Uncategorized | The Money Man Report

To help both the everyday investor and the experienced investor, it’s vital that they
understand what kind of market we’re in and how changing bank practices affect
the way we purchase properties and build wealth for ourselves and our families.

I have been in this business, particularly the investment side of real estate, for 15 years
and I’ve completed hundreds of transactions. But either I, nor other veteran investors I’ve spoken to, have ever seen the kind of opportunities that are being realized through the new approach
banks are taking.

This is a great time to learn and understand this market and the business of real estate
investing. Many people out there, right now, are planting the seeds, so to speak, that can make them money and continue to profit in the years ahead for their children and grandchildren.

So don’t stand on the sidelines—get in the game and do it right!

We were in this business before the boom, during the boom, and after, and we never imagined
that banks would be willing to show the flexibility that they are displaying in this current market, especially in south Florida.

Please understand one thing: Banks are not in the real estate business, they are in the money lending business. Banks are not set up to take properties back, nor to manage property ownership, or to renovate, rent, or sell.

Therefore, when a bank must foreclose on a property, and no one purchases the property at
the foreclosure auction, the banks ends up owning the property and now find themselves in the real estate business. The banks are not looking to build wealth or accumulate positive cash flow or start wholesaling or flipping properties; they are just looking to get out as fast as possible. Most banks use Listing agents (Realtors) to sell their properties. So we investors will often end up dealing with Realtors when we want to purchase bank-owned properties.

Now before the boom, if the homeowner did not pay his mortgage payment after the third
month of nonpayment, the bank would file what we call a lis pendens. This is a written notice that a
lawsuit has been filed concerning real estate, involving either the title to the property or a claimed ownership interest in it. This is the first part of a foreclosure process.

Now once this process is initialed by the bank, the homeowner has—depending how hard they
fight, or if bankruptcy is in their agenda— approximately 3-9 months before their home appears in the court schedule for foreclosure sale. The banks have never been in the habit of negotiating the principle amount, or giving any kind of discount or even accepting forced mediation from the courts.

There was no modification of the loans, or two to three years of delay in auction date, and someone would end up living for free till some kind of agreement was reached. Flexible options where simply not bank industry standard. Banks were compared to robots, lacking common sense, with all business decisions and following strict corporate policy.

The banks would discount at a live auction at the time of sale only, and no one really knew
how much it would be. In other words, if the loan was 70k the banks would tell their lawyers to bid it up to 55k, but this happened only during the actual live bidding.

This is why we never thought the banks would do what they are doing now.

We are all aware of the subprime lending and what it did to this country and the rest of
the world. Before subprime and before the BOOM (due to greed and loose lending and policies) the only way a borrower could attain a high Loan-to-Value loan on a purchase was with a FHA loan.

The Federal Housing Administration, generally known as "FHA,” provides mortgage insurance on
loans made by FHA-approved lenders throughout the United States and its territories. FHA insures mortgages on single family and multifamily homes, including manufactured homes and hospitals. It is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception
in 1934.

FHA lenders will lend up to 96% of the purchase price (or appraised value, whichever is less) and they allow for closing cost contributions from seller to buyer (these laws change from time to time, so
please refer to mortgage brokers for latest terms and condition). These loans are insured by the government in case the borrower gets foreclosed upon.

This is why all the FHA loan that go bad end up with Housing and Urban Development. Known as HUD, they do many things; one of them is the disposing of FHA loans that go bad, in a closed- bid auction that takes place online, through real estate agents.

Therefore, before the BOOM the most common way to get a high Loan-to-Value mortgage was
FHA, which is only for owner-occupants and each loan has limits on the purchase
price (again, these laws change from time to time, so please refer to mortgage brokers for latest terms and condition). For investors the most common Loan-to-Value ratio, especially for investment properties, was 70-80% of the purchase price.

What happened during the boom? And how did it make so many people you know come to believe that they were real estate investment experts?

Keep one thing in mind: FHA loans never went away. But during the subprime era most
borrowers did not choose to use the FHA loan program, simply because subprime
required very little red tape (where FHA required quite a bit of red tape) while still offering the benefit of 95-110% of the purchase price.

Let me explain subprime in my words, the words of MOE:

During the BOOM time getting a loan was like getting a car loan.

Let me ask you something: when someone wants to purchase a car, how many borrowers actually earn the income that they claim on a car loan application? Not many. It’s a “credit- driven” loan. The bank relies on a credit score, not on the borrower’s clamed income. Well, with subprime, getting mortgages during the BOOM was like applying for car loans; you simply stated assets and income
with no verification as long as your credit score was acceptable. The worst part of it was the lack of due diligence, in addition banks gave high Loan-to-Values with these terms.

Crazy practices if anyone takes the time to analyze it!

With interest rates at record lows and loose and easy qualifying, this triggered unprecedented increases in real estate values in a very short period of time.

Real estate was moving fast. Price values were going up by 10-20% every 6 months, and closings are happening within weeks, where they usually takes months. Real estate had almost become a liquate asset! The business of refinancing existing mortgages also took off, and many homeowners were placing large mortgages with negative amortizations at a record high.

We all know now that this caused more damage than it did good.

So where are the banks now?

Banks realize that they are now being forced to be a part of someone’s homestead or
investment property. Although banks have always had some percentage of their portfolio in default, and are prepared for litigation and foreclosure, it was historically nowhere near the numbers that they deal with today.

All this has triggered flexibility by the banks and opportunity for those who know
how to take advantage of this market. Opportunities like this:

Short sales: The concept is new and is a great way for banks to get rid of
a bad loan, save money on litigation, and get it off their books before
fighting in court for years. For the investor, it allows us to purchase a property at a great price and at the same time get the homeowner out of debt and back on his feet. Truly, I think this is a great vehicle for buyers, sellers, and banks.

REO sales: Real estate owned, or REO, is a class of property owned
by a lender, typically a bank, government agency, or government loan insurer, after
an unsuccessful sale at a foreclosure auction. As soon as the beneficiary
repossesses the property it is listed on their books as REO and categorized as
an asset. These assets are sold through real estate agents and are always a great source of inventory for us investors. There is a lot of inventory in the hopper, ready to be sold, and those that know how to take advantage of that will built a lot of wealth.

Bulk Sales: The sale of a group of real estate assets, typically dissimilar properties in different
locations. This sales technique was used by the RTC in the early 1990s to dispose of multiple assets at one time, forcing a buyer to accept the bad ones with the good. Another good way to purchase cheap assets, but these require a bit more sophistication and knowledge. Banks like this disposition method because it allows them to get multiple loans off the books in one time.

These are great opportunities to acquire properties in today’s market. There are many more and we’ll bring you those in the weeks ahead.

If you have questions or are interested in learning more, please contact Moe at 954-266-8389.

To your success!

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Morris Vahnish: Foreclosures and Banks White Paper