Wednesday, January 06, 2010

HML #9 paid off

Between Christmas and New Years, hard money loan #9 was paid off. I made a couple thousand dollars on it. I'm leaving my principle with my partner for investing in another loan when he finds a good one.

Over Christmas, we had some out-of-town relatives staying with us and one night, my brother-in-law handed me a real estate listing for a property that was literally down the street from my house. It was listed for $90,000! Being that I live in the neighborhood, I know that property was worth at least $250,000. So we walked down the street to look at the house. It was night, so we couldn't see much, but we could tell it was still occupied. It looked to be in good condition on the outside. The listing said it had a pool. Back at home, I did some more research. Obviously, this was a foreclosure or pre-foreclosure, but I couldn't find anything in my search of public records. No notice of foreclosure auction, no judgments against the owner, nothing. If I had to go based on my research, I'd say the owner was not in any sort of financial difficulty at all.

The following day, I called the listing agent and asked if the $90,000 price was correct. He said it was, although he had received offers so far up to $150,000. He confirmed it was heading to auction. The agent's cell phone cut out, so I didn't get more info, but it sounded good.

The average selling time for properties in the neighborhood is 6 months. I ran some numbers on the conservative side - using an 8 month holding time, below market selling price, etc. and the results looked pretty good. For an all cash deal at $160,000, they could get about a 42% annualized return in that 8 months. Unfortunately, they had no funds available, so they had to pass. I passed as well, since most of my funds are tied up in hard money loans right now. Too bad.

One interesting thing is that I found the original note for the loan on the property and it was for more than $90,000. More than the current high offer of $150,000. That must mean they are trying a short sale, which means the lender would need to approve the final sales price. I would have thought the listing agent, who was a Realtor, would have mentioned this. I also suspect the $90,000 listing price was deliberately set low to attract potential buyers. I'm not sure about the ethics of this and I'm not sure what requirements Realtors have in setting the initial asking price, but it seems like a used-car salesman trick to me.

In other news, my progress towards rolling my IRA into a self-directed Roth IRA is slowly moving forward. For tax reasons, I had to wait until 2010 before I could do the actual conversion. I'm going about this in a couple steps. First, I am converting my Rollover IRA to a Contributory (Traditional) IRA. They are basically the same thing, but my CPA tells me the law that allows me to spread out taxes on the Roth conversion for two years only specifies conversions from a Contributory IRA to a Roth, not a Rollover. The law will probably be changed to fix this, but just to be on the safe side, I'm taking this extra step. The second step will be to convert the Contributory IRA to a Roth IRA. I will do this at the brokerage the IRA is currently at. The third and final step will be to transfer that Roth IRA to a company to who will set up the self-directed IRA. I am currently leaning towards the iTrust offered by NAFEP.

I am currently at the first step in this process and imagine it will take a couple of months to get everything all set up.


Another Investor said...

It's common for short sale listers to list below market to generate offers. It generally takes an accepted offer for the bank to move forwatd with a BPO (broker price opinion), which establishes the value at which the servicing bank or investor will sell the property. By setting the list price well below market, the lister creates an auction environment in which buyers have to guess the winning price. The lister collects the offers and sends the best offer or offers to the bank.

I recently bought a short sale out there that was about 35 percent of the selling price at the peak of the market. I paid cash and I stepped in at the last minute after another buyer backed out. The banks and the seller were just happy to get the deal done. It was a little below what the foreclosures were going for and it was in better shape.

Are you sure the house is worth $250,000? If the lister has several offers around $150,000, that may be near the current market value of the property. Check the current comps before you calculate that rate of return....

Shaun said...

Thanks for the info on short sales. I've never done one of those.

Yes, I've checked comps. I live literally down the street, so I know the neighborhood well :-) The only unknown is the interior condition. In my analysis, I figured on $15,000 in fix-up costs. Based on the other rehab work I have done, this should cover it even if the inside was fairly well trashed (which would be surprising given the outside condition). I also figured a sale price $20-30K below comps for a quick sale. As I said, it was a very conservative analysis.

The listing agent did not give me a date for when the auction was set and I couldn't find any listing for it. I saw the for sale listing about 1 day after it was posted, so that was probably why there were only low offers at the time I spoke with the agent. I live in the Phoenix area - Kiyosaki-land. There are a bunch of flippers and rehabbers here and I'm sure they were the ones who put in the early offers.

About two days ago, I saw a notice of a trustee's sale taped to the entrance gate of our neighborhood (it's a gated community). The text was too small to read from my car and, since I was passing on the deal anyway, I didn't bother getting out to look more closely. I assume it was for the house in question. The notice was gone when I went out again a few hours later.

Another Investor said...

You should be able to piece the info together on Go to the assessor's site and put in the address. That will give you the owner's name. Then go to the recorder's site and put in the name of the owner. That should give you the notice of trustee's sale. You should also find all the mortgage information as well.

If you know someone with MLS access, they can look up the listing. The tax records associated with the listing will show the information from the notice of trustee's sale in a concise format.

There are lots of flippers trying to do short sales in Phoenix. Unless they can tie the property up with a low bid and hoodwink the agent doing the BPO, they are out of luck. Too much competition.

Shaun said...

That's exactly what I tried. I have done this before you know :-) I found the original mortgage but not the notice of trustee's sale. Now that I've seen that notice posted on the gate, I could probably find it again if I looked. I'm guessing the sale listing went up a couple days before the notice of trustee's sale was filed.

Another Investor said...

It's possible the property that has the NOTS is another property. I review about 100 short sale listings a week, and some owners are not even delinquent yet. That often occurs when someone is transferred out of town and is left with a Phoenix house that is worth significantly less than the mortgage balance.

Short sale listings run the gamut on the point of listing. Some owners list before they are delinquent, and some wait until a week or two before the trustee's sale. A lot of people try for loan modifications and don't list until late in the foreclosure process.

There are some good deals out there for cash buyers that don't require you to be a slumlord. You are doing well with your hard money lending, but you might want to start looking at acquisitions as rates go up and purchase subsidies disappear.

Ralph D Bredahl said...

Trying to buy a short sale is a lot like rolling the dice in Vegas

stephen said...

Shaun as far as your hml's go what rates do you get from them?

Shaun said...

Stephen - I give the details in the first post about each loan. Currently, I'm getting 10%. A couple years ago, when interest rates were higher, I was getting 12%. The borrower actually pays 2% more than that. My partner keeps 2% as a servicing fee.

HBInvestments said...

It's good you made a couple of dollars....

Richard Stabile Bergen County New Homes said...

Have you tryed to form a small fund to do these sales? It seems to me it would be the way to go. You have a track record. Put together a business plan and take to the streets and raise capital.

Diary of a Bad said...

Brookline Condos For Sale

Do you not get scared with the fee's, charge's and points hard money lenders charge.


Shaun said...

Since I'm the hard money lender in this case, no I'm not scared by them :-)

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