Even A Blind Pig Finds An Acorn Now And Then

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June 2009
Vol 32 No 9
                                                 
EVEN A BLIND PIG FINDS AN ACORN NOW AND THEN

          Most Americans — especially the media — think of the housing market in terms of new construction, home sales, falling prices, and loan defaults.  TV and radio’s “talking heads”, investment letters, magazines, tabloids, etc. focus on housing bailout programs, reduced interest rates, first-time homeowner incentives, falling equities, upside down homeowners, and rising foreclosures.  The billions of dollars aimed at resolving the housing crisis and liquidating “toxic assets” ignore entrepreneurs and private investors.  Nobody is bailing them out.  They’re going to have to find their own solutions.  Single family landlords who invest in houses and/or mobile homes are virtually invisible.  Multi-family Landlords always seem to be described as oppressors of tenant-victims who somehow aren’t held accountable for turning decent housing into abandoned slums.  Thousands of entrepreneurs who make their livings investing in, renting, financing, or dealing in existing houses are out of sight and out of mind for about 99% of the population and the Federal government.  They seem to focus solely upon owner-occupied single-family homes.  

          Institutionalized ignorance of private sector housing market works to the advantage of those who actively ply their trade in today’s market.  All those bailouts will provide a cornucopia of opportunity for us.  We are the unintended beneficiaries of billions of dollars being spent by the new Administration.  The new financing and cash tax rebates will enable us to convert frozen equities into cash by selling to first time homeowners.  To qualify, they must not have owned a personal residence for 3 years (but could have owned a vacation house or rental property) to get up to $8000 in cash tax credits and thirty-year, fixed-rate loans with interest rates between 4%-5%.  Is this program working?  You bet!  In the past quarter, 65% of all buyers qualified for the $8000 cash credit.  The lesson is clear:  You should start selling aggressively right away because buyers only have until December 1st, 2009 to buy a home and to occupy it.  Your ad might lead off with “$8000 cash back”.

          Congress has issued instructions to banks to start making more long term, low fixed interest rate thirty year loans; and for HUD, FNMA and Freddie Mac to start buying them.  It’s O.K. to talk about shifting into high gear to start selling houses; but to whom?   Absent of any provisions in the law that preclude us doing so, start by marketing your houses to those of your current tenants who would be deemed first time homeowners.  Tenants can use seller financing to buy with “nothing down” and still qualify for favorable financing plus the cash tax-credit.  They have no way of knowing about these opportunities unless you market the house they’re living in to them; or sell them other houses that you own or control with Options.  

            In the past, I’ve sold many houses to long-time tenants on “nothing down” terms; and with payments less than current rent.  How?  Try offering tenants a short-term Option to buy.  Offer them a “Reverse Rental Credit” to use for their down payment.  In the recent past a lease/Option was considered to be the same as an Installment Purchase Contract.  When a tenant exercised the Option, it was treated as a home equity loan by FHA.  By adjusting buyers’ Form W-4s to reflect interest deductions, they could buy a home; get cash back, and still have more net income.  Start out by identifying and allying yourself with a “can-do” mortgage broker who will test the institutional loan market to see if you can’t use Lease/Options and Reverse Rental Credits now before the market changes.  

          Tax-credit buyers must remain in the houses they buy for at least 3 years. Anytime after 3 years they will be able to sell their homes.  Over the same 3 years,  all that money and credit created by the FED will trigger high inflation and drive equities skyward; giving today’s buyers a terrific incentive to sell at that time.  
 
SOMETHING FOR EVERYONE . . .

        While distress-sale prices continue to drop, we’ll be able to buy more newer, bigger, and better houses via foreclosures, REOs, and Short Sales at lower prices while profit margins grow.  Part of me wants to keep ideal upscale houses for fractions of their cost and holding them as rentals.  But, the prospect of buying bargains solely with profit from a prior sale and selling them quickly to millions of new buyers, who will rush to buy their first homes, is irresistible.  Sooner than later, I’ll no longer be able to buy at today’s fantastic prices.  Once prices start up, I know I’ll regret having sold rather than holding for long-term income and future gain, but for now, building up cash by selling houses seems my best choice.    

          As prices rise along with interest, it will be much harder to sell.  During the Nixon recession I was funding down payments for buyers by having them create an Option to buy the house they were trying to buy.  Then I’d sell the Option to raise cash.  Sometimes the Option price merely repaid the buyer’s down payment and principal payments.  Sometimes it shared future gain.  Once documented and recorded properly, these fully disclosed Options could be sold for enough cash to provide down payments and closing costs.  Since there was no additional debt involved, even FHA loans were approved.  All documents needed to exercise the Option were escrowed.

          Initially, as a Broker, I used this technique to spur sales.  My ads read, “Absolutely No Cash Needed With Good Credit”.  This attracted lots of buyers.  Often, I agreed to take an Option on a house in lieu of a brokerage fee.  Still later, I began to provide the funding for the down payments for buyers by having my company buy the Options.  When prices began to rise and people began to sell their homes I shared in the profit in accordance with the Option terms.  When I could buy an optioned house at a low price, I’d exercise my Option and take title subject to the current financing.  After ten years or so, when I summed up, I discovered that I had bought back almost half of all the homes that I had sold as a Broker and as an entrepreneur.  Can you see how this Option technique applies in today’s market?

          A lot of first-time homebuyers are going to be able to get loans fairly easily; but what about other buyers who can’t qualify for these loans?  Think about the possibilities with houses that somehow won’t qualify for institutional financing because of their location, zoning, construction, seasoning, etc.; or buyers who can’t qualify for institutional loans because of problems – other than low credit scores – such as divorces, being freshly fired and rehired, being self-employed, etc.  What about situations in which both houses and buyers could qualify for financing, but the loan couldn’t be closed and occupancy taken prior to 12/1/09?  In all of these situations, the Option technique previously described combined with private financing can enable buyers to buy while creating profit for lenders and sellers.

          How does the $8000 that first-time homebuyers fit it?  Buyers must be able to qualify for first-time homeowner tax credits.  Marrieds can’t make more than $150,000 AGI ($75,000 for singles).  It has yet to be settled whether or not a buyer could pledge the $8000 credit, in lieu of a down payment, on a conventional loan or not; or whether it would be assignable like a pay-day loan by a buyer, who could then use the cash received for the down payment in the same way the Option was used above.  

         One way to resolve this is to enter into a sale contract that incorporates the tax credit as part of the purchase price and down payment; then to see whether or not the loan is approved.  If it is, you can begin to think in terms of using the cash to motivate buyers by promising “cash back”, if not at closing of sale, shortly thereafter.  How?  If they completed their purchase before they filed their 2008 tax returns, they could claim their 2009 credit refund on it.  Those who have already filed their 2008 tax return can file an amended return on Form 1040X.  Some tax preparers are offering to file these for $100 for short-form filers.  In any event, until December 1st, sellers have been given an outstanding tool to attract buyers.
 
SUPERCHARGE OPPORTUNITY WITH CREATIVITY

          How can the $8000 credit increase profit?  Think of this as additional cash that can be added to any transaction for the benefit of buyer, seller, lender, or possibly all three.  The cash tax credit could be used to motivate more tenants to become buyers if it were described in terms that tempted them, or solved personal problems.  It could be used pay down credit cards, pay off car loans, pay for medical insurance, pay to get the kids’ teeth fixed, etc.  

          If cash would tip the scales in favor of a faster closing, a higher price, or a real estate commission; you might increase the price and incorporate a short term 2nd Mortgage for, say 75% of their tax credit, to repay a loan you might make in advance of their tax refund.  It could be further secured by an assignment of the amount of tax-credit-cash that you calculate would be coming back to them.  Since only 10% of the purchase price is credited, it behooves you to price a house as close to $80,000 as justifiable.  Charging $80,000 on a house might seem like a slam dunk to many readers, but that ignores mobile homes on HUD-approved foundations, low-income housing, those who are selling small condos, and others in areas where prices are traditionally low for starter homes, etc.  How might you increase the price of a house?  By including “extras” that buyers might want; such as central air/heat, upgraded cabinets, counters and baths, new window treatments, etc.  

          Anytime a house is sold with seller financing it is commonplace to increase both the price and the interest rate on the loan to offset the higher risk that selling to an unqualified buyer might incur.  That might explain part of a price increase.  Another maxim in the seller-finance business is that buyers are more interested in down payment and monthly payments than in price.  If you reduced the interest rate, you could increase the price and payments would still be sustainable.  Let’s call this Plan A.

          Plan B might be to finance the house with a combination of payments that are less than market interest and a short-term balloon Note.  Loan terms would require that all of the tax credit be applied toward the principal on the balloon Note rather than to accrued interest.  This way, buyers’ loan balance would be reduced while interest continued to compound.  The cash would be taxed at lower long-term capital gain rates for non-inventory property; which a former rental would be.     

          Depending upon the price and terms, you might motivate buyers to pay more if you allowed them to keep a portion of the tax credit for their own use.  Your ads might easily be confused with car-dealer ads.  They could offer not only home ownership with no cash needed at closing; payments less than rent; plus cash back at the point in time at which they receive their tax credit.  Of course, instead of a cash refund, something else might be more attractive to a buyer, such as a new flat screen TV, or bass boat, or a Caribbean Cruise for the family, etc.        

          New government programs are going to provide opportunity for years to come.  When they mandated that FNMA buy low interest rate loans originated by troubled banks, they virtually guaranteed future profits for us.  For many years I made a diary entry when I sold a house, and continued to follow up with the buyers in order to list, or buy, their home when they wanted to sell it.  Do this with every one of these tax-credit buyers that you sell to and offer to buy their home after 3 years.

          If your buyers had been fortunate enough to be able to get one of those extremely low interest-rate loans that are being offered to first time homebuyers, you’d wind up with even more profit than you might have made simply by selling the house.  First, you’d capture some or all of any price appreciation and amortization.  Second, you’d get the benefit of positive rental cash flow from day-1 by virtue of low interest and a relatively low investment in a house for which you had zero loan liability.  For those who act, today is setting the stage for tomorrow’s fortunes.
 
OPTIONS MAKE MONEY WITHOUT MONEY . . .

          Many readers of this letter may not be able to use either seller financing or investor financing to buy houses because of lack of investors or sellers who would be willing to provide financing.  But, by using Options, they can buy, sell, and hold houses without the cooperation of either investors or sellers.  

         In virtually every market, Options can be used to create very high yields primarily because they can be obtained for about 1% – 3% of a property’s value.  They can share both in future appreciation and loan amortization.  Options are perfect investments for Pension Plans or IRAs because of their high leverage and risk/reward ratios.  Or, they can be sold immediately to provide current cash flow; or held for 12 months, then Exchanged tax-free for other Options or for real estate.  When you consider all the ways Options can be used, it stirs the creative juices.
                   
          Suppose you sold a house by buying an Option to provide the down payment.  Later you could sell the Option for cash, or Exchange it for a share of the equity on the same house you sold, or another house.  By doing this, you’ll have helped the buyer buy a house with nothing down; so it would not be unfair for the person who bought the Option to be able to cancel it in return for half interest in the house.  Think of the opportunity for investors, Brokers, CPAs, Attorneys, Financial Advisors, IRAs, etc. to be able to build future equity starting with today’s extremely low prices without any cash investment other than the funds, or services, they contributed for the Option.  Let’s take this a little further:

          The highest paid skill in real estate today is to discover and tie up property at a bargain price; thus earning either a fee or share in future profit.   By combing neighborhoods and the Internet to find owners willing to walk away from their equities with a Short Sale contract, a lot of money can be made.  A few weeks ago, I entered into a Short Sale contract with a seller for half of the MLS listed price.  I met him at his garage sale.  Unable to sell, he was cleaning out his house and leaving the State.  If the Short Sale is approved, I can wholesale my position to an investor before I have to pay anything.  Or, I might sell for my actual cost and retain an Option to buy one half of the house back for one half of the cash paid.

          By using Option techniques, you won’t need to go into debt to make money with houses.  Here’s how: Using investor cash, for finding and buying a house at a big discount to value, doing any necessary repairs and either reselling or renting it, in lieu of a fee you should demand half of all profit.  One person has been doing this for years; steadily building net worth without using any of his cash at all.
 
          There are a lot of websites out there maintained by mortgage lenders, mobile home lenders, HUD, FNMA, Freddie Mac, and Auctioneers that are loaded with billions of dollars of unsold and foreclosed inventory that can be contracted for with very little cash.  Up to $35,000 in FHA 203K loans are available for houses that need rehab.  Some sites show opening bids and prices; all of which can be severely discounted for cash.  Some of these websites are easily found, and some less well- known web address are closely guarded secrets.  Nonetheless, diligent entrepreneurs have found these sites and are making a lot of money by contracting to buy houses they list, then getting cash investors to split the profit with them.  If you aren’t investing almost every waking hour finding ways to take advantage of today’s market, you’ll have missed one of the greatest opportunities of a lifetime.   
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