Another Facelift

This is a duplex I bought in the late 90s … it was aluminum siding — still is — but was looking a little tired, to say the least. I recently sold it on a land contract to a wonderful family, who started making improvements immediately.¬†FSCN0518IMG_2874

Take a look at this exterior before and after! They’re not quite done, but they’ve replaced some windows, made it into a single family home by opening up the downstairs living area, replaced the front door, and repaired and painted the siding and brick front porch. They also tore out the old shrubbery and put in new plants. They put a big vegetable garden in back.

This home is over 100 years old, but is built better than many of our newer homes today.

These people wouldn’t have been able to purchase a home the traditional way, as they have no credit and the banks have tightened the purse strings so much.

They gave me a large down payment and I didn’t charge them much for the home … they’ll own it within the next couple of years. They’re enjoying the pride of home ownership, and I’m so happy to have helped them achieve this dream … we’ll definitely maintain a relationship going forward. ūüôā

The Jury’s Still Out . . .

In my post “The Party May Be Over” I discussed land contracts, which are an excellent exit strategy.¬† I’ve used them over the years to enable my tenants to buy their rental homes from me.¬† For clean, wonderful tenants who can’t obtain a mortgage for whatever reason, this is a great way to provide them with the joy of homeownership.¬†

The tenant gives me a down payment, usually $2000, and I draw up the land contract.¬† Basically, I’m the bank.¬† The tenant pays 10% interest on the loan, and is responsible for all maintenance, etc.¬† I retain title of the house until the last payment is made, and I do periodic checks to ensure they are taking care of the property to my satisfaction.

Back in 2008, the government instituted the Housing and Economic Recovery Act (HERA) and also the Secure and Fair Enforcement Act (SAFE Act), both of which were instituted as a result of fraudulent practices by mortgage brokers, who lent money to buyers who weren’t really qualified to purchase homes.¬† We all know what happened after that.¬† Many of those buyers purchased adjustable rate mortgages.¬† They were okay paying the original $800/mo. mortgage payment but when that payment jumped up to $1300 (or more) ¬†three years later, they were in serious trouble!¬† Thousands defaulted on their loans, and here we are today.¬† There were 2.8 million foreclosures in 2009, and the 2010 forecast is about the same.

Back to the SAFE Act . . . which requires¬†everyone who performs mortgage transactions to get a mortgage loan originator’s license.¬† This affects all mortgage brokers in all states, and¬†the licensing is tougher to obtain and it’s costly.¬† As with all laws, the devil is in the details.¬† Am I defined as a “broker?”¬† What are the definitions?¬† And what is the definition of a mortgage transaction?¬† Does a land contract fall under that definition?¬† ¬†

I recently listened to a teleclass given by Griffith Law Group which covered this issue.¬† Evidently, the state regulators have taken land contracts out of the definition, at least for the time being.¬† Since there’s no transfer of deed involved and we investors retain legal title, the definition doesn’t apply to land contracts.¬† There is some ambiguity however, and oftentimes these definitions take a year or more to become crystal clear.¬† So, would I do a land contract right now?¬† I might, because I’m somewhat a risk taker,¬†but I also think the original version of this law was a bit severe and the interpretations will result in it loosening up a little.

If you’re not willing¬†to take the risk, you can get around it by paying a mortgage broker to actually write a note/mortgage for you for the land contract.¬† (Make sure he/she has gotten the mortgage loan originator’s license which is now required.)¬† It’ll cost somewhere between $500-750, but it will keep you legal.

The other option, which is also a great exit strategy (I discuss it along with the land contract option in my book) it the lease option.  If your buyer may qualify for a loan in three or four years, this is an excellent plan for both of you.  Hook him up with a credit restoration company like DSI, Sky Blue or Lexington Law, and draw up the option agreement.

So in closing, the jury’s still out and the party may NOT be over!¬† Stay tuned . . .

The American Dream

Yesterday was a good day.¬† No, make that a wonderful day.¬† My tenant Jesus and his lovely family gave me the last payment on their house.¬† They are now homeowners.¬† To give you a little background, they first rented from me in 1996, shortly after the birth of their first child.¬† I was thrilled with their tenancy . . . clean people, excellent payers . . . a landlord’s dream.¬† They returned to Mexico after renting from me for a couple of years.¬† In 2000, I received¬†a call from Texas.¬† They were on their way back to Indianapolis and had saved my number, and were wondering if I could accommodate¬†them, now a family of four.¬† I happily put them in one of my duplexes.

In 2003, Jesus asked about the possibility of buying the house from me.¬† His sister lived in the back apartment and they were very happy there.¬† I sold them the house on land contract.¬† He gave me $7000 down (in $100 bills!) and we set up the payment schedule, at 9% interest.¬† For people who have marginal credit or no credit (like Jesus) this is an excellent way to purchase a home.¬† He’s never been late on a payment and has improved the¬†home in many ways.¬† Here are a couple before/after exterior pictures:

The interior changes are more dramatic; as his family grew to three children, Jesus made the attic into additional living space and added another bathroom.  It looks professional. 

I explain the ins and outs of land contracts in detail in my book, The Landlord Chronicles: Investing in Low and Middle Income Rentals:

“The major advantages to land contracts are the following:¬†

  • I don‚Äôt have to claim all the profit in the year I sell the property; it‚Äôs spread out over the life of the loan (check this out with your tax advisor)
  • I have no responsibility for repairs or bill-paying at the property
  • The buyers are invested in it financially and emotionally, therefore motivated to take good care of it
  • Being the bank enables me to make more money on the sale, through principal and interest, than I would by selling outright
  • Land contracts provide long-term income, with little work involved

I‚Äôve had people in tears after being given the keys to their homes.¬† These are people who never dreamed they‚Äôd be able to own a home.¬† Although land contracts are a great moneymaker for me, providing these dream homes for my buyers makes me feel part of something wonderful‚Ķfor these families, the neighborhood and the city as well.¬† I love it.”

(If you’d like to check out more of my book or purchase a copy, you may go to www.authorhouse.com and click or their book store, or you may contact me personally at barb@thelondlordchronicles.net.)¬†¬† Re: land contracts, with HERA and the Safe Act (see “Is the Party Over?”) my ability to do these without a mortgage loan officer’s license may be restricted.¬† The jury is still out . . . everything depends on the interpretation of the law.¬† I’ll keep you posted . . .

The Party May Be Over . . .

For many years, I’ve used land contracts as one of my exit strategies.¬† For those of you who aren’t familiar, here’s a biref¬†scenario:¬† Let’s say I have a trusted tenant who is tired of renting and would like to buy the house he’s currently renting from me.¬† Robert’s done a great job of paying on time, and he keeps the house clean, inside and out.¬† The problem is, he has¬†bad credit.¬† He made some poor choices in the past, and there’s no way he could get a mortgage in today’s economy, even though he as a couple thousand dollars he could put forth for a down payment.¬†

This is where I come in.¬† I can be “the bank” for someone like Robert.¬† With a website like www.bankrate.com and a financial calculator, I take his $2000 down, and structure the deal.¬†¬†I set the sales price, determine how much per month he’s comfortable paying, and go from there.¬† I discuss this stategy at length in my book, The Landlord Chronicles, which will be available through www.authorhouse.com¬†by late July, or directly from me at barb@thelandlordchronicles.net.¬† The land contract is an excellent way to provide your tenants with the joy of home ownership, and also make a great deal of money in principal and interest payments over the term of the loan.

Unfortunately, with the abuse in the real estate market that occurred throughout the early 2000’s, which allowed unqualified people to obtain loans, the government has cracked down on mortgage loan originators.¬† As part of the federal Housing and Economic Recovery Act of 2008, each state is being required to pass its own set of rules that will oversee mortgage brokers, to ensure against fraud in the future.¬† In light of what happened to thousands of uninformed individuals who bought homes they had no business buying, then lost them within a few years, I quess this is a smart move on the part of the government.

However, this extension of HERA, called the SAFE Act (Secure and Fair Enforcement Act) requires all people who handle¬† home loans of any kind to be licensed.¬† This includes you and me.¬† At first I thought, “No big deal, I’ll just get licensed.”¬† Not that easy . . . it’s expensive, and you have to jump through lots of hoops along the way.¬† So, my land contract days are done, for now.

But, the party isn’t necessarily over.¬† We investors can still use the lease option as an exit strategy.¬† It’s similar to the land contract, in that you plan on selling the home to the renter.¬† But it hinges on the renter being able to qualify for a loan at some point in the future.¬† You and he can set that date between the two of you.¬† He pays extra (usually $100 or more) per month on his rent, and this applies to the down payment.¬† If he defaults, you can evict him easily, through the small claims court, just like a normal renter.¬† I discuss this option in my book as well.

If you use the lease option, you may want to research a good credit restoration company to help your tenants repair their credit.¬† So, is the party over?¬† Not necessarily, but the keg with the imported beer¬†just ran dry . . .¬†¬† ūüôā

Land Contract: Worst Case Scenario

I’ve been doing land contracts, which are a variation of “rent to buy,” for several years.¬† I’m a big fan of this type of exit strategy, for many reasons:

  • The buyer gives me a nice down payment, usually $2000 or more, which is non-refundable if he defaults.
  • I am not responsible for home maintenance or repairs.
  • Although I carry the home insurance and property taxes, I add these costs into the buyer’s monthly payment.
  • Since none of my buyers are able to qualify for a traditional mortgage, they are willing to pay the higher interest rate I charge (10%).
  • Even though I’m acting as the bank, I still have control over the property and can make sure my buyer is taking good care of it by doing occasional checks.

In all the years I’ve been doing these land contracts, I’ve had three buyers default.¬† I mentioned one of them in my post “Be The Bank.”¬† A second buyer, Kenny and his wife, had been renters of mine for a year.¬† They¬†were clean people and had been steady payers.¬† I allowed them to purchase one of my single family homes on contract.¬† They were thrilled.¬† Unfortunately, Laura suffered a heart attack which required surgery, and their hospital bills were financially debilitating.¬† They were forced to default on their mortgage with me.¬† However, it was a painless process.¬† They admitted the difficulty immediately and relinquished the home to me.¬† The quit claim deed gave the house back to me, and I found a renter for the¬† home.

My most recent default was what I call the worst case scenario.¬† Jim and his wife bought my three-bedroom home and lived in it for two years before the wheels came off.¬† He had his own auto repair shop, and with the economy being down, his business was struggling as well.¬† He got behind and my kind nature got the best of me.¬† I decided to “work with him” while he looked for something else.¬† By the time he found work with an auto repair shop as a manager, he owed me almost $2000.¬† I trusted him to pay me regularly until he was caught up, and he didn’t honor his word, so I had to forclose on him.¬† This rarely happens.¬† The situation with Kenny and Laura is typical.¬† The vast majority of buyers do not want to be taken to court.¬† I guess Jim didn’t care.

Unfortunately, you can’t get rid of a land contract buyer by going through the small claims court.¬† It’s not that straight forward.¬† I had to involve my real estate attorney and he had to file the foreclosure in¬† superior court.¬† The process took about three months from start to finish.¬† And my buyer didn’t show up in court, so it was a simple five-minute signing of some papers, giving the house back to me.¬† I paid my attorney $650 for the favor.

Worst of all was the fact that my buyer left the house a total mess.¬† This surprised me.¬† He took everything he wanted, and left a bunch of junk and trash behind.¬† I was mad and disappointed, to say the least.¬† I treated him with kindness and respect.¬† But I have to say, I wouldn’t have been as mad if I hadn’t let him stay so long!¬†

So in closing, some advice. . .

I still like land contracts, and will continue to use them, for the reasons mentioned above.¬† But¬†here’s the¬†valuable lesson I’ve learned from Jim.¬† When someone stops paying, you need to get them out of your house, regardless of the situation!¬† Times are tough out there and bad things do happen to good people, but we are real estate investors, not social workers.¬†¬†Don’t let your emotions cloud your thinking.

Be the Banker

In today’s economic climate, homeowners are being pushed into rentals.¬† They bought homes they thought they could afford, and then realized they were in over their heads.¬† Balloon payments became due, and they couldn’t come up with the money.¬† Foreclosures are on the rise, and this trend promises to continue through 2010.

There are thousands of Americans who’ve been through the heartbreak of foreclosure.¬† They are now in rental properties, and their credit is ruined.¬† But, think about this for a minute.¬† Many of them still hold the same jobs they’ve had for years, and still have decent income.¬† They just can’t get¬† a mortgage on another house.¬† That’s where you and I come in.

I currently have four single family homes and one duplex I’m selling on contract to the tenants who live there.¬† None of them would qualify for a traditional mortgage, but all of them have the ability to pay what they’re paying me every month.

I’m acting as the mortgage company, and I’m charging them 10% interest on their loans.¬† You may think this is a little steep, but 1) it’s a risk for me, and 2) they’re willing to pay the higher interest for the privilege of buying the home.¬† ¬†Before I make the deal with them, I find out what they’re comfortable paying per month.¬† Although I continue to carry the taxes and insurance, I pass these costs to the buyer¬†and include them in the monthly payment.¬†¬† A financial calculator can determine monthly payments and length of loan for you.¬† I found a great website http://yona.com/loan/¬†¬†to help figure out mortgage amounts.¬† If ¬†you know the loan amount, length of¬† the loan¬† in months and the interest rate, this site will pop up the entire payment schedule, and you can print it out and give a copy to your buyer.¬† My land contract is written in simple language, and the buyers are required to maintain the property, etc., etc.¬† I’ve included a copy of my land contract in a book I’ve written, which will be available soon.¬† I’ll keep you posted…

I allow my buyers to refinance in three years if they can.¬† Most of the time, this doesn’t happen, becuase they either have bad credit or no credit.¬† But if they can refinance, that’s great.¬† They can lower their payments, you can cash out and buy another property or reinvest somewhere else.¬†

I never take less than $2000 as a down payment on land contract sales.¬† If you charge them $1000 or less, they’re less invested, financially and emotionally, and will be more likely to default.¬†

To protect myself in the event of a default, I have my buyers sign a quit claim deed at our closing, giving the property back to me in the event of a default.  This has happened only once, but I was glad I had that deed, because my buyer got into an argument with his boss, quit his job, and left for Missouri!  I filed the quit claim deed, which gave the house back to me immediately.  Usually, if people fall behind in their payments, they see the writing on the wall, and they just leave.  You keep the down payment, and find another buyer.

One of my contract buyers, the Castillo family, has been on contract with me for six years now.¬† They’ve improved the home and are thrilled to be homeowners.¬† In August of ’10, they’ll own the house free and clear.¬† Here is a photograph of their home.¬†

They enclosed the front porch to create more living space.

Although¬†doing land contracts is a great money maker for me, providing these dream homes for my buyers makes me feel partof something wonderful…for these families, the neighborhood, and the city as well.¬† I love it.