If you are a fan of late night TV you can't not see an infomercial showing how you too can make a fortune in real estate. They purport to show you how to do this with little or no money down and that often you can do it without actually taking out a loan or going on title.
I'm not going to say that their systems don't work, because they do. Many people have made a fortune through creative real estate transactions. But what they don't tell you is that things have changed. Some of the ways that deals were structured in the last few years are no longer able to be financed today. Following are a few.
Earnest Money with buyer "or assignee". This would allow a borrower to purchase a property or assign the right to purchase to someone else. For the last few years many investors used this clause to lock up the rights to purchase a property with a small down payment and then find another buyer to purchase it from them at a higher price. This was, and still is, very popular with new construction developments or condo projects. A buyer will try to get in at the beginning of the project while properties can be bought cheaply. Their hope is that as the project moves towards completion property values will increase and they will be able to make a nice profit. It wasn't uncommon to see an increase of $10,000 or more over a few months time.
Most of my lenders will no longer allow this wording on earnest money agreements. One of the reasons is that to many Realtors and investors would make an offer on a property at close to market value and the find a buyer willing to pay tens of thousands more for the same property with little to support the increase. Couple this with appraisers who would stretch the value of the property and you have potential for fraud. This is one of the reasons that property values have increased so much over the last few year.
I honestly believe that there will be a lot of surprised investors, and Realtors who have recommended this strategy, who will be in for a surprise as their clients try to assign the property to another party for a higher purchase price when it comes time to close on the property. Many will either have to go ahead and purchase or lose their earnest money.
While it's not impossible to fund these loans, the industry trend is moving away from allowing them.
Option to Purchase: This is a tool used by many investors and is a legitimate method. It allows an investor time to do their due diligence and look at their options prior to purchasing. It also allows them time to find another buyer. This has also been combined with a simultaneous close allowing investors to quickly make money with no credit, down payment or risk. (These are the ones you see on TV.)
An example of how this could work is party "A" makes an offer with an "Option to Purchase" with party "B" for $200,00. "A" then finds a buyer, "C", who is willing to pay $220,000 for the property. "A" and "C" draw up a purchase agreement to close at the same time that "A" and "B" close. "B" is not aware of "C".
Where the lender would have a problem is when the Title company is instructed to pay"A" a "fee" of $20,000. "A" is not on Title nor a real estate professional. "A" is doing many of the same tasks of a real estate professional yet is not licensed to do so. Lenders want to see a clean paper trail with sellers being on Title. In this case, "A" never goes on Title.
Many lenders are no longer allowing for a quick flip at a higher selling price unless there is substantial proof that the property was either sold under value or that sufficient work was done to the property to support the increase. I'm also finding that most lenders want an investor to bring cash to the table and/or carry a 6 month to 1 year pre-payment penalty.
I am in no way saying that these practises are illegal or not being used. I'm just trying to show that the market has changed and lenders are no longer making many of the same lending decisions that they formally did.
I've been told that a "reasonable" increase for a quick flip will be allowed. This would probably equate to 1-2% of the purchase price. Not a lot, but still a decent living for an aggressive investor.
The best way to invest and see an profit in your purchase is to go on Title, plan on holding the property for 6 months to a year or make significant improvements.
Most importantly, work with a competent mortgage professional who can help you understand what financing issues your future buyer will be faced with when the evidence of your purchase transaction comes to light.
Blessings and good investing.
Larry Morris is a loan Officer with Equipoint Financial Network in Newberg, Oregon. He specializes in relocations and Sherwood, Oregon neighborhoods. He can be reached at larry.morris@equipoint.com. His website is www.PDX-Mortgage.com. This material is copy protected 2007 by Larry Morris, Mortgage News that Matters. All Rights Reserved
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