What this means is closing costs are higher than I am used to.
Actually, I spoke with the escrow agent and got some more details. Oklahoma is one of the last states in the nation that uses Abstracts. An Abstract is a book that lists the original grant and all subsequent conveyances and encumbrances on the property. When you buy a property or get a lien on it, this book has to be updated and then run past a lawyer. You can image the extra costs that incurs. So a rough estimate of my closing costs, including title insurance, is around $1,200, which is roughly half of what they would be here in Arizona.
The good news is that if I use the same escrow company for the refinance, many of these charges can be waived or reduced if the refi happens within 6 months or the purchase. And I will not need to purchase buyer's title insurance on the refi since it stays in effect forever as long as I am the owner. This is similar to buying title insurance here in Arizona and requesting the policy be kept open for and flip.
Wednesday, January 31, 2007
What this means is closing costs are higher than I am used to.
My out of state property I mentioned earlier is located in Oklahoma and that purchase is moving forward smoothly. The contract has been signed and escrow has been opened. For the purchase of this property, I am buying it with one of my LLCs and using the second as a hard money lender to the first. This lets me get a cash price from the seller and then after escrow closes, I'll turn around and refinance it with a traditional lender. This means I'll need a mortgage showing the second LLC as a lender. The escrow company we are using doesn't do mortgages, so I found some mortgage forms online and bought those to use. I'll fill them out, get them notarized, and send them to the title company for recording. Those should go out tomorrow. Escrow is set to close the end of February, so I expect things will be fairly quiet until then.
The next step is setting up insurance coverage to go into effect on the close of escrow.
Tuesday, January 30, 2007
The Associated Press has a story about how rising foreclosure rates are leading to a rise in fraudulent foreclosure avoidance services. The story lists three of the most common scams. What caught my attention was the first one: A company loans or gives the property owner money in exchange for the owner signing over their house to them, money that comes from the built-up equity in their home. The former owners are now renters, but they get to stay in the house and, supposedly, the money they received from the company for their equity is used to pay off the delinquent bills. The fraud allegations arise when the former owners claim they did not know they were signing away their property.
This method is basically what Live Free Investment Group (as well as other companies) does here in Phoenix. As I discovered during my visit with them, they are in the process of adding some forms to their paperwork that make it abundantly clear to the owner that they are no longer going to own their home. This should go a long way towards preventing such situations as the AP story talks about.
It's a tough spot for the investor to be in. It's very easy for the homeowner to sign away his property, get some money and get out of debt, then turn around and claim he didn't know what he was doing. Even with signed documents that clearly acknowledge the owner is giving up his property, all it takes is one judge to agree that the poor, distraught owner was taken advantage of by the mean, fancy-talking investor. Nevermind that the investor has helped the owner avoid having a foreclosure on his credit report or that he has helped the owner get financially solvent again.
The news coverage will never be in favor of the investor. It is a much more heart-wrenching (and therefore higher ratings-getting) story when portrayed as some couple being swindled out of their home. Just look at the AP story. The couple profiled look to be in their 50s or 60s and have lived in the home for 20 years. The accompanying picture shows the man frowning, angry at the evil corporation that did this to him. Now, I don't know the details of their case and the Nebraska Supreme Court did rule that they were defrauded, but I can guarantee you that, even had the court sided with the loan company, the slant of the article would still be the same. Unfortunately, even with clearly spelled out contracts, people still expect to be protected from their own stupidity.
Posted by Shaun at 7:36 AM
Monday, January 29, 2007
As mentioned in the comments of this post, I finally received some of my round up shares from the PAQC / PAQN reverse split arbitrage play. I received 100 shares in my Scottrade account on Friday. I am told I should receive another 100 shares in my Schwab account today or tomorrow.
This morning, I sold the shares in my Scottrade account for $1.15 per share. If you recall, I purchased 30 shares at $0.30 each. My total cost was $16.05. I held the shares for 60 days, had them reduced to 1 share after the split, then received another 99 "round up" shares to bring me to a round lot of 100, and I received $107.99 from selling them. Total profit, including commissions on the buy and sell sides: $91.94. ROI: 573%. Annualized ROI: 3,485%.
Hopefully, I can do this again tomorrow in my Schwab account.
Posted by Shaun at 9:41 AM
Wednesday, January 24, 2007
I've decide to get a jump on one of my goals for 2007 and am in the process of picking up a new rental property! This one will be out of state and I'll be using a property manager to manage it. The property is currently rented with a lease though November. I won't say anything else because there are no contracts yet, but I'm excited about the opportunity.
I hadn't planned on investing out of state mainly because I didn't want the headaches that can go along with out of state landlording. Instead, I had been concentrating on the filled lease option properties that some companies in the Phoenix area are selling. I don't want a negative cashflow property and the only way I could see to make those investments cash flow positive would be to put in $10,000 to $20,000 of my own money and, even then, the cash flow would be pretty small. So I was out driving one morning and had a small epiphany. I had seen some properties for sale in the Midwest a couple weeks ago. At the time, I had dismissed them in favor of going after the lease option deals, which I thought I could get into with less cash. But now that I was committed to putting more money into the investment, these properties suddenly seemed more attractive. They may not provide the appreciation that the Phoenix market might, but they would produce nice cashflow each month and the entry costs would be much lower. In fact, I may be able to get two properties instead of the one I'd get here in town!
Friday, January 19, 2007
If you have been following the comments of this post, you'll know that another reverse arbitrage play I tried was Point Acquisition. The reverse split occurred back on December 12 and I and several other have been anxiously awaiting our round up shares (the shares needed to bring us up to a round lot of 100 shares post-split). I spoke to their transfer agent today and she tells me she received authorization to send out the round up shares and they have gone out. Apparently, she sends them out in groups to the various brokerages. She said shares have been sent to Scottrade. She said 4,000 shares were sent to Schwab on 1/17. No shares have been sent yet to Fidelity, so if they are your broker, you might want to give them a call. I have not received any share in my accounts yet, so it still may be another day or to until they show up.
The share price was hovering around $5.00 for the last couple weeks, but it seems to have fallen down to $2.50 or so lately. I expect a price decline due to a bit of dumping as the round up shares start making their way into people's accounts, so I would be sure to use a limit order when selling (if you are going to sell). As always, this is not a solicitation to buy or sell any security. Do your own due diligence.
Posted by Shaun at 1:13 PM
Friday, January 12, 2007
I met with Derek Jarr this afternoon to talk about his filled lease option properties that his company sells. Specifically, I wanted to address the questions that Kenric and some others raised in comments to a previous post about this. What all the questions really come down to is how does the investor cover his butt and prevent the former owner from raising legal issues a year or two down the road when their option and pre-paid rent run out?
First off, realize you can never fully protect yourself from having someone sue you. No matter what documents they have signed, if they feel you are abusing them, they will sue. If you have done things right, they will lose the lawsuit, but they can still file. It's a fact of life in real estate investing.
That said, it appears they do cover their bases pretty well. Their standard filled lease option deal with the seller involves three separate documents: a purchase contract, a lease, and an option to buy. They are very upfront with the seller and tell them that they will no longer own the property, that they will now be renters, and that they (Live Free Investment Group) may sell their house to another investor and that the investor still must honor the terms of the lease and option to buy. The company will soon have an additional document that the sellers will sign that states, in big, bold letters, that they are selling the house and are now renters to further emphasize the fact and to provide written proof of that this disclosure was made.
From listening to Derek talk, the company is concerned with helping the seller get back on the path to financial solvency. The pre-paid rent payments they work out with the seller are ones the seller can afford. They strongly recommend to the seller that they enter a credit counseling program. They are working on establishing relationships with mortgage brokerages that can help these people get loans a year down the road that will enable them to buy the place - and by getting them in contact this early, the brokers and banks can instruct them what they need to do to improve their credit. In short, I am pretty convinced that the company makes every effort to help the people they are buying homes from.
All in all, I feel comfortable dealing with them.
Full disclosure: I found out there are a couple people in his office that read this blog. I also have not actually done a deal with them yet. These are my unsolicited comments.
Posted by Shaun at 2:39 PM
Another year has gone by and it is time to request my annual free credit report from TransUnion. Last year, I had a couple of corrections to make on my report and a few on my wife's. This year, I was pleased to see my report looked 100% correct. I also paid $7.95 and got my credit score. Normally, I don't do this since I know my credit is good and don't really care about an actual number. This time however, I was curious to see my score for a couple of reasons: I plan on buying another property fairly soon and my current home equity line of credit is close to being maxed out. (If you recall, this is where I got my money for the Louisiana investment. I'm pocketing the difference in interest between what the HELOC charges me and what I get from the investment.) When the credit score number first flashed on the screen, I was quite surprised! 894! I thought the max score was 900, but after further reading, I discovered that, with TransUnion, their max score is 1000. They gave me a "B" rating - but an "A" rating starts at 900 points, so I'm really close. My score ranks higher than 84% of the nation's population. The report also gave some tips on how to raise your score. As expected, my score is low because I have little available credit on my real estate account (HELOC) and my balance is too high relative to the credit limit. (The two seem to go hand-in-hand, so why they list them separately is beyond me.) Anyway, I'm not worried about it. My score is still pretty darn high and should allow me to qualify for the best interest rates on loans.
I also checked my wife's credit report and that is a different story altogether. All her accounts are OK, but for some reason, they list her current name as her name from a previous marriage. They also list her current address as her ex-husband's current address - which is in a state that she has never lived in. The report states the address was reported to them in February of 2006. I was able to correct the address issue via TransUnion's on-line website, but the name change requires proof to be sent in via mail. I will be doing that tonight.
All in all, this provides a good example of why it is important to check your credit reports each year, even if the last check showed everything was looking good.
Posted by Shaun at 10:00 AM
Thursday, January 11, 2007
Here is a link to the John Tarr radio show I was listening to last weekend that featured Derek Jarr talking about filled lease option properties. (Warning: this is a 73 MB file.) I'll be meeting with Derek tomorrow to talk about these deals in more detail.
Posted by Shaun at 12:54 PM
"Mind you own business" is always good advice. No one will ever care about your company or your finances as much as you will, so you need to be extra diligent in these matters and not assume people will get things correct, done on time, etc. A perfect example is my current issue with the Danbury Connecticut Tax Collector's office.
Yesterday, I faxed over a copy of my 1998 Connecticut state income tax return. This was a Part Year Resident return and showed I moved out of CT on January 21, 1998 and therefore could not have incurred any tax on my car from living there from October 1998 to September 1999. I included a cover letter and my phone number in case there were any questions.
I called again this morning to verify not only that they received the fax, but also that the tax return was sufficient proof for them. The first time I talked to them, they suggest a utility bill as proof. I only keep my utility bills for 5 years, so I didn't have any from that long ago, however, the tax return seemed like a good alternative.
This morning I spoke with the same person I spoke with yesterday. She put me on hold while she verified she got my fax. When she came back on the line, she said she did receive the fax, but since it only covered one year, she was not able to cancel the additional years taxes I owed. Huh? I didn't owe any other years. She said I owed tax on a Pontiac. I told her I never owned a Pontiac. She asked for my wife's name. I told her I wasn't married when I lived in Connecticut. It turns out, she was looking at the wrong record. I gave her my name, old address, and birth date and she found my record said she would be sure my account was credited correctly.
Had I just assumed the fax was handled correctly, I would still have a delinquency on my record and my credit report would get dinged.
Next step is waiting one week, then calling the collection agency back to make sure they have gotten the update status.
On a side note, I have to smile at the timing of this post - one day after Kenric made a post about following up too much!
Posted by Shaun at 9:09 AM
Wednesday, January 10, 2007
Tuesday, January 09, 2007
This morning, I tried calling the collection agency that sent me a letter yesterday that said I owed the City of Danbury over $400. I got voicemail again, so I called the Danbury Tax Collector's office directly. Turns out, the bill is for a tax on my old car for the period from Oct. 1998 to Sep. 1999. I moved out of Connecticut in January of 1998, so this obviously doesn't apply to me.
The Tax Collector's office transferred me to the Tax Assessor's office. I told them the situation and they said I just need to fax them something showing I moved and they could cancel the fee. They also said the collection company is in regular contact with them and they would get an update of my account status.
To be on the safe side, I also told all this to the collection agency when they finally returned my call. He said the same thing, but suggested I also follow up with them about a week after I faxed my info to the tax office to make sure they have the updated status. Since I plan on buying a property shortly, I want to me sure my credit report isn't dinged.
Anyway, the cause of all this, according to the tax assessor, is that I did not cancel my license plates when I moved and registered my vehicle out here. I thought this was all handled by the DMV out here - after all, they confiscated my old plates! Apparently not.
Posted by Shaun at 1:33 PM
Monday, January 08, 2007
One thing I dislike about living in the West is that many times the companies I have to deal with a headquartered back East and by the time I get home and check my mail, their offices are closed. As someone who likes to jump on problems and get them resolved right away, it frustrates me to be forced to wait until the following day to respond to something I received in the mail. Today is a good example.
I got a letter from a collection agency who claims that I owe the city of Danbury, Connecticut just over $400. This completely boggles my mind. I've never been late on any bill and have spent a great deal of effort to keep my credit spotless. I have no idea what this could be referring to. The letter references a city tax, not state tax, so it's not some error in my old income taxes. I left Connecticut in January or 1998. Furthermore, I never owned property there - I was a renter - so it can't be some sort of property tax that I owe. I don't know what other tax the city, not the state, might collect.
I called the collection agency and got a recording. Even though the recording said they were open until 8 PM, still no one answered, so it looks like I will have to wait until tomorrow to find out what this is about.
Posted by Shaun at 5:04 PM
I've decided to get a head start on my New Year's resolution to buy at least one rental property this year for my personal investment portfolio. I think I may even be able to do it with no or very little money out of my pocket.
Over the weekend, I heard an investor / businessman on a real estate investing radio program talk about filled lease option properties that his companies sells. Now, I've been aware of these for a while because I've been on his mailing list for quite some time, however, this was the first time I actually got to hear him speak about it in detail and take questions from listeners. In a nutshell, you can buy a property from his company for under fair market value. The property has a tenant in place who has an option to buy the property at your appraised price after 1 or 2 years. The best part is that, at the close of escrow, you get a year or more of pre-paid rent. This means you won't get cashflow since the tenant isn't paying rent, but instead you get all that rent money up front. And thanks to inflation, money now is always better than money in the future!
My plan is to buy one of these properties with hard money, then refinance to a conventional loan. If the purchase price is low enough, I may even be able to completely pay off the hard money loan, thus getting into the property for no out of pocket costs (except for the 1 or 2 months interest I may have to pay on the hard money loan). My investors in my flipping LLC have agreed to be my hard money lender and earn some interest while they wait for their other funds to because available.
Before I embarked down this path, I had a couple of nagging questions. How should I structure the purchase from a paperwork perspective? Should the hard money lender buy the property outright and have a private note between itself and my company for the loan (the easier route) or should an actual mortgage be created and recorded with my company as the property owner and the hard money lender as the mortgage holder? It's helpful to remember that the goal of this process is to refinance later with a conventional lender, so I need to look at the paperwork from that perspective. Is it easier for a bank to approve a new, cash out mortgage on a free and clear property, which would be needed in the first case, or a refinance of an existing loan?
This is the first time I've done a deal involving bank loans from the hard money lender's perspective, so this is fairly new to me. Back in 2002, I purchased my very first rental property using hard money and then refinanced through a bank to pay it off, so I went back and checked the paperwork for that deal. In that case, the hard money lender actually took title to the property and gave me a private contract stating he would sell the property to me for a certain price. So when I "refinanced," what actually occurred was a sale from the hard money lender to me.
I also called and spoke to my friend Les, a real estate investor and former mortgage broker and that call settled the issue. He said it is much easier to do a refi of an existing mortgage than to get a brand new mortgage on a free and clear property - the bank's lending standards are much lower. Additionally, he pointed out that, on jumbo loans (loans for more than $417,000), the most cash back you can get is $200,000. The properties I am looking at are less than that, but it is a good piece of information to know.
Now, it's just time to find a property!
Posted by Shaun at 12:56 PM
Thursday, January 04, 2007
It appears I've been tagged not once, not twice, but three times for this particular topic. Thanks, I suppose, to Building An Empire, Savvy Saver, and TheLandlordBlog for this dubious honor :-) Sorry about the delay - my day job company shuts down for the week between Christmas and New Years, so I fell behind in my blog reading for a while and just now found out about this. Wait, does that imply I only read blogs while at work? Umm.. That's not what I meant at all! Anyway, on to the five things you probably don't know about me...
1. I've got a bachelor's degree in Electrical Engineering with an emphasis in Computer Design (as in designing actual computers, not designing things with computers), but I've been working in the software / database field for the last 10 years or so.
2. I'm a foodie. I love to cook and try new recipes, but my food experiences are limited because I hate seafood - except for clam chowder and fish sticks. I actually read more food blogs than real estate blogs (15 versus 10).
3. I own a $600 ice cream maker (which was paid for entirely with passive income *grin*).
4. My deepest, darkest secret - I'm a lapsed Debbie Gibson fan. Excuse me, a Deborah Gibson fan. Shake your love!
5. I'm pretty shy. I have a hard time meeting people. And since so much of REI is about building relationships and networking with other investors, I tend to make things hard on myself by doing more things on my own than I should.
So there you have it... Five things you probably never wanted to know about me! My turn is done. Time for Eric, and Gualberto.
Posted by Shaun at 1:28 PM
Newsweek spoke with John Hayes, CEO of HomeVestors in an msnbc.com exclusive interview. It's a bit of a fluff piece, but he does briefly address the real estate slowdown, TV shows like "Flip This House", and the misconceptions of people wanting to flip houses.
The point I find interesting is that he says a franchise costs $49,000 plus an additional "couple hundred thousand" in capital to get started. Since this is a franchise, franchisees will also be required to pay a percentage of their profits back to HomeVestors. Personally, I think this is a bad deal for anyone wanting to flip houses. You can do the same thing on your own and save yourself the $49,000 franchise fee and the ongoing payments to HomeVestors. If you use hard money, you can even get started without the "couple hundred thousand" capital investment. What HomeVestors really offers is marketing - their signs are all over town and their "We Buy Ugly Houses" slogan is well known. However, I think anyone can spend some time locating and networking with other investors in their area and come up with enough deals on their own.
One good thing Mr. Hayes mentions is that it is a misconception that you are going to make $50,000 on a house and that a more reasonable profit to expect would be in the $15,000 range. He states a franchisee might buy 25 to 30 homes a year, which I find a little on the high side. If you follow the 100-10-1 rule of house buying (look at 100 houses, make offers on 10, buy 1), you're not going to buy that many in a year. Given his figures, I think his system might encourage the purchasing of properties with marginal profit potentials.
(I like the pictures at the start of the article.. Notice the satellite dish looks good in the "before" picture and broken in the "after" picture! Also notice the trees in the background. The "before" picture looks like it was taken in winter because the trees have no leaves. The "after" picture has trees with lots of leaves, so it was probably taken in spring or summer. In case anyone thinks rehabbing is a quick job, this picture should show it takes at least a couple months.)
Posted by Shaun at 7:17 AM