Beware of the "Trigger List"

Have you ever applied for a mortgage and all of a sudden get a swarm of calls from other lenders the next day promising to give you a better deal? This phenomenom occurs because the credit bureaus (Equifax, Experian, and Transunion) sell your information for a pretty penny and other lenders can buy this information on a daily basis.

With the cooling of the hot real estate market, many lenders are investing heavily in this type of lead generation for business. It is very attractive to lenders because for the most part, all of the leads are currently in the market for a mortgage. The "lead" is generated when your current lender pulls your credit. This is one of the most sought after lead and the credit bureaus charge a premium for them.

As a consumer, you are open to shop around as much as possible. Just be carefully of the "bait and switch". The competing lender can dangle falsely discounted rates and terms just to gain your business. After weeks of going through the process, they can change their tune and can either leave you with a higher cost loan or no loan at all.


If you would like to opt out of any potential prescreened credit solicitations, which includes mortgages, credit cards, etc .... you can visit www.optoutprescreen.com. According to the Federal Trade Commission (FTC) your request should be processed within five days. However, it may take over 2 months for calls to stop completely. In addition, you can also register your phone number on the National Do Not Call Registry (www.donotcall.gov).

Update: How to Evaluate an Investment Property

Well .... I have submitted my offer for the investment rental property covered in the previous blog posts How to Evaluate an Investment Property I & II. I believe it was a competitive offer and will now wait to see what happens. It still seems like sellers are holding on to the the notion that they can get the astronomical prices of 2005.

In my particular situation, I believe the seller may be misguided by following facts:

1. In 2005, a similar building in the neighborhood sold in the $600ks.
2. In 2006, another building sold in the $800ks.

The problem with this is that the previous owners marketed the properties as condo conversion candidates. This was really big in the Washington DC area in 2005 and early 2006. Sellers more or less sold the pipe dream that you could buy a building for $750k, renovate, get the proper permits and licenses, and then resell each unit for $275k each. This may have been true in 2003 and 2004 when building were acquired at reasonable costs. But in 2005 and 2006, once you factored in the high acquisition costs, carrying costs, renovation costs, and the high probability that you will have a very HARD time getting approval for the condo conversion .... you are left with a bad investment.

Needless to say the two buildings that sold in the $600k and $800k respectively have not been converted to condos. I especially don't know how the owner of the building bought in the $800k range is keep up with their payments. They must have put a hefty amount down.

I acquired a small apt building in DC in 2004 with hopes of a condo conversion. After a month or so of analysis, I decided to sell it because I felt that the condo craze was getting out of hand. Fortunately my timing was good, because I was able to sell it 6 months later for about a $275k profit without doing any work. It was sold to someone that wanted to "condo convert". At the present time, the building has been renovated but I am not aware of any of the units selling. So don't be lured into believing that condo conversions are still the way to go.

So at this point I will wait and see what happens with my offer. One thing is for sure, I won't be increasing the price. Hmmmm ..... I wonder how many buyers are going through the same thing I am at this very moment??

How Much Did The Owner Pay?

With spring upon us, there will be an increase real estate market activity. Sellers will definitely be selling ..... and hopefully buyers will be buying :). But what are the best strategies for getting the best deal out there. Well today, I am on the buyer's side ... sorry sellers ;).

One technique that I use when negotiating an offer price is to find out what the current owner paid for their property. The days of $100,000 appreciation per year are gone, so owners are now more willing to negotiate. But what if the owner paid $500,000 for that great property in 2006 and now is selling it for $525,000 and it is really worth $475,000? Chances are he or she will not have much if any negotiation room. If a buyer offers less than that .... lets say $500,000, he or she may be wasting their time. But what if the owner paid $115,000 for that property in 1997 and now is selling it for $500,000 and it has been on the market for 6 months? In this instance, an offer of $425,000 has a greater chance of going over because either way the owner will make a lot of money at closing.


Minus the owner having a huge 2nd mortgage, this technique can improve your chances of having better success in getting a great deal in this new buyer's market. The best places to find out how much the current owner paid is either through your realtor or through online county records.

Use the Home Inspection To Your Advantage

While many real estate professionals have experienced a slowing in business, there is one group that has seen an upturn .... the home inspector. While we had the torrid pace of home sales during the 2000 - 2005 real estate boom, the home inspector was relatively left out in the cold. If you presented a contract with a home inspection in many markets, the seller would chuckle as he or she dropped your contract in the trash. Even buyers' agents would urged their clients not to attach home inspections to their contracts. Most of a home inspectors business was based on "information-only" purposes inspections.

Fast forward a couple of years and now the home inspector is back. The new market has made the home inspection customary and they are becoming an excellent negotiating tool for buyers. Nowadays, buyers are using the home inspection to gain leverage. It is used to either reduce the seller's price after the contract is ratified or to get more seller concessions. For about $400 - $500, you can save up to an additional few thousand dollars. Sellers are more likely to give cash concessions as oppose to fixing the problem themselves, because they usually are just ready to get out of the home. In addition, most sellers are more likely to negotiate once a contract is ratified and they have already spent a week or two committing to your offer.

As a buyer take a thorough look at the home inspector that you will use. Don't always just rely on the inspector recommended to you by your realtor. Get other references and referrals. An inspector that is a member of the National Association of Home Inspectors (www.nahi.org) or the American Society of Home Inspectors (www.ashi.org) is always a good option. Try to nail down an inspector before you have a contract accepted, it will make the process a little less hectic. Also, it is a good idea to attend the inspection to make sure of the work and learn a thing or two about your potential new home.

Importance of Rental Property Depreciation

A common mistake among real estate investors (I am guilty of this too, when I first started investing) is that they often do not deduct depreciation on their investment properties when doing their taxes. The government allows you to take a depreciation deduction each year on your investment properties. There is a schedule that tells you how much your property has "gone down" in value each year. The idea is that property gradually degrades over time, so its value also decreases over time. In general this is true of furniture, television, vehicles, etc. But the same cannot be said for real estate. Real estate has a "perceived" value that usually gradually increases over time. But good old Uncle Sam has provided this nice perk for real estate investors. Even though we know property that is bought right and maintained can drastically increase in value, the government allows us to take a yearly tax deduction for a reduction in the property value. There are tables provided by the IRS that calculate how much the depreciation will be for your property.

There is a specific procedure that must be followed to properly depreciate your real estate as well as the personal property within the property. You will need to consult your tax professional for those details :).

But back to the mistake most investors make .... the problem with not claiming your depreciation every year is that when you sell the property, you must recapture that past depreciation, whether you took it or not. The IRS will assume that you took it anyway, so you will end up paying taxes on the recaptured depreciation even if there is nothing to recapture. If you have missed this important step, you can catch up by filing a Form 3115 and attaching a statement to accelerate your past depreciation.

In general, depreciation is pretty much like reaping gains from the investment property when you own it and then paying it back after you sell the property. Depreciation is useful for getting a "net" cashflow from investment properties while you own them through increased tax breaks.

Once again consult your tax professional to sort out the details and find the solution that is best for you.

Strategy for High Equity Rental Properties

This is probably a tax law that many of you know already, but I feel compelled to state it just in case there are a few who are unaware of its benefits.

We all know about the tax law that states if you live in your primary residence for two year out of the last five years, you can keep up to $250,000 from the profits from the sale as an individual or $500,000 for a married couple. The two years does not have to be consecutive. It could be one year in the beginning of the five years and one year at the end of the five years, does not matter.



Well, if you have a investment home (single-family) that you have held for a while and has greatly appreciated, you can apply the same rule to the investment home. Normally, you would have to either pay tax on capital gains or roll the gain into another property through a 1031 exchange. This option would be to move into the investment property for two years and then take the gain out tax-free up to the applicable limits. Note, that you will still have to pay taxes on the recaptured depreciation that you benefited from during the investment period.

This strategy works most effectively with single-family homes, because with a mulit-unit, only the part that is your principal residence will qualify.

As always, consult your tax professional to see if this strategy will fit your needs.

The "Make Sense" Interest-Only Loan

With all of the fallout of the subprime market and the bad press on ARMs, Option Arms, and Interest-Only loans, it seems like the only good option nowadays is the traditional 30-yr fixed principal and interest mortgage. Rates are still at relatively low levels hovering around the 6% mark.

It is true that a 30 yr fixed principal and interest mortgage is the safest bet, but I think homebuyers should also give some thought to the 10 year interest-only 30 year fixed mortgage. This is one of the only loans available that gives you a fixed-rate with an option to make interest-only payments when you want to. How is that? Well, an interest-only loan does not restrict you to making only interest payments. You can make payments to principal at anytime.

For example:

A $400,000 mortgage with a 6% interest rate, yields a principal and interest payment of: $2.398.20 per month. The interest only payment would be: $2,000.00

In this example, a homeowner could acquire a 30 yr fixed mortgage, with a 10 year interest-only option. They can then proceed to make principal and interest payments of $2,398.20 every month. During certain months where they either need extra cash or are tight on cash flow, they can make the $2,000.00 interest-only payment. If they had a 30 year fixed mortgage, without the interest-only option, they would not have this flexibility (I don't think their lender would appreciate them doing that :)

Now, this scenario is targeted to the disciplined mortgage holder. At the end of the 10 year period, the loan has to be recalculated so it could still be paid off within the remaining 20 years. So, each interest-only payment will ever so slightly increase your new mortgage payment at the end of the 10 year interest only period. So 10 years of interest-only payments would result in a new principal and interest payment of $2,865.72 for the remaining 20 years. This is not because you had some negative amortization or deferred interest as with PayOption Arms, it is because your principal balance of $400,000 has stayed the same and now you must payoff that balance in 20 years instead of 30 years. But in reality, most people would refinance their mortgage or sell their home within that period.

So in my option this interest-only loan is not bad if you are disciplined. One nice feature of this loan is that it does not have an interest rate that varies because it is tied to a market index. If you are in the market to buy a home, consult with your mortgage professional to see if this loan is right for you.

How to Evaluate an Investment Property - Part II

I have completed my video of the investment property that I visited earlier in the week. Below is a picture of the front of the property:


I ran a spreadsheet that took into account an offer of $550,000, a fixed 30 yr mortgage, different types of possible 2nd mortgages, the monthly costs of misc. expenses, heating, insurance, taxes, and water. I then compared that cost to the current rents and the future rents.

Here is a link to the excel spreadsheet with a summary of the basic analysis: Rental Property Analysis Spreadsheet. I go into full detail of the rental analysis on my website HouseWealthy.com.

Here is a link to a clip of the Real-life Evaluation of an Investment Property. video. The full video analysis is available on my Build Wealth Through Real Estate website.

In summary, I plan to make an offer on this property that will be in the mid to upper $500k range. I will let everyone know if my offer is accepted :). Hopefully this video will help with your plans to acquire income-producing investment properties.

Hold each Investment Property as an LLC

Many wonder if it is necessary to hold or transfer their investment properties in an LLC. I think it is not only necessary, but you should have a separate LLC for EACH investment property. This is especially true if you have multiple apartment buildings with many units.

The whole idea is to protect your personal assets from potential lawsuits from tenants, etc. If you hold all of your investment properties under your name, then that leaves you open for getting sued for your personal assets (bank accounts, principal residences, etc). This can be devastating for most and I have seen a few people get burned this way. I don't even think it is a good idea to have all of your investment properties under one LLC. The problem with this is if someone sues you because of an incident at Apartment Building #1, they can also go after the equity and assets of Apartment Building #5 if they are under the same LLC. You will be personally protected, but you open yourself to potential liability with your whole real estate investment portfolio.

Another good option, would be to get personal umbrella insurance. A yearly premium of a couple of hundred dollars can protect your personal assets for millions of dollars. It is relatively cheap and offers great protection.

As always consult your tax planner, insurance agents, and lawyer (if you have one) to see if these options can meet your personal needs.

How to Evaluate an Investment Property - Part I

I took a look at the 5 - 2 bedroom, 1 bathroom, multiunit in the Washington, D.C. area today. Just to recap, it has a list price of about $650,000. The rent is currently about $950 per unit and the onsite manager pays only $600. That is a grand total of $4400 per month.

I will be getting the income and expenses statements for this property and will do a full analysis so I can come up with a offer that will actually give me a decent cashflow (approx. $300 - $800 per month) if possible. It will definitely be less than the list price of $650,000, which is way too high.

It is a nice looking building.

Here is the front of the building:



Here is the back of the building:



Here is the garage:



Here is the backyard:



The garage has the potential for being rented once fixed up. The tenants pay for their gas, and electric. The landlord pays for the heat. This property is close to transportation and has good potential ..... at the right price of course. I will have a summary of my evaluation and analysis around the end of the week.

I also videotaped my visit to this property. This narrated video covering my visit of the property, evaluation, analysis, and final offer price will be available on my Building Wealth Through Real Estate Website www.housewealthy.com

Subprime fallout may hurt homeownership

With the increasing defaults of Subprime Adjustable Rate Mortgages, (Subprime is a loan that does not meet the quality of what is called A paper, in general usually a middle credit score of 620 or more) many lenders are leaving that side of the business and it seems like the federal regulations for these types of loans are going to tighten.

For example, New Century a long time subprime lenders has stopped taking new loan applications because of the large increase in defaults. According to Reuters, they may soon seek bankruptcy protection. In addition, more than 20 subprime lenders have quit lending or gone bankrupt in the past year or so.

Even large lenders like Countrywide recently halted their no-money down programs. Now borrowers are required to have at leat 5% equity in their homes.

So why do I mention all of this? Well, because of these recent occurrences, potential homebuyers that may have lower credit, but have every intention in making their mortgage payment may be pushed out of homeownership. These mass changes will probably decrease the rate of defaults and foreclosures, put will also keep well deserving individuals from acquiring that first home.

Now is the time to make your credit rating a priority. Get a copy of your credit report and take steps to correct mistakes or get current with small discrepancies, etc. Making those small payments on that credit card, mobile phone, or department store card can make a drastic change to your credit score and mean the difference between owning and not owning that first home.

Going to see an Investment Property

I am going to see two investment properties in the Washington, DC area next week. One is a 4-unit building, with 3 - 2 bedrooms, and 1 - 1 bedroom. Of course it is listed way too high (mid $600,000). The other is a 5-unit building, with 5 - 2 bedroom units and parking for 5. Also priced in the mid $600s, but seems to have more potential.

I am going to videotape each visit of these multi-units with my realtor. Then I will basically make a short video documentary of how I pick and evaluate rental properties and arrive at a reasonable offer price, step by step. The offers will be presented and I will let everyone know the outcome of the offers. I anticipate this video will be done by the end of next week sometime.

I will use some of the principles covered in my previous Real Wealth Through Rental Properties posting. I will post a clip here on my Financial Freedom Through Real Estate blog site and the whole video will be available on my Wealth Building Through Real Estate website, www.HouseWealthy.com.

Stay tuned .....

Mistake Buyers Make around Settlement Time(audio)

Here is a link to part of an audio interview that I had with an owner of a reputable settlement company. We are discussing the mistakes people make before, during, and after settlement. Click here to listen to the audio.

You can log onto HouseWealthy.com to listen to the whole interview (requires a quick registration).

Getting Money Out of a 1031 Exchange

As many investors know. A 1031 exchange is a way to roll the gains of selling one investment property into another investment property of "like-kind". This method allows the investor to defer paying capital gains on the profits from selling the investment property.

Taxes are not paid on the gains until the the investment property is sold without rolling it into another investment and the investor opts to take the proceeds as cash.

Well, what if you need to get access to this money, but don't want to pay taxes on it. There is a real estate loophole that allows you to take out a loan on the property that you receive after a 1031 exchange. In other words, do the 1031 exchange, get the new property, and then refinance. This will allow you to access the gains without immediately paying taxes on it. Of course once this property is sold and the proceeds taken as cash, you will have to pay taxes on the money taken out during the refinance.

Please consult your tax professional about this loophole to learn the exact procedures to follow.

First-Time Homebuyers ... get those deals

Now seems like the perfect time for the first-time buyer to step up to the plate and take advantage of the cooling market. A cooling market does not mean a bad market, just a return to a more normal market. Houses will continue to be sold …. sellers will sell, buyers will buy, and homes will appreciate over time. All of this will just happen at a more normal pace as compared to the 2000 – 2005 time periods.

A normal market means that home buyers have more time to look around, compare homes, and make informed decisions. This was a non-existent phenomenon during the boom years. Many first-time buyers could not react quick enough to secure the house of their dreams. The quickened pace of home sales did not allow inexperienced first-time buyers to comfortably evaluate potential homes and make a decision in their best interest. Now sellers are giving more incentives and concessions to potential buyers. In addition, many first-time buyer and income-based programs are available to be taken advantage of; this makes it easier than ever to make that first purchase.

Good programs for first-time buyers include:

Federal Housing Administration (FHA) Mortgages: which allow as little as 3% down and offer low interest rates. This program makes exceptions for borrowers with limited income, limited savings, or poor credit.

MyCommunity Mortgages: which are sponsored by Fannie Mae and is designed to assist low and moderate income families, public service employees, and disabled people to realize their dream of owning an affordable home. This program allows for 100% financing and little to no money required into the transaction for those who qualify.

Expanded Approval Mortgages: this is also sponsored by Fannie Mae and is designed for borrowers with less-than-perfect credit. This program takes a broader view of a customer’s situation and allows a reduction in interest rate in exchange for timely payments (usually 24 consecutive months). Low to no money down is required for this mortgage program for those who qualify.

Most of these programs allow down payment to come from family and friends as a gift. Currently the average interest for a 30 year fixed mortgage hovers around 6.18%. These programs can reduce your interest rate by .25% as well as require no money down by the borrower. Why not take advantage of such government programs available to you? In addition, I always suggest offering 15% less than the asking price on a home, especially if it has been on the market for 90 days or more. This is a good starting point and can help you secure the best deal.

Consult a mortgage professional for more details on these and other beneficial government programs.

How to afford a Home with little money

I run across many first-time homebuyers that have trouble coming up with money for closing costs or downpayment. This seems to be a hurdle on the road to homeownership for many people. But with decent credit (600 or above) you can qualify for many community programs that allow 100% financing at competitive interest rates.

In addition to these programs there are a few tricks and techniques that one may consider when making a purchase.

Technique 1:
If you are limited to only 3% closing help from the seller (because of a particular loan program), consider asking the seller to pay for all state transfer and recordation taxes. This is customarily split between the buyer and seller in most states, but you can ask the seller to pay for the whole amount. This is usually not considered "closing help" by lenders. This can save the borrower an additional 1% of the total loan amount.

Technique 2:
If you secure a loan that is 100% financed, it is not necessary to purchase Owner's Title Insurance at settlement. Owner's Title Insurance protects the owner's equity in a property. If you have 100% financing, you do not have any equity, the lender has financed the whole amount. The only insurance that is required is Lender Title Insurance. This can save you hundreds to a couple of thousand dollars at settlement.

Technique 3:
Closing on or near the end of the month will also reduce closing costs. When you close on a property, you must pay all the interest due for the remainder of the month. So if you have 1 or 2 days left in the month, you will only have to pay 1 or 2 days worth of interest for that month. If you settle on the first day of the month, you will have to pay 29 days of interest up front at settlement. So scheduling a settlement at the end of the month will save you close to one month's mortgage payment at settlement.
Note: This is a pay now or pay later scenario. In essence you end up paying the same thing in the long run, just not all on the date of settlement. Technique #3 helps if you have tight monthly cashflow.

As always, consult your mortgage professional and settlement attorney before considering these techniques. If all goes well, hopefully it will lead you to acquiring that first house.

Tax Liens as a Safe Investing Option

Most of you have heard about the tax lien sales either on T.V., books, or through friends. For those who may have cold feet about taking the jump into full-fledge real estate investing, tax liens may be a viable option. Tax liens are a more conservative, methodical approach to real estate investing. If done right, it is considered one of the least risky ways to invest in real estate.

There are about $7.6 billion dollars in delinquent property taxes created each year according to TaxLiens.com. There are thousands of counties in the US that sell tax liens every year. Approximately 31 states currently issue tax liens every year according to the site.

If you are considering this investment option, be sure to conduct the proper research. This will ensure you a good return (around 10% – 15% per year) with minimal risk. With tax lien investing you are partnering with local governments to create above average gains on your money.

The liens can be purchased for hundreds to tens of thousands of dollars. In essence, you are paying someone else’s taxes today while the issuing city or county pursues payment from the property owner. Once the due taxes are collected from the property owner, they pay off the investor with interest. About 98 percent of tax liens are paid by the property owners, so expect a 10 – 15 percent gain on your money the majority of the time. The instances where an investor forecloses on a property are rare, although they do happen.

More information about the process of tax liens can be found in books and on the internet. Find the state and local counties that you are interested in and then learn about their tax lien practices and procedures. Obtain the contact information of the specific tax collectors’ office; they will have details about when their auctions occur and the process of purchasing tax liens in their jurisdiction.

In general, once an investor acquires a tax lien, there is a redemption period where the jurisdiction allows property owners to eventually pay their back taxes. This period can run up to two years. If the property owner does not redeem the lien, then the process moves into the tax deed sale stage. This is where foreclosure proceedings can begin, and the tax lien holder can take possession of the property. Every jurisdiction has their own set of rules, so proper due diligence must be taken.