Top 10 Lessons Learned on House #1

If you have any of your own lessons to add (or have any questions about ours), leave me a comment. I have a feeling a lot of our readers will find this article to be very helpful…

Given that I’ve sold several houses now in under 90 days using this waiver, and given that I’ll have two more on the market for sale in a week or two, you’d think this would be top-of-mind for me…but unfortunately I completely forgot about it.

The hope — of course — is that the waiver is extended, and I have to imagine that folks for all areas of real estate are petitioning for this to happen, but in the end, investors should prepare for the worst and assume the waiver will expire on January 10, 2011.

I’ve had a couple people ask me what the deadline means — is that the last day that a sale will be approved? Or is that the last day a property can be put under contract? Or something else?

Unfortunately, I don’t know the answer to this question (or any others), but will be doing some research and talking to other investors over the next couple weeks, and hopefully I can find out some more information.

As of February 1, 2010, the FHA will be waiving their 90-Day Rule for flipping houses. The waiver is planned for 1 year, though that can obviously change at any time.

This means that investors will have the option to resell houses they purchase and renovate at any time after their purchase, without the requirement to wait 90 days prior to selling to an FHA buyer.

According to the official FHA documentation, there are a few (fairly obvious) requirements for these transactions:

1. All transactions must be arms-length, meaning that there must not appear to be any impropriety taking place between buyer and seller. This requirement also indicates that any prior flipping activity on the home in the previous 12 months may be a red flag to the lender.

2. In cases where the sale price exceeds the previous purchase price by more than 20%, the lender will be required to take extra steps to ensure the sale is legitimate. This includes a second appraisal and a full FHA inspection.

3. The waiver only applies to forward mortgages, and not to Home Equity Conversion Mortgages (HECM).

The waiver of this rule will most likely have a huge impact on the real estate investing community short term. I’m certainly looking forward to the positive impact it will have on our business.

It’s been several weeks since we submitted any offers, but as I mentioned the other day, we are in the process of going after about a half-dozen houses this week. Two of the offers that we submitted were on REO properties owned by Fannie Mae (the large mortgage lender). On both of these properties, we received calls from the agent saying that Fannie Mae was not yet accepting offers from investors.

After a bit more research, here’s what I found out about this new “First Look” program that Fannie Mae is instituting (this is directly from Fannie Mae literature):

“During the first 15 days a property is listed for sale, only offers from owner-occupants, public entities or their designated partners will be considered. Offers from investors can be submitted, but they won’t be considered until after the initial 15 days.”

Here is a bit more info from Fannie Mae…

So, if you’ve been wondering about the benefits and drawbacks of getting your license to benefit your real estate investing business, you might want to check this out:

Getting Your Real Estate License

And, of course, all feedback is appreciated. I know others have a different take on this decision, so if that’s the case, feel free to share your disagreement as well…

For those not familiar with the concept, there’s a form of real estate investing often referred to as “Lonnie Deals.” A Lonnie Deal involves purchasing a mobile home (MH) in a mobile home park, doing some minor rehab to get it into move-in condition, and then reselling it to an owner occupant looking to buy a MH to move into. The key to Lonnie Deals is that the reseller also finances the purchase of the MH. When I say “finance the property,” I mean that the reseller will actually play the role of the bank/lender, and allow the buyer to make monthly payments until the home is paid off (generally less than 5 years).

Because it can be very difficult to get bank financing on a MH, and because a lot of people who live in MHs have sub-prime credit, there is a huge demand for MH sellers who will finance the properties for their buyers. For example, while it may be difficult to sell a particular MH for $6000 in cash, it may be relatively easy to sell that exact same MH for $10,000 if it is financed. This is because very few sellers are willing to finance the sale of their MH (they want/need the cash as soon as they sell), so buyers who can’t pay cash for the MHs don’t have very many options.

A typical Lonnie Deal involves buying a MH for anywhere from $1,000-6,000, doing minor rehab (or no rehab, if it’s not needed) and then reselling for at least double the total cost, with owner financing and interest rates around 10-13%. If you run the numbers, you’ll find that Lonnie Deals provide a tremendous return on investment, with yields often over 100%!

Here’s a good example:

Let’s say you find a MH listed for sale by owner for $5000. Because the seller is unlikely to find a buyer who can get bank financing, and is even more unlikely to find a buyer who has $5K to put down on a home, you are able to negotiate him down to $2000; this is actually a very common scenario. Now, you go in and make sure the plumbing, electrical and HVAC works, you make sure there are no roof leaks or floor damage, etc. All of this minor repair may cost $500 on a typical MH. You now have an investment of $2500 into this home.

Then you list it for sale for $5500, and offer to owner finance it for $500 down, and $250 per month. At 10% interest, this works out to exactly 22 payments before the MH is paid-off. If it’s a decent home in a decent mobile home park, you will likely get a lot of interest at these prices.

So, what’s our return if we can sell this MH for $500 down, $250 per month for 22 months? According to my calculator, the yield is over 135%! I don’t know about you, but compared to the 2% I’m making off my savings account, that’s pretty darn good…

Digging a little further and you’ll notice that the original $2500 investment is paid back in 8 months ($500 down-payment and the first 8 payments of $250), and then the next 14 payments of $250 are all pure profit (minus taxes, of course).

So, what happens if the buyers stop paying on their loan or decide to just move out? Well, that’s actually a great scenario for the seller. Let’s say the buyers default on the loan or move out after one year — the seller will have collected the $500 down-payment, plus $3000 in loan payments. He’s already made a $1000 profit, and can then turn around and resell the same home to another buyer! Best case scenario is that the buyers keep defaulting on their loans, the seller can keep reselling the property…over and over and over again…

And nicest thing about Lonnie Deals is that you don’t have the headaches you have with a lot of types of real estate investing. Because you are turning around and selling the home (sometimes just hours or days after you buy it), you don’t have to deal with all the hassles of doing expensive renovations, being a landlord, etc. You are essentially playing the role of the bank, and as you can imagine, that’s a pretty easy job.

As you might have guessed, given the theory behind Lonnie Deals, I’m very interested in seeing how well it works in practice. Starting this week, my wife and I have teamed up with my brother and another investor-friend of ours, and are looking for mobile homes. I have no idea if it will be a profitable venture or not, but as I’ve always done, I’ll keep you updated on my progress, whether successful or not…

Today, I wanted to provide an article on the topic of negotiating with private home sellers who may be desperate to get rid of their property, and therefore might be ready to provide you with a fantastic deal!

The article was written by guest author Scott Costello. Scott currently runs Struggling Investor.com, where — between his blog, his articles and other great material — he is giving away a tremendous amount of information that up-and-coming investors should greatly appreciate. Scott previously wrote “Building a Buyers List” for 1-2-3 Flip, and I’m thrilled that he’s back again with another article:

Top 4 Seller Questions – Answered!

If you’re working directly with motivated sellers, this article is for you…thanks again, Scott!

If you want more information on this topic, check out our latest article in our Flipping Education section:

Employee vs. Independent Contractor

Scott currently runs Struggling Investor.com, where — between his blog, his articles and other great material — he is giving away a tremendous amount of information that up-and-coming investors should greatly appreciate.

Scott has been kind enough to write a guest article for 1-2-3 Flip.com, aimed at helping up-and-coming wholesalers build their buyers list:

“Building a Buyers List,” By Scott Costello

If you’re looking to beef up your buyers list for your wholesale deals, this is a must-read…thanks Scott!

Based on the feedback from the attendees, I have decided to host another event on July 18 — and perhaps another in August if there is enough interest.

So, if you’re in the Atlanta area, and want to learn how to do your own Pre-Purchase Inspections and Rehab Cost Estimation, sign up now…