Monthly Archives: June 2009

The Millionaire Real Estate Investor Next Door

millionaire real estate investor next doorWarren Buffett wrote last year in a New York Times op-ed piece called ‘Buy American.  I Am.’ that “A simple rule dictates my buying:  Be fearful when others are greedy, and be greedy when others are fearful.”  Of course, he was referring to stocks.  However, I believe the same is true for investing in real estate.

 It’s easy to find the fear.  Just pick up your local newspaper.  My daily reported last week that ‘45,000-plus Valley Properties Remain in Foreclosure’.  If Warren Buffett is right then I guess now is the time to start building your real estate empire.  But, before you go out and pay big bucks for a real estate seminar to learn how to wholesale, short sale, buy at the courthouse steps, or lease/option remember this:  real estate is a local business.

 In June of 2002, I flew to Atlanta and paid $2,700 to learn how to get banks fighting to lend me money.  This was the second seminar I attended that year.  The other was a workshop in Denver where I spent $1,200 on a lease-option course.  Unfortunately, all of this real estate education was getting me nowhere.  The banks I talked to weren’t fighting to give me money.  Actually, I think they were laughing at me.  The lease-option strategy netted me a little cash but certainly not enough to quit my day job. 

 Then I called a local real estate attorney named Bill Kozub for some advice.   Bill had a great sense of humor.  He told me that he used to be a real estate broker and later became a real estate attorney to kill his own deals.  That was funny.  Bill set me straight right away.  He told me to stop wasting time and money traveling all over the country.  I needed to find a real estate investor in my home town that could teach me the business.

 Through a little networking and detective work I met one of the most prominent, and discreet, real estate investors in the state.  He made me a simple deal:  I get a contract with a homeowner in foreclosure and he provides the leads, money, title company and buyer to close the transaction – we split the profit.  Because I was ambitious and willing to serve he shared many of his investing secrets with me.  I spent a year as his apprentice and he never once asked for anything in return.

real estate investing not taught in the classroom Don’t get me wrong.  I believe there are many quality real estate education programs out there that will help you reach your goals.  Next month I’m enrolling in several, including a class on using self-directed IRAs for real estate investing and a business financial management class.  My point is that much of what you need to know in real estate isn’t taught in the classroom.

 Attend a local real estate investment class.  Talk to a realtor, title company representative, your church pastor, anyone who might know the millionaire real estate investor next door.  And when you find the millionaire real estate investor next door, be ready to serve.  It’s like Jim Rohn once said, “Whoever renders service to many puts himself in line for greatness – great wealth, great return, great satisfaction, great reputation, and great joy.”

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Why the Mainstream Media Hates Loan Modification Companies

mainstream media hates loan modification companiesYour lenders are prepared to negotiate’, a column today in the Arizona Republic penned by Rick DeBruhl, a consumer reporter for 12 News, the NBC affiliate in Phoenix, advises you to “Avoid loan-modification companies. While there might be a few good ones, I hear from too many people who have lost money with no result. Better yet, find a certified counselor for free. You can even try it on your own. Just don’t give up.”

 Virtually every story I have read about loan modification companies, written or broadcast, by the mainstream media comes with the same disclaimer, which usually goes like this, “there might be a few good ones…”, or “legitimate loan modification companies do exist, but…”  In the very next sentence they then proceed to blast an entire industry.  Whatever happened to objective news reporting? 

 If these legitimate companies exist then why don’t the mainstream media interview the company’s principals?  Better yet, how about actually interviewing the people these for-profit loan modification companies have helped?  The mainstream media has no trouble researching, finding and publicly humiliating the bad guys (this is deserved most of the time).  Why don’t they put the same time and effort into profiling the good guys? 

 This is why…because every story needs a villain and right now for-profit loan modification companies fit the bill perfectly.  Admittedly, the industry as a whole has done little to boost its public image.  The illegal roadside signs and the poorly produced radio and TV commercials by personal injury law firms now doing loan modifications paint a very sleazy picture of the loan modification industry.  Couple that with the fact that the industry does not have a unified voice and you get a perfect target for the mainstream media.  After all, if the good guys don’t collectively yell and scream every time a column like Mr. DeBruhl’s is published or broadcast then they must be corrupt, right?

 It is a fact that far more consumers have been scammed or ripped off by financial advisors, accountants, attorneys, realtors and doctors than have by loan modification companies.  Don’t believe me?  Research your local bar association, real estate licensing division, or board of medicine website and read through the laundry list of complaints that exist against their members. 

 The mainstream media shies away from reporting these individual complaints because they recognize, as the general public does, that one bad apple doesn’t spoil the whole bunch.  More importantly, the mainstream media refrains from unilaterally dismissing any of these industries as a scam because they will feel the wrath of powerful organizations like the American Medical Association or the National Board of Realtors. 

 Until there is regulation and a unified voice for loan modification companies these attacks will continue.  And the loser in all of this, as always, is the homeowner.  Contrary to what Mr. DeBruhl wrote in his column today, most lenders are not ready to negotiate.  Most of my clients have done exactly what he suggests and have gotten absolutely nowhere.  The certified, “free” counselors are inexperienced and overworked.  And going it alone?  I just spoke with a prospective client on Friday who has sent his loan modification package to his lender three times and they still can’t find it.

 The bottom line is if you pay an attorney to write a will and trust for you, an accountant to do your taxes, a realtor to buy your home and a mortgage broker to secure a loan for that home, wouldn’t you also want a professional to modify your home loan?  Use the same criteria you did to select your attorney, CPA, accountant, realtor and mortgage broker to choose a loan modification company.

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Putting the Credit Score Puzzle Together

credit score puzzleIn the 1960’s, the Fair Isaac Corporation started working on a system designed to help lenders analyze the probability that they would be repaid on a loan. Fair Isaac sought to develop a system that could dependably predict one’s statistical likelihood of creditworthiness, thus the FICO score was born. The evolution of Fair Isaac’s research became the standard of credit scoring by the 1980’s.

Credit scoring has a tremendous impact on one’s ability to purchase high dollar items such as a home. One’s credit score can determine whether the consumer receives a good interest rate to whether or not one can even qualify for a home. For this reason, consumers should understand how credit scoring works and how it impacts their personal ability to borrow funds.

What the credit scoring model quantifies is how likely the consumer is to repay their obligations without being more than 90 days late. Credit scores can range from 350, which is considered a very low credit score, all the way up to 850, the highest possible credit score achieved. Only 1 in 1,300 consumers will achieve a credit score over 800. Consumers with 800+ credit scores are the most likely to obtain the best interest rates available on the market, effectively saving thousands of dollars in interest. On the other hand, 1 in 8 consumers with credit scores between 500 and 600 face the possibility that they won’t qualify for financing. This is why it’s so important to understand how credit scoring works and how it impacts your financial future. 

So how is your credit score derived? Here is a simple guide to help you understand what factors contribute to the composition of your credit scores.

  • Payment History:                              35% Impact.
  • Outstanding Balances Carried:     30% Impact.
  • Credit History:                                    15% Impact.
  • Mix of Your Accounts:                    10% Impact.
  • Inquires:                                                10% Impact.

Payment History: Paying your debt on time and in full has a major impact on your credit score. Charge off’s, late payments and judgments will negatively impact your credit scores. Missing a higher payment has a more severe impact than missing a lower payment. Delinquencies that have occurred within the last two years carry more weight than older delinquencies.

Outstanding Balances Carried: This factor marks the ratio between outstanding balance and available credit. Ideally consumers should try to keep balances as close to zero as possible. The general rule of thumb is that consumers should keep their balances at or below 30% of their available credit limits.

Credit History: This factor marks the length of time a consumer has had credit. The longer the duration of time a consumer has had credit, typically the stronger the consumers credit scores will be.

Mix of Your Accounts: A mix of auto, credit cards, and mortgages are typically more beneficial to obtaining higher credit scores than solely having credit in just one segment such as credit cards.

Inquires: This represents the number of inquires made on a consumer’s credit history within the last six months. Each hard inquire can potentially cost the consumer from 2 to 50 points to their credit score. The consumer’s credit score can be impacted by the first 10 credit inquires in a six month period however at the 11th inquire; the consumers credit will no longer be impacted.

Having a complete understanding of how your credit scores are derived is essential to making positive decisions regarding the management of your credit. In next week’s article, we will help explain how people with credit challenges can make simple changes that can positively increase their credit scores as much as 100 points in 40 days.

By Eric Fowlston of Desert Hills Bank, Phoenix Arizona – efowlston@deserthillsbank.com, 602-324-6725

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Foreclosure 2.0: Mortgage Running

mortgage runningThere’s a disturbing trend developing in the real estate market today.  I have no scientific data to support this trend.  I didn’t hire a consulting firm to do market analysis for me to come to this conclusion.  It’s more than just a hunch.  I sense an avalanche, or perhaps a tsunami coming.  All types of people I meet in the online and offline world are grumbling about it.  Here it is:

Honest, hard-working Americans with integrity and significant cash reserves, including many with deep religious faith and beliefs, are giving up on the dream of homeownership.

I’m not the first to notice this trend.  In an article written on February 8th, 2008 in the Wall Street Journal called ‘The Rise of the Mortgage Walkers’, it was reported that “The apparent willingness of borrowers to ‘walk away’ from mortgage debt has contributed to extraordinary high levels of early default on loans issued during the 18 months before the mortgage bubble burst.”

But many industry experts expected mortgage walking to cease when the $750 billion TARP plan was rolled out last fall.  The banks, presumably flush with cash and performing assets on their books, would be more agreeable to modifying loans and helping distressed homeowners stay in their homes.  Instead they stuffed the money under their mattresses to improve their balance sheets and kept rolling along with record foreclosure filings nationwide.

running awayAs a result, property values have continued to spiral downward and even the most responsible homeowners find themselves stuck in homes worth half of what they paid for them.  Among these homeowners, what is most stunning is the emotional transition that has taken place over the past six months.  They no longer have any attachment to the home.  Therefore, the decision to run, not walk away from the home is business, not personal.  Forget about the fact that they signed a promise to repay the lender.  Forget about the fact that their credit will be negatively affected and forget about the fact that everyone they know will find out that they lost their home in foreclosure.  All of this pales in comparison to losing hundreds of thousands of dollars on a place to live.

In fact, outside of a tarnished credit report, for primary homeowners there is very little at stake in walking away from a mortgage.  In Arizona, for example, banks are forbidden from getting a deficiency judgment against a borrower if the loan was used to purchase the property (refinancing and home equity lines of credit don’t count) as long as the dwelling is four units or less and sits on 2.5 acres or less.  It doesn’t matter if the home was an investment property or not.  And, in January of 2007 the IRS changed their guidelines and no longer count forgiven debt (from a short sale or foreclosure) on a principal residence as a taxable gain.  This means that if you walk away from your primary residence your only concern is about a 100 point loss to your credit score.

Armed with this information most homeowners are packing up and moving on.  They aren’t walking anymore, they’re running.  Until the banks begin to voluntarily reduce principal balances on all mortgages to within 10% of market value, regardless of whether or not the homeowner is current, this mortgage running problem will not cease anytime soon (see The Missing Piece of the Foreclosure Solution by Jim Randel, 6/6/09).

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Everything but the Kitchen Sink

foreclosure strippingI read a story in the Arizona Republic last week with a headline that read, Foreclosure Home Strippers Can Face Arrest.  And they should face arrest!  After all, it’s bad enough that neighborhoods around the country are full of dilapidated homes with waist high weeds growing in front of them.  Prices will be driven down even further with people taking their clothes off and dancing in front of these homes to loud, pulsating music.

 That was a bad joke, but honestly that was the image that came to mind when I read the headline.  All kidding aside, foreclosure stripping is a serious problem that hurts the homeowner, lender, investor and neighborhood.  In most cases, the foreclosure stripper is the original homeowner.  The homeowner, being understandably frustrated by the foreclosure, decides to take everything in the house, including ceiling fans, light fixtures, cabinet doors and drawers, door hardware, appliances, window coverings, garage door openers and faucets. 

 I’ve yet to hear about any kitchen sinks stolen.  However, I toured a house yesterday that an investor partner of mine bought at the trustee’s sale.  The former homeowner was so angry he even took the 9-volt batteries out of the smoke detectors!  Of course, there are other types of foreclosure strippers (common thieves).  They scope out vacant homes and return to steal copper wire and pipes, air conditioning units and cabinets.

 The problem is that local law enforcement can’t really solve this problem.  In the case of my investor friend, we called the police but there was nothing they could do.  There was no way we could prove that those items were in the home at the time of the trustee’s sale when ownership legally changed.  Nor could we prove that the original homeowner was the one who stole them.  My friend is left to file a civil complaint against the former homeowner and hope for a favorable judgment.  But, realistically he’ll never get a dime.

 Once again, the lenders continue to shoot themselves in the foot.  IF they would be more responsive to their borrowers, IF they would be more agreeable to a short sale or loan modification, IF they would start loaning money again, then maybe we’d have fewer vacant homes and frustrated homeowners.

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When to Pay for a Loan Modification

don't pay for a loan modificationThe experts say you shouldn’t pay for a loan modification because you can do it yourself.  That got me thinking about all of the things that I can do myself.  I can change the oil in my car, do my own taxes and buy or sell my own house.  But, I chose not to because I would rather have a professional mechanic, CPA or real estate agent handle the job for me.

Before you decide to pay for a loan modification here’s a checklist of what you should do first:

  1. Contact your lender at least three times.  Have you ever called the customer service department at a major corporation?  I recently called DirecTV for help setting up a new receiver.  It wasn’t getting a signal so I called for support.  The first person I talked to told me I would have to schedule a service call for $50.  I didn’t like that answer so I called back the next day.  This time I was told I needed a special adaptor and that they would mail it to me for free.  The adaptor fixed the problem.  The lesson learned here is not to expect the person on the other end of the phone to be fully trained or aware of all of the loan modification options available to you.
  2. Contact a mortgage broker or lender about refinancing.  You may qualify for a refinance that will lower your payment.
  3. Visit the Making Home Affordable website to see if you qualify for a government incentivized loan modification program.
  4. Consider selling your home.  If you don’t want to move because you have kids in school, family in the area or a job close by then this isn’t an option.  But, if you have no strong emotional ties to the neighborhood, put the home on the market even if you owe more than your home is worth.  Your lender will be open to a short sale even if you are current on the mortgage payment.

 If you’re like me and tried all of these options without success it’s time to start shopping for a loan modification company.  I chose my loan modification company the same way I chose my daughter’s preschool:

  1. I got a referral from a family friend.
  2. I reviewed proof of performance information.
  3. I checked for complaints.
  4. I toured their place of business.

 This worked for me and I’m very satisfied with the results so far.  Admittedly, my loan modification is not complete.  It usually takes 3-4 months to get a file completed and I’m only about 2 months into the process.  However, they have kept me up to date and are moving forward as promised.

loan modifications take timeKeep in mind that it can take up to 100 hours to complete a loan modification yourself.  If you have 2-3 hours per day for the next 3-4 months then the odds are in your favor.  If you don’t believe that this is true then check out this story from ABC News, called ‘The Runaround’, that aired last month.

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