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Tag Archives: Phill Grove

How Do Investors Use Wraps?

For Sale By Owner with Financing

If you see a sign like this, you’re probably looking at a seller wanting to finance the sale of the house with a wrap.

This post is my third in a series sparked by pending legislation in the Texas Senate. Last time, I explained how wrap-around mortgages (or wraps) work. Today, I want to talk about how investors use them. I’m not going to sugar coat. Unscrupulous sellers can take advantage of unsophisticated or unwary people using this technique. So I want to explain how ethical sellers, including investors, can protect their buyers.

Based on our turducken example, investors would probably fall into the role of either John or Greta, owner-financing a house for someone who couldn’t buy it with more orthodox financing. They may also act as a third-party middleman who takes a fee for bringing together the seller and a buyer who needs financing under what Phill Grove calls the Assignment of Mortgage Payment System (AMPS).1

So here’s what to look out for. A reputable seller or investor will use a mortgage servicing company and close with a title company. A scammer, not so much. The title company issues a title policy on the property and handles all of the legal paperwork for the transaction. The mortgage servicing company provides a plethora of benefits to buyer and seller alike, including:

  • Collecting the payments from the buyer and ensuring all of the mortgage payments are satisfied.
  • Managing an escrow account for the buyer, if one is not part of the original mortgage, to ensure taxes, insurance, and other expenses are paid.
  • Notifying all parties if any payments are missed or late.
  • Reporting interest income and payments to the IRS.
    • The seller gets a 1099-INT to report interest income.
    • The buyer gets a 1098 to report interest payments and to document their potential deductions.
Cash flow diagram from borrower to servicer to recipients.

A mortgage servicing company protects everyone’s interests by collecting and distributing the monthly payments. It can also act as an escrow agent for tax and insurance accrual.

Continue reading →

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Reverse Mortgages: Security and Legacy

Coins stacked in growing piles.

The ads on television would have you believe a reverse mortgage will have you set for life. All you need to do is borrow against the equity in your house. But you may find that you end up with nickels, not dollars.

This is my last post specifically about reverse mortgages—at least, for a little while. We’ve already talked about some of the cloudier aspects of reverse mortgages, including how the mortgage company can foreclose. Today, I’m going to talk about how much cash you can raise and what happens when you’re gone. The numbers I present are based on a real-world example.

  • You raise cash with a reverse mortgage, but not as much as you might think.
    The amount of money you can raise from a reverse mortgage is limited by the amount of equity in your house. Let’s say your house appraises $200,000, and you own if free-and-clear. The maximum many reverse mortgage will loan is 70% of your home’s appraised value less fees and closing costs.

    Most reverse mortgages now pay out the majority of their cash distributions over your remaining life, as predicted by actuarial tables. If you’re expected to live another 15 years, the mortgage company would probably pay you about $652 each month or a total of $117,360 over those 15 years. That might not help you very much.

    Most people only get 50% of the equity in their homes. If you have an existing mortgage, the reverse mortgage company would pay off that mortgage and reduce your payout accordingly. In this example, the most you could get from a reverse mortgage if you still owed $100,000 would be around $50,000 paid out over your remaining life expectancy.
Mom, Kids, House, clipart

Even though you’re old enough to qualify for a reverse mortgage, today’s reality is that you may still have people who will need shelter after you’re gone. Reverse mortgages don’t provide for them.

  • You are leaving your legacy to the bank.
    To qualify for a reverse mortgage, the youngest applicant (usually a married couple) must be at least 62 years old. So long as either applicant occupies the home full-time, the mortgage and the income stream from it remain in place. But as soon as the last applicant dies or can no longer live in the house, the mortgage terminates, and the survivors must either deed the house to the lender or pay off the mortgage at 95% of the value of the house.

    Notice that I said, “95% of the value of the house,” not what is owed on the mortgage.

    If your house has appreciated, your heirs could have to pay more to save the house than you actually owe on it. And they have a limited time to comply. And this is true regardless of when the last mortgagor dies. If you and your spouse were killed in a car wreck two months after initiating that $140,000 reverse mortgage, the mortgage company could be due as much as $190,000, depending on the specific terms of your reverse mortgage.

    This would not be that big a problem in most cases. We often buy houses from heirs that don’t want the trouble of liquidating their parents’ unwanted old house. But in today’s economy, more children (and even grandchildren) are living in the same houses as their parents and grandparents. That accident I spoke of could leave them homeless unless they are unable to pay off the reverse mortgage, usually over a shorter time than it takes to settle an estate.

My last word on reverse mortgages comes from one of my mentors. Phill Grove told me, “Normal mortgage companies want the interest and will work with people to ensure they continue to collect the interest. Reverse mortgage companies want the house and can be much harder to work with.”

If a reverse mortgage is right for you in your situation, there are a number of reputable companies offering them. But it’s never as easy as the advertising makes it seem. Please consider the motives of anyone (including me) who says a particular strategy is good or bad for you. Are they telling you everything you need to know?

Next time, I’ll talk about an alternative to reverse mortgages. You might be interested in this alternative if a reverse mortgage doesn’t meet your needs or if you don’t qualify.

Don’t Forget!

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Getting Enthused

Einstein had the right idea!

I’m a pretty creative person. I’ve been a writer my whole life, I love to decorate houses, I created knitting and crochet patterns for a number of years, and generally am an idea factory (it’s telling that brainstorming is my favorite part of any project, though thankfully I also like building up the projects). But no matter how creative you are, sometimes you need a little spark to get  your creative juices flowing.

I enjoy using this blog for sharing my thoughts and ideas with our friends, and one of my goals for the year is to write or upload at least three posts a week, with the help of my team.  That requires a good deal of creative energy on the part of us bloggers, but it’s fun, like Einstein said in the quote at right! I share these posts (and other links I find that might be of interest to fellow real estate investors or clients) on our Hermit Haus Redevelopment Facebook page, and on our LinkedIn page. But can I do more? Maybe, with some inspiration!

mentor

Who are YOUR mentors?

Helpful Mentors to the Rescue!

Our company doesn’t work in a vacuum. We have quite a few folks and organizations we turn to for advice and inspiration. On Thursday of this week, we were on our monthly call with one of our mentors, Phill Grove of the Love American Homes group (plug for Phill), and we turned our topic to social media marketing. He started throwing out all sorts of ideas that got me thinking–I just needed that little spark of knew ideas and tools I could work with. I spent much of last night looking up tools and classes I could take to try out new things.

Then I was thinking about some older things. Back in ye olde days of blogging, when I wrote dozens and dozens of blogger.com posts on knitting and traveling, I had many email subscribers. Well, duh, of course WordPress will have a plug-in that does that. And so it does! I spent some time on my lunch hour yesterday setting up email subscriptions, which I linked to in yesterday’s post.

Phill also talked about easy ways we could get more people to engage with our Facebook ads, so I have some new photos to use for those (thanks to our lovely and talented coworker, Carol). That’s today’s fun task.

And then there was talk of giveaways. I’m still working on what we will use giveaways for…hoping it’s something that will help beef up our mailing lists. But I did come up with something to give away. What if we made an “e-book” collection of Lee’s posts on how we are running our business? (Not my endless posts of rehabbed house photos…those don’t really stand the test of time or of “great reading,” to be honest, but they are fun.) Would any of you readers be interested in an e-book like that? I know how to make them! I’m a professional documentation person!

Call to Action!

What can you do, as a friend of our company, to help us out with our enhanced social media presence? To start, how about these things:

  • Go to LinkedIn, search for Hermit Haus Redevelopment (if you didn’t click the link), then please follow our page and share our updates with your colleagues! It just takes a click. Let us know your page and we’ll return the favor!
  • Share our Facebook posts with your friends. We have a couple of readers who do this consistently, and we have returned that favor and shared their posts. Win-win!
  • Give us some feedback! Use the comments on this post, or email us at info@hermithaus.com and let us know if you like the idea of an e-book of blog posts by Lee, or of having the option to receive our blog entries in your email inbox…or if you have any other social media services you’d like us to provide.
  • And as always, send your friends with sad houses, your friends who would like to work with us as contractors, or your friends who might be private money lenders to us. We can always be reached at 512-807-8777.

 

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Figures Don’t Lie

Paul Esajian

Last year, Paul Esajian invited Sue Ann and me (and some other investors) to watch the San Diego Chargers from the Fortunebuilders skybox. Paul has given us some great advice in the time we’ve known him.

One of my mentors, Paul Esajian, says, “Always trust the numbers.” By that he means your numbers. Phill Grove, another mentor, emphasizes this concept. He says, “Always do your own due diligence. Run your own CMA. Do your own repair estimate.” In other words, buying real estate is a perfect opportunity to follow the advice of the old Russian adage, “Doveryai no proveryai”—trust but verify.

Trust but verify. Especially when dealing with wholesalers.

We expect homeowners to lie through acts of commission, omission, and ignorance. They, after all, are in dire straits. They really need to get out of a problem house, and they often know what they need to accomplish that goal down to the penny. We expect them to over-emphasize their house’s strong points and ignore or hide its deficits. Further, they may not even know about a termite infestation, a leak in a wall pipe, or countless other problems that can drive a renovation over budget and into red ink. And, to be fair, homeowners expect investors to lie to them, too.

But wholesalers are a different animal. They speak Investor, so it’s easy for investors to let their guard down too much. For example, wholesalers know how to get our attention with numbers. They know the secret formula we use to make sure we have some cushion for the unforeseen issues that arise in every project: .7ARV – R = O. Our Offer should be in the neighborhood of 70% of the After Repair Value of the property less the cost of Repairs.

Asking Price $100,000
Repairs $40,000
ARV $200,000

So when we see an opportunity like the one shown to the right, our immediate tendency is to short-circuit our processes and jump to the conclusion, “That’s a good deal!” Why? Because .7 of $200,000 is $140,000. Subtract $40,000 in repairs and we should be comfortable paying $100,000 for the house. I mean, what could go wrong? Well, there are only three possible reasons why the numbers match our formula so well:

  • The deal is a perfect fit to our expectation, and we stand to make about $25,000 after holding and marketing costs.
  • The ARV has been overstated, intentionally or not, which could reduce or eliminate our potential profit.
  • The repairs have been understated, intentionally or not, which (again) could reduce or eliminate our profit margin.

We don’t need to talk much about what happens in the first outcome, where the numbers are correct. Everybody is happy. Everybody wins. But I reckon each of the other two outcomes deserves its own post. As I write them, you can find them gathered here.

Most wholesalers are hard-working, honest people. But especially with the growth of HGTV, DIY, and similar networks, vast numbers of newbies are coming into this profession, and wholesaling is the logical starting point. (We can discuss why in another post some other time.) People in our profession follow the distribution of the general population with roughly 2% falling somewhere along the psychopathy scale.

It’s like one of my favorite bosses (she hired me three times in the corporate world) once said, “Figures don’t lie, but liars figure.”

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How To Finance Your Projects

OPM

“Other People’s Money” didn’t originally have the meaning we think it does today. Based on what happened in 2008, Brandeis’ thesis is a lesson lost. I highly recommend this book to anyone who has money or wants to have money some day.

If you watch HGTV’s Flip Or Flip—and who hasn’t?—you’ve heard Tarek El Moussa say, “We buy houses for cash.” If you watch regularly you may have also heard him say that they don’t always use their own cash. Not using your own cash is a consistent bit of advice from everyone from Than Merrill to Phill Grove.

But if you have enough money, why not use your own?

Honestly, if you have enough money to complete a purchase and remodel on your own, you probably should do your first one or two deals with your own money. But you really don’t want to continue that practice for several reasons:

  • It limits the number of deals you can do at one time.
  • It lowers your return on the money you invest.
  • It ties up resources you might be able to use for bigger deals or personal emergencies.

But, to me the most important reason to use other people’s money (OPM) is that doing so enables you to spread the rewards of this business as well as the risk.

I seldom fund a project completely with my own money. Why tie up $100k on one project that returns $30k when you can tie up $40k on two projects that return $25k each in the same amount of time and still have a reserve? (All numbers in this post are provided to illustrate points and do not necessarily reflect any given project.)

So where do you get OPM?

Here are some sources:

  • Hard money—Hard money lenders are bricks and mortar businesses, like banks. But they play by different rules than banks. They generally charge the most points and highest interest rates of any source.
  • Private money—Private money lenders are people like you and me. They loan you their money to complete your projects in return for the guarantee you’ll pay them back.
  • Banks—You’ve probably heard the myth that banks won’t loan money on distressed houses. What that means is you can’t get a traditional mortgage on a house that isn’t up to code. But you can get a one or two year construction loan. In many cases, these loans are interest-only until due, and they are at a much lower interest rate than hard or private money. The catch is that you must already have a proven track record and assets to get a bank to finance your project.
  • Owner financing—Owners are the least likely source of capital. If they had the money to fix up their house and sell it on the open market, they probably would. But you can offer to fix up their house for them and split the proceeds.

My favorite source is private money. Even when a bank finances the purchase, private money often finances the renovation. Why? That’s the topic of my next post.

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