Can Foreclosure Investing Be Criminal? © by William Bronchick, Esq.

Published with Permission From: I recently attended a "free" seminar on how to "get rich quick" in foreclosures. The speaker had a different angle than the usual "steal it from the homeowner" method. The speaker suggested that you approach the homeowner with the following plan: Tell the homeowner you will make up his back payments and give him some cash.  Take title to the property. Lease it back to the former owner with an option to buy it back for one year. The speaker suggested that after one year, the house would be yours if the former owner didn't exercise his option. Sounds great doesn't it? You could beat out all your competition who are trying to "steal" the same house. Well, here's the catch. The poor homeowner in foreclosure will be your best friend when you make up his back payments. However, when the year is up and he can't get his house back, the trouble will begin. In a number of cases, these homeowners will go to court and claim that the "sale/leaseback" was really just a disguised loan. He or his attorney will ask the court to "re-characterize" the transaction as a loan and place title to the property back in his name (for an in-depth discussion of sale/leaseback re-characterizations, read "How to Structure Sale-Leaseback Transactions"). If the court agrees, the loan is illegal, since it is usurious. Here's how it works: Let's say that you find a house in foreclosure worth $100k. The balance of the loan $50k, and the homeowner is behind $5k. You agree to make up the back payments of $5k and take title. You then lease it back to the homeowner with an option to buy it back for $100k, its fair market value. What's the problem? The problem is that if the court re-characterizes the transaction from a sale/leaseback to a loan, you have loaned the homeowner $5k at 1000% interest! Think about it . . . you give him $5k, and he has to pay $50k ($100k option price minus the $50k loan balance) to get his equity back. 1000% interest is usury, and the court will set aside the loan. You will lose the house AND your $5k. If you're not familiar with the word "usury," it means charging more interest than permitted by law. The consequences of a usurious loan are usually civil; the court will declare the loan void and the borrower won't have to pay it back. If you get caught making usurious loans on a regular basis, you'll be hearing the words "loan-sharking" and "racketeering." These are CRIMINAL acts that will get you in jail. Many foreclosure real estate investors have been indicted on racketeering charges for doing exactly what I described above.  The Better Way to Do It The safer way to deal with someone in foreclosure is to buy him out and get him to leave. If a person is in serious financial trouble, chances are he will get into trouble again. Thus, you will end up with a messy eviction and a court battle when the tenant/former owner. If homeowner insists on staying in the property, then simply lease it to him without an option to purchase.  If the homeowner is not willing to be just a tenant and has significant equity in the property, offer a partnership arrangement wherein the partnership will own the property. Your contribution to the partnership is the money to cure the back payments due on the loan. The homeowner’s contribution is the equity in his home. The partnership will lease the property to the former homeowner for market rent. If he defaults on the rent payments, the partnership evicts him. The former homeowner still has a partnership interest, but he does not have possession. At that point, you can buy him out of the partnership.  The partnership approach should not be approached without the assistance of qualified legal counsel.#

Flipping Properties for Cash Profit © by William Bronchick & Robert Dahlstrom

Published with Permission From: Real estate, like any other commodity, is bought and sold every day of the week. Many people become real estate agents because they know a small piece of a large pie means big bucks. Agents help facilitate a sale by finding a willing buyer for a willing seller, earning a commission of approximately four to seven percent of the sales price for making the deal happen. It is relatively simple to get a real estate license, and it is a lucrative field for many people. However, as you may expect, there is strong competition among agents, and the ones that are successful work long, hard hours. In fact, most agents are on call weekends and nights, with their cell phones glued to their ears. Furthermore, real estate agents are required to take continuing education classes and follow strict guidelines set forth by bureaucratic agencies. There are better ways for an "entrepreneur" to make a living! The Flipper Investors that "flip" houses accomplish the same basic task that real estate agents accomplish. Specifically, the "flipper" investor buys real estate with the intention of immediate resale for profit. As a flipper, he buys properties at substantially less than the going or "retail" rate. He acts as both principal and middleman, buying at one price, then reselling at a higher price. If a deal is marginal (not much profit) and he adds no value to the property, the flipper's profit is commensurate to that of a real estate agent. However, unlike an agent, the flipper may only have a few hours of his time tied up in the deal. Furthermore, the flipper's upside profit potential is much higher than an agent's commission, since an occasional bargain purchase can bring a tremendous return. The flipper does not need a license to practice, nor is he under the oppression of a government agency. He benefits from low overhead, flexible work hours and he doesn't have to drive a Mercedes to be taken seriously (although he can certainly afford one). Three Different Types of Flippers There are three different types of flipper investors, usually based upon experience: - The Scout - The Dealer - The Retailer  The Scout The Scout is an information gatherer. He is the "bird dog" who finds potential deals and sells the information to other investors. Many people get started as a Scout for other investors because it does not take any cash or prior knowledge to look for distressed properties. The Scout finds a property for sale, gathers the necessary information, and then provides this information to investors for a fee. The fee will vary depending on the price of the property and the profit potential. The Scout can expect to make five hundred to one thousand dollars each time he provides information that leads to a purchase by another investor.  The Dealer The Dealer, like the Scout, locates deals for other investors. He locates a bargain property and signs a purchase contract with the owner. He then has the option of closing on the property and selling it outright, or just selling his contract to another investor. He is providing more than just information; he is controlling the property with a binding purchase contract. The Dealer often puts up earnest money to secure the deal, so he assumes more risk than the Scout does. Since the Dealer controls the property with a purchase contract, he has greater profit potential than the Scout does. Dealers can flip as many deals as they can find. On a full-time basis, a Dealer can make well over fifteen thousand dollars a month without ever fixing a property or dealing with a tenant. On a part-time basis, a dealer could easily make an extra three thousand dollars a month flipping a property or two. The dealer's lifestyle is that of a true "entrepreneur." He can work as much or as little as he likes, with no boss, no employees and the freedom to do as he pleases! The Retailer The Retailer usually buys properties from a Dealer or with the assistance of a real estate agent or Scout. The Retailer's goal is to fix up the property so he can sell it for full retail price to an owner-occupant. Compared to other flippers, the Retailer puts up the most money, has the most risk and stands to make the largest profit on each deal. However, it may take the Retailer months to realize his profit, unlike the Scout or Dealer who makes his money in a matter or days or weeks. Published with permission #

Flipping Is Illegal! © by Ron LeGrand

Original Article Click Here: Oh No! All this time you've been telling me I could make a killing buying & selling (flipping) houses and now you're telling me it's illegal, Ron?  Well, sort of! But before you get all upset, I'd better explain. Don't worry; you're not going to jail. Here's the deal. Illegal flipping is indeed illegal. But first, lets define flipping because it is a misunderstood term, sort of like the term "nothing down." When I say you can buy houses with nothing down, I mean you're not using your own money. That doesn't mean the seller doesn't get money. Some-times they don't and sometimes they get cashed out. But, it is NOT your money; it's a "nothing down" deal.  When you take over a loan "subject to" the mortgage, and the seller doesn't want any money, it's a nothing down deal. When you pay all cash but borrow the money from a private lender, it's still considered a nothing down deal. Thousands of people don't believe in the nothing down philosophy and aren't doing real estate because they simply don't understand the term, and therefore they're convinced they can't buy houses without their own money. Their loss. A closed mind and an open mouth will keep you broke and working for those who are willing to learn.  Just try and tell my Boot Camp grads (especially those who have become millionaires because they refuse to listen to the morons) you can't buy houses without your own money. The same ignorance seems to be attaching itself to the term "flipping." Totally misunderstood and misrepresented.  Here's The Shocker.  Every house you buy and sell is a flipper. Whether you're in wholesale, retail, sell- on-lease-option or owner financing, you've just flipped a house. Most people use the term when applied to wholesaling, but it's all flipping. It's either a fast flip or a slow flip, but it's still a flip no matter how you look at it.  Ok Ron, So How Come It's Illegal?  The Answer Is It's Not. The term "flipping" seems to be used by the media in cases where an investor bought a property and sold it a short time later. However in all the cases I've read, fraud was a part of all their deals. These investors made a practice of illegal activities and got away with it long enough for the long arm of the law to catch up to them...then they instantly became a news item. Flipping houses is not illegal. Fraud is. So what kind of fraud did these guys get in trouble over?  Here's A Short List Of Possibilities.  1. Paying appraisers to grossly appraise properties to get bigger loans for themselves or their buyers.  2. Rigging down payments to put unqualified buyers in houses that shouldn't be approved for the loan in which they're applying for.  3. Falsifying documents required to get a buyer approved such as pay stubs, verification of equipment, tax returns, verification of deposit, etc.  4. Selling houses to unsophisticated buyers, representing them to be in good condition but covering up obvious problems to get the loan closed. This is the most abused type of fraud, and once discovered it leads to an investigation of all the investor's activities and usually uncovers all other kinds of fraud.  5. Back dating lease agreements to prove a track record of the tenant making payments on time and a year or more occupancy, when in reality the tenant just moved in. This is very common. I've had loan processors with large mortgage companies suggest I do it. The last time was on a $600,000 house. I asked the loan agent if he knew that was lender fraud. His reply was, "my boss said it was o.k. We do it all the time."  Just remember this. Anytime the deal is different than the contract presented to the lender, it's lender fraud. The loan is based on the stated facts. If you misrepresent those facts, it's fraud. Regardless of how many other people participate in the process.  O.K Back To Flipping.  What does lender fraud have to do with flipping and the stigma some of the media have placed on it? Some lenders have had so many loans default on lower priced properties sold by investors it's opened their eyes and made them cautious, and justifiably so, if I were a lender making loans at 80%-100% of the purchase price, I'd be cautious too. In fact, I'd be paranoid, but then again I'd be neither because I'd never even consider doing it.  I have no way of proving this, but if I had to guess, I'd say 75% of all loans closed to fund low income homebuyers contain some kind of false statement or fraud.  I know that's a bold statement, but I've been around a long time. Long enough to see numerous loan companies take a dive from bad loans. It's almost standard practice in the cheap house business to stretch the truth to get unqualified buyers qualified. This creates default and a bad name for those who operate within the law. That's exactly what has happened with the term "flipping." But, Ill say it again. Flipping is not illegal.  There's no law against agreeing to buy something at price 'A' and then finding a buyer at a higher price. Suppose you had a stereo unit you agreed to sell me for $500, and I told you I would pay you next month when I get my tax refund check (fat chance!). You agree to wait the 30 days it takes me to raise the money. We then sit down and write a letter stating that, and we both sign it.  A couple of days later, I'm talking to a friend who mentions he needs a good stereo. I decide to sell him the one I'm buying for $1,000 and make myself a $500 profit. Obviously I can't deliver his stereo until I give you $500 because you probably won't turn it loose until you get paid. However that doesn't stop me from searching for a buyer.  Once the buyer agrees, I can collect all the money in advance and pay you, collect a $500 deposit and pay you, or I can pay you first with my money and then collect from him. There's no law that says I have to pay you and take possession before I can talk to anyone about the stereo. If they were on Ebay, they'd have a problem. Half the stuff sold on eBay isn't in the possession of the person doing the selling. They agree to buy at a lower price from another auction site and put it up on Ebay. When it's sold, they simply have the old owner ship it to the new buyer.  That's called drop shipping and it's very common in any industry that sells products. That's exactly what we do with real estate sometimes. You don't have to own it to shop for a buyer. You simply must control it, which is what you do with a contract. The problem comes when lenders see investors buying at deeply discounted prices and selling for two or three times the amount a few weeks later. Some just assume there must be fraud somewhere to make such an unconscionable profit. You see, they haven't attended my Wholesale/Retail boot camp.  If you're buying and rehabbing houses it would be a good idea to document the work you've done to the house. Keep a file on everything you've spent to make a case on how you raised the value so quickly. You should also furnish before and after photos. It is also not a bad idea to create your own album to keep while you're doing this. It will help with future credibility with everyone you deal with including bankers for a line of credit.  If you're using private money from a loan broker, you probably have an escrow account for repairs. That means an appraiser may be supplying the mortgage broker with a completion certificate once the work is done. Get a copy and add it to the pile of evidence. Of course some lenders won't be happy with anything you provide and simply won't fund the loan unless you've owned the property for a year or more. I wrote a past newsletter article on six ways to get around that, but the best way to deal with lenders who don't want your business is . . .Whack 'em!  Flipping is not illegal. The length of time you own a house is your business. Making a killing is your right. Providing for your family is your obligation and the smartest thing you can do with people or institutions who want to make life difficult is cut them off at the knees and tell them to take a hike . . . and that's my final answer. They are the weakest link.  Before you even take a buyer to a lender for a loan, ask them right up front if your length of ownership is an issue. If they give you any indication that it's a problem, move on. The country is full of lenders and there is a ton of money available. They need you more than you need them. Don't take any crap from any lender and don't let them make you believe their rules are the law or even the norm.  Well, I'm getting tired now! It's been a long day of battling ignorance and skepticism and I'm worn out! I think I am going to go "flip" open the refrigerator and get a little snack, then "flip" on the shower, then "flip" down the bed spread and shut my eyes for the night. Life seems to be one flipper after another. Hope it's legal.  Ron LeGrand

How Much Disclosure Is Enough?© by Peter G. Miller

Original Article Click Here: It used to be that buying a home was a great adventure: Purchasers were never quite sure what they were getting because the rule of the day was "buyer beware."  But in the past decade there's been a radical change in the marketplace. Professional home inspections are entirely common, buyer brokers represent purchasers, and seller disclosure statements created by state governments are used universally. And yet, despite such advances, the question of what is disclosed or should be disclosed is sometimes fuzzy.  For instance, consider the matter of "stigmatized" houses. These homes are physically fine but not for everyone -- for example, properties which have been the site of a suicide or murder. Must the owner tell? What if the event happened many years ago? How much time is enough? The rules vary by state.  Consumers today want to know about the physical condition of a home and much more. For instance, which broker represents which party in a transaction. Is the broker representing the buyer or the seller, both parties as a dual agent, or is the broker a facilitator trying to bring buyer and seller together?  In the usual case, disclosure is covered generally in real estate education classes. But now the state of Arizona is trying something new, classes now for the state's 700 approved real estate instructors devoted entirely to the matter of disclosure -- and later this year a new disclosure education requirement for all real estate licensees.  "Disclosure of all sorts of information about real property offered for sale is becoming an increasingly complex matter," says Arizona Real Estate Commissioner Jerry Holt. "According to legal experts, 70 to 80 percent of all real estate law suits are filed by buyers, and nearly all of these suits address disclosure matters."  "Even though some important aspects of disclosure law are usually covered in other core required courses, like agency and contract law, under the present continuing education requirements a licensee can go a whole career without the mega dose of exposure to disclosure law the subject merits," says Edwin J. Ricketts, Arizona's Deputy Commissioner of Real Estate from 1991 to 1997.  As well, Ricketts says "then, as now, it occurred to me that most licensee law violations were in the area of disclosure, whether it was property defects, agency related, secret compensation, a licensee's interest in the deal as a principal, etc. Obviously, licensee education in the area of disclosure law is beyond merely important -- it's essential to the public interest."  "I spend my days defending brokers," says Robert N. Bass, a Phoenix-based attorney who specializes in real estate litigation, risk reduction, and education, "and time after time I see the same kinds of mistakes being made by the licensees."  Bass said he has been surprised by the response to the all-disclosure class.  "Arizona's Real Estate Commissioner took a bit of a risk by implementing a new rule requiring that all licensees attend a three-hour course on disclosure," says Bass. "I was expecting some resistance from the brokerage community, but every broker I've talked to thinks it is a great idea. The AZ Association of Realtors was heavily involved in developing the program, and the industry seems squarely behind it."  The instructor development workshop will address such topics as a broker's obligation to investigate, verify and discover. In essence, what is the duty a real estate licensee to interpret a property disclosure statement, check zoning, or assure that the home really has a connection to public sewer lines?  Ricketts says the Arizona effort is unique.  "To my knowledge, no other state has recognized the coming of age, so to speak, of disclosure law as a concentrated academic and practitioner issue. And I'm certainly not aware of any other state mandating a disclosure law continuing education course."  Beginning July 1, 2002, Arizona real estate licenses must take a new three-hour continuing education disclosure course. Classes are expected to be available from most real estate schools in the state.  No less interesting, if the Arizona program is a success -- if claims against real estate licensees tend to fall -- then similar disclosure courses are likely to emerge in other states.  "If other states are able to develop a disclosure course of this caliber, it will take the practice of real estate to a higher level," says Bass, who lectures before industry groups nationwide. "At a time when many are questioning the continuing value of real estate agents, I think the long-term effect off this kind of program will be to improve the public's perception of this industry."

Making Big Mistakes!© by William Bronchick, Esq.

Original Article Click Here: "Real estate fever" . . . it's hit the Country like a plague. Zillions of "newbies" are hitting the bandwagon, trying to make a profit where they lost in the stock market. I meet them all the time, and many are making big mistakes! Mistake #1: Stock Market Mentality You'd think after losing $7 trillion in the stock market people would have learned! Nope, they are making the same mistake, which is assuming what happened yesterday will happen tomorrow. Nine of ten new investors I meet say they are interested in real estate because they saw someone else make money from the rapid appreciation of the market over the last few years. But, buying real estate solely for short-term appreciation is often a big gamble! If you buy real estate to hold for 15 years or more, the chances are you will come out on top. If you buy a property and flip it in within a year, you probably are fine, too. And, despite the risk, many people can intelligently time the "boom" of a local market (or subdivision within a market) and make a profit. But, if you buy a rental property for full market price with break even or negative cash flow, you'd better have a backup plan if the market doesn't keep going up. Investing is a lot like surfing... if you don't know how to ride the wave, you will drown! So, should you refrain from investing if you think the market has peaked? Absolutely not! You can find bargain-priced properties in every real estate market, even the hottest. You can find low-interest rate financing that will increase your cash flow so if values drop, you still are covered. You can plan short-term (six to 12 months), because real estate markets rise and fall slowly. And, if you keep a cash reserve for your business, you won't sweat when the market tanks, because you know that in the long run, real estate markets virtually always come back. You'd think after losing $7 trillion in the stock market people would have learned! Nope, they are making the same mistake, which is blindly buying real estate based on bogus advice or complete lack of education. Real estate is one of the few investments in which risk is directly proportional to knowledge. True, it has a higher learning curve than investing in the stock market, but there's no proof that having knowledge of the stock market reduces risk (just ask your mutual fund manager). Mistake #2: Investing Blind I read a comment on a real estate discussion group on the Internet. In response to an inquiry as to whether a particular seminar or training program was worth the money, someone answered, "Why waste your money on that stuff? Just use your money as a down payment and learn as you go." This is probably the worst advice you could ever give a beginner. Money for real estate deals is easy to find if you can find good deals. But, you won't know what a good deal is without having first invested in your education! The more knowledge of real estate investing techniques, financing, acquisition, negotiating and, of course, your local marketplace, the less risky your investments will be. A bargain real estate purchase will generally always be a safe investment; a bargain stock purchase isn't - after all, who says the company you bought into will be in business next year?. Mistake #3: No Cash Reserves Ask anyone in real estate long term (or any other business, for that matter) and they will tell you the two most important words for survival are: "cash flow." Heck, even K-Mart failed to learn that valuable lesson! In order to stay in real estate long term, you need cash reserves. Buying real estate nothing down is easy; handling negative cash flow, repairs and other expenses in the meantime is the trick. In fact, if you can handle the bad times, real estate will always make you come out on top. Lack of cash reserves puts unnecessary pressure on you to do substandard repairs, accept less than qualified tenants and give into tenants' demands for fear of vacancy. When you have a sufficient cash reserve, you act rationally. You hold out for a higher sales price. You hold out for a qualified tenant. You leave properties vacant rather than rent to low-lifes. You call a tenant's bluff when they threaten to leave. You take care of necessary repairs and improvements on your properties. It's a whole different ballgame than operating from a lack of cash. Like I said, buying properties with no money down isn't hard; it's handling the cash flow. In other words, you can buy real estate without money, you just can't survive in business without cash reserves. Thus, consider accumulating cash reserves before investing in rental properties. Mistake #4: Being Greedy Many investors get started flipping properties to other investors, which is a good idea to generate cash reserves. However, you must be realistic about how much profit is in a deal. If there is a potential for a $20,000 profit in a rehab project, you can't expect to make $10,000 flipping that property to a rehabber. A rehabber has a huge risk in embarking in such a project and wants a large enough profit to justify the risk.  For example, if a house needs $10,000 in repairs, the rehabber investor wants to make at least a $20,000 profit. If you find a deal with $20,000 in profit potential, how could you expect to get $10,000 for flipping the property if the rehab investor you flip it to is only going to make $10,000? You should be happy making $2,500 and moving on to the next deal. If you want to make more than $2,500 on such a deal, then you must find and negotiate a better bargain that has more profit potential. Mistake #5: Treating Real Estate as Anything OTHER than a Business. People are lured to real estate because of the quick buck that it promises. Don't hold your breath, you won't get rich quick. An "overnight sensation" usually takes about five years. More than ninety percent of the people who take a real estate seminar quit after three months.  Why the high fallout rate? Lack of action and unrealistic expectations. Real estate investing should be treated with the seriousness of a career. It takes months, even years for a business to cultivate customers and have a life of its own. You need to treat real estate like any other business. Give yourself at least six months to see if real estate works for you. It may even take a year before you buy your first property. Maybe in the second year you will buy three or four properties. If you work hard at it and keep your eyes and ears open, you may even find your first deal in 30 days. Certainly, you will not make money by talking or thinking about it; you must go out and take action.

Negotiating the Real Estate Contract - How to Buy at the Lowest Possible Price!© by Diann E. Tonnesen

Original Article Click Here: Seller Motivation  You must try and determine what is most important to your particular seller. If possible try and find out the answer to why he is selling his home. It may give you some insight as to what he is or is not willing to take or where he is willing to make a trade off. Although this may sound obvious, sometimes the reason "why" may not lead to the sales price you would expect. Is it a divorce sale? Statistics show that while you may get lucky with the "just want out of it" seller, far more often one party or the other may not want to sell at all and may hold out for a higher sales price than the market may indicate. Even if you get a good price, arguments between the sellers could make more problems later than it was worth.  Is it a foreclosure sale? These properties tend to be over-mortgaged in the first place, and unless you can get the underlying lender to agree to a "short sale" the seller may owe more than the property is worth. Short sales can be worthwhile, but are not a "sure" thing and may take much longer to close.  Is it a job transfer? If the seller has a wonderful job offer in another state he may indeed be willing to settle for less for a "quick" closing so that he can move on and not have to worry about making double payments. If it is a corporate relocation, the relocation company has probably offered the seller a set amount for his home (typically less than market) with a bonus to the seller if he can sell it himself first.  Is the seller buying another home? This can be good or bad. Some sellers need to realize every cent out of a transaction to be able to purchase their new home, otherwise they just cannot afford to sell at all. Others are able to sacrifice part of their profit so that they don’t lose their dream home, especially if you are willing to be negotiable about moving dates. Some may actually prefer a longer escrow so that they don’t have to hassle with the expense or aggravation of moving twice.  Is there an illness? Often the seller in this situation may have more of a sense of urgency and may be willing to settle for less for a quick sale.  Is the seller getting married? Sometimes the euphoria of a new life can also lead to a better deal for the buyer!  Is the seller retiring? Many times retirees feel that they must realize the maximum the profits from their existing home as they will no longer be earning a salaried income.  Other major factors in a seller’s willingness to bargain may be the length of time the house has been on the market, a death in a family, job instability, homesickness, etc. Once you have determined the seller’s probable motivation then it is time to position yourself so that you can give the seller most of what he wants so that you can get what you want - the lowest possible price!