need a list of workers that is just as important as your list of lenders or sellers or buyers. Since so many are out of work, some will be your contractor without cost just like a realtor will be your teacher without cost. Once you have a good worker or subcontractor that does carpet and tile, ask who they recommend for plumbing, roofing, etc. Developing this list is essential. I am asked 10 times per week for referrals for this or that and yes, realtors are a great source for workers as well.

Most of us can assess issues on homes once we have lived in one for a while. When looking to purchase, if the roof looks bad, call your trusted roofer and ask him to take a look. He will be the one that tells you, no problem with the roof, but be careful of the framing on that back patio - looks sketchy. Then you can call in someone for an estimate on that. Look in the "who does it" section of your local newspaper, call other investors, check at the investment clubs, do what you have to do, but get a list.

I have and am able to do most anything on a home having built some. When I do a flip, I do nothing unless I just cannot find anyone to do it. My time is better served making money selling homes. I might use 6-8 different folks for a complete (I mean 50K) rehab - which I can get done for 30K if I play the general contractor myself and use sub contractors for the detail work. On most properties, 2 or 3 different specialities is all that is required to get is up to par such that you can maximize profits.

What is the best way to find these deals? I haven't started to the bandit signs yet or any advertising yet but I'm about to. Any info would be helpful?

Thanks

Sorry I didn't get to talk to you at the EDGE, But all of you info is great and I am sure it will help a lot of people.

Randy

work with a realtor, look on realtor.com., drive the neighborhoods looking for sale or rent signs by owners, ask everybody you know, knock on doors of run down homes, ask a realtor to put you on a automatic email list for expired listings and tell them you will use them to purchase if on the internet - we work for free for folks, go to foreclosureradar.com and check out what homes are being foreclosed upon and knock on their door or a neighbor's door and ask what is up??

It takes a lot of work, but if you make 10K on the deal, how much of your time was it worth?

Best Wishes, Bill

Coming from a construction background you can certainly save money acting as a GC. You need to make sure of a few things to protect yourself:

1. Get references
2. Make sure they are licensed
3. Make sure they are insured
4. Get them under contract

This will protect you, especially if someone gets hurt on your property.

I was asked for strategies for receiving your referral fee (on a wholesale or other purchase) on the closing financial estimate of costs which is called the HUD-1 (US Department of Housing and Urban Development Form 1). The writer wanted to know how to include that cost (their fee) as a legitimate part of the cost of the sale of the home such that it could be financed or referenced in the loan with other settlement costs, like escrow, appraisal, title, etc. In all states, those who receive compensation for the facilitation of a sale of a home must be licensed - this is an effort to protect the public from either neglegence or intentional misdeed. Paying for referrals or paying assignment fees as part of the sales transaction is to violate state law in most cases. On the other hand, paying fees or the like as a distinctly different contractual agreement, can be totally legal.

If I pay someone to run around and look at many homes and give me a report on the homes relative to my criteria, I can most likely legally pay them for their service because they are doing leg work for me that leads me to a seller or realtor with whom I discuss purchase terms, etc. This contractor has supplied information, they have not negotiated a sale for me. The contractor, in this case, has gathered information for which I pay them. If I, as a realtor, pay someone to do marketing for me, pass out flyers, sit on open houses for security purposes, hold a sign saying house for sale, I have contracted for services that helps me be a realtor but that contractor is not part of the sale of property, as to do so (be part of the transaction without a license) would seem to violation statute.

Are their legal ways for non-licensed individuals to be paid for providing services relative to property purchases; I believe there are. However, one must be careful in what you do and what you call what you do in order to avoid even the appearance of practicing real estate sales without a license. Since there are so many differences across the states, I recommend you spend the 200 bucks to talk to a real estate lawyer to determine what you can and can not do relative to laws in your state. The local board of realtors will often provide you with this information for free as they want to protect the real estate agent's turf. Our local board has an attorney on retainer who gives seminars, free to all, relative to these areas of interest. Check it out and be careful. I do not want to violate the law, nor do I want someone to think I might have violated the law for to defend ones self is a losing battle even if you win in the long run. Stay in the middle of the road on this issue and you will sleep better.

Sorry to my writer I could not tell you what you wanted to hear but I hope what I have written is of more value.

Godspeed.

Per the above post, it must be pointed out that if you have a financial interest in the property (even a right to purchase - meaning under contract to you) all bets are off, you can negotiate all you want, charge whatever fees you want and in any state I am aware of, sellers of ones own property are exempt from having to have a real estate licence.

Bill>remember with these deals the worst case scenario is you pay no payments and rent it out for 12 months or until foreclosed upon (former owner is mortgagee not you so they foreclose on them not you the new owner).

Bill,

What kind of a scenario would play out for one NOT TO make the payments, yet rent it out..just sounded unethical/wrong. Obviously, that would destroy homeowners credit as(subject to processor/new owner) $$$ is being made yet not making the payments? If one is documenting a Subject To it is with the full intention/ability/ethic to make those payments, right? So whats the worse scenario that you spoke of above where you wouldnt make the payments?

Thanks Bill YOU ARE AWESOME DUDE!!!!!! OH MY GOSH YR. GRANDBABY..OH BOY THEY ARE THE BESTEST THING IN LIFE,.THEY SOOOOOO ARE..Im assuming thats yr. grandbaby.