How to get Fannie Mae financing on an investment property!

My real estate investing lawyer, Matt Griffith, hit me up last night about a new Fannie Mae program that allows investors to get financing on some of their REO properties… This comes from a local mortgage broker, Mickey Brooks (317 218.0283), who has the contacts to get deals done in a couple of states nationwide, so give him a call, and if he can’t help you, he can prolly refer you to someone who can!

“Dear Valued Partner,

As we enter 2009, the crisis in the financial markets seems to be the top story on every news channel. But many of the reporters and so-called pundits don’t understand what really happened, what’s happening today…and what may happen next.
That’s why I’m excited to tell you about a series of articles I’m creating to put an end to the confusion once and for all! In these easy-to-understand articles, with help from many resources, I explain in layman’s terms exactly what caused the current financial crisis, what the almost daily news reports really mean – and what to be watching for in the near future.  The content for these articles comes from various services that I have invested in to stay up to date and educated, in order to always best serve as your trusted advisor. It’s important to me to stay on the leading edge as a professional, and when I saw these resources, I wanted to make them available to you as well.   I’ll attach basic stories behind the crisis for your review, to help you better understand what happened, why, and where we’re going from here. The few minutes you spend reading them will open your eyes to what very few experts truly understand.

As your trusted advisor, I’m committed to doing whatever I can to help you understand what the current economic situation means for you going forward in 2009.
Give me a call if you want to discuss strategies for strengthening your financial future in the weeks and months ahead.

Fannie Mae HomePath Financing Program
Fannie Mae has just released a new program called HomePath to help consumers buy and finance many of their REO properties.  All FNMA REO properties are not eligible for HomePath financing.  Only those properties listed at the following web site http://www.homepath.com  with the HomePath logo qualify for this program.

Mortgage Financing  The benefits include:
•  Low down payment and flexible mortgage terms (fixed-rate, adjustable-rate, or interest-only)
•  You may qualify even if your credit is less than perfect
•  Available to both owner occupiers and investors (Primary, Secondary, Investment)
•  Down payment (at least 3 percent) can be funded by your own savings; a gift; a grant; or a loan from a nonprofit organization, state or local government, or employer (2% Seller Maximum)
•  No mortgage insurance
•  No appraisal fees
•  Also eligible for HomePath Renovation Mortgage (see details below) (Primary Residence Only)

Available only on homes you make your primary residence  and offers these benefits:
•  Financing to fund both your purchase and light renovation.
•  Low down payment and flexible mortgage terms (fixed-rate or adjustable-rate).
•  Down payment (at least 3 percent) can be funded by your own savings; a gift; a grant; or a loan from a nonprofit, state or local government, or employer.
•  No mortgage insurance.
•  Renovation funds are borrowed as part of the purchase financing and held in escrow until the renovations are completed.
•  Renovation Costs limited to 20% of the “as repaired or completed” value or $30,000, whichever is less, and renovations must be completed within 3 months of closing.

About Fannie Mae Homes

•  Why does Fannie Mae have properties for sale?  Fannie Mae works with all of its partners to help homeowners prevent and avoid foreclosure; however, sometimes it is unavoidable. When foreclosures occur on mortgages in which Fannie Mae is the investor, our goal is to sell properties in a timely manner in order to minimize the impact on the community.

•  What kinds of properties are available in the Fannie Mae HomePath database?  Fannie Mae’s HomePath database includes only properties that are owned by Fannie Mae. There is a wide selection of homes, including single-family homes, condominiums, and town houses — located in a variety of neighborhoods. The number, types and the sales prices of the homes that are offered for sale may vary substantially. Many of these homes are relatively new; however, older homes are offered in some areas. Some homes may require repairs.

•  How is buying a home owned or managed by Fannie Mae different from other home purchases? Usually, when you buy a home, you deal with a seller who lives in the home. Fannie Mae has acquired these properties through foreclosure, deed in lieu of foreclosure, or forfeiture.  When buying a Fannie Mae-owned home, you should know the condition of the property, as explained in more detail below, the cost of any needed repairs, and the steps in the loan qualification and closing process before you enter into a purchase and sales agreement.•  Has Fannie Mae fixed everything in the house? Fannie Mae may make some repairs to properties to increase their marketability; however, the buyer should be aware that other repairs may be needed. Fannie Mae sells each property “as is,” which means that the buyer accepts the property “as is.” Fannie Mae is not responsible for fixing any problems after settlement. Even if the house has fresh paint, brand new carpet, new appliances, perhaps even a new roof or siding, it doesn’t mean everything in the house is new, or even works. Fannie Mae does not warrant or guarantee any work that may have been done on the property, whether as part of its efforts to sell the home or pursuant to conditions in the purchase contract. Where a home warranty is available, you may wish to buy it at your own expense. You should also consider hiring a qualified professional to inspect the property, whether it has been repaired or not. Hiring a home inspector is a recommended practice, no matter what type of home you buy.

•  What can you tell me about this house? If Fannie Mae knows of any hazards on properties we own or market, we disclose this information through our real estate listing agents. However, we may not have been informed by the previous owner of all hazards. We encourage you to have the property inspected by a professional before you buy.

•  What type of sales contract does Fannie Mae use? Fannie Mae uses a state-specific real estate purchase contract and a real estate purchase addendum for our properties. If there is anything in the document you don’t understand or aren’t comfortable with, you may want to contact a real estate attorney, the real estate sales professional who has listed the property, or any real estate professional of your choice to review these documents with you.

•  Do I have to use Fannie Mae’s selected title, settlement, or escrow companies? No. You may designate the title, settlement, or escrow company of your choice, subject to the terms of the contract.

•  Will Fannie Mae accept an offer contingent on the sale of my house? No, Fannie Mae will not accept offers contingent on the sale of your current home. Other types of contingencies will be considered on a case-by-case basis.

•  Why does Fannie Mae require a lender’s prequalification statement before negotiating a home purchase offer? Fannie Mae wants to be sure that prospective buyers will be able to complete the sales transaction, including obtaining financing when needed. Prequalification allows you to see how much house you can afford and the mortgage amount you may be able to qualify for before you make an offer on a home. It also helps you focus on homes in an affordable price range. A loan prequalification doesn’t mean your loan is approved. You must apply for a loan separately, after you are prequalified and your purchase offer is accepted.

•  Does Fannie Mae provide special financing? Special financing is available on many properties through HomePath Renovation Mortgage.

•  Can I buy a house directly from Fannie Mae without going through a real estate sales professional? No. Fannie Mae depends on the expertise of local real estate sales professionals and accepts offers only through our real estate listing agents. You may work with any real estate sales professional to submit an offer to the real estate agent who has listed the property.What happens if Fannie Mae gets more than one offer? All interested parties may be asked to submit their best offer in writing though the listing agent no later than a specified date and time. Fannie Mae may accept or provide a counteroffer that we determine to be in our best interest. Fannie Mae is not obligated to accept any offer submitted.

General Mortgage Lending Terms
(Underwriting conditions may change on a per transaction basis)

30 Year Fixed & 30 Year Fixed with 10 Year Interest-Only Option
3/1 and 5/1 LIBOR ARM & 3/1 and 5/1 ARM with Interest-Only Option
Property Type	Max LTV	Max CLTV	Min Credit Score	Notes
1-2 Unit Primary Residence	95%	95%	660	1 Unit Warrantable Condo Pud
	80%	95%	580	1 Unit Warrantable Condo Pud
1 Unit Second home	90%	95%	660	1 Unit Warrantable Condo Pud
	80%	95%	580	1 Unit Warrantable Condo Pud
1-2 Unit Investment property	90%	90%	660	1 Unit Warrantable Condo Pud
	80%	90%	580	1 Unit Warrantable Condo Pud
30 Year Fixed & 30 Year Fixed with 10 Year Interest-Only Option
5/1 LIBOR ARM & 5/1 ARM with Interest-Only Option
Property Type	Max LTV	Max CLTV	Min Credit Score	Notes
1-2 Primary Residence ONLY	97%	105%	660	1 Unit Warrantable Condo Pud

Real Estate Wholesaling.. Get rich quick scheme, or a lot of work?!?

Real Estate Wholesaling.. Get Rich Quick Scheme, or a lot of work?!?

I work with a lot of investors. I have a booth at our local REIA(Real Estate Investors Association), and I am constantly looking for experienced investors looking to buy my properties(yes I wholesale), or newbie investors looking to get their feet wet with private money lending and tutoring.. Point is, I see A LOT of newbies who want to get their feet wet by wholesaling. A lot of these guru’s preach how easy it is to make 5, 10, 50k on a single wholesale deal.. Most guru’s don’t tell you how much work is involved.

Yes, you can make money in wholesaling, but there is a lot of work involved. There is many facets to wholesaling.. It’s not just making lowball offers on houses, and then selling them quick and easily… You are going to need to find sellers(banks/reo properties are easy enough, but there is decent competition there, so don’t depend on these). You will need buyers(Investors who have cash and are ready to go on a moments notice). You will need to know how to be creative and market effectively. Finding sellers and buyers and coming up with the marketing and the marketing itself are all things that are going to take time… Lots of time!!

Let’s run down the main process, as if we already have some buyers(investors) on the line, and we are looking at REO/Bank Owned properties, and since we are in fantasy land, lets say you are a Realtor and can make your own offers(I kid, I kid!)..

On average you will write 20 offers on houses before you will get 1 under contract… So that means you are going to go look at 20 houses(30 minutes a piece), then spend 10-15 minutes a piece writing up offers to submit. Let’s say they all counter offer and it takes you another 15 minutes each to write a counter to their counter, etc So 1 hour per house @ 20 houses = 20 hours per week plus or minus. Add in multiple second or third counter offers and the time limits can go up.

Once you get one under contract it will be time to submit your earnest money and then on to crunch time and getting it sold… You need to be calling all your investors and getting them in to see the house. Once you get one on the hook, you need to get them to give you the wholesale money and get them on the contract. Sounds easy right?

Let’s talk issues….

You don’t have your Realtors license… You have to drag a Realtor to 20 houses a week. You have the Realtor look up comps for your deal. You have the Realtor write up the contracts on 20 houses. You have the Realtor submit and defend all the offers. You have the Realtor submit your earnest monies. You are probably going to have to submit earnest money checks with each offer(don’t worry, they won’t be cashed unless the deal gets accepted). If you can’t close, your Realtor is going to have to fight to get you your earnest money back.

You can’t find a buyer…. Most likely you didn’t get a good enough deal for most investors, or you missed some repairs. You either buy it yourself, or you have to get out of the contract, and get your earnest money back. Be aware that getting your earnest money back might not happen, and in most cases it will take a LONG time to get your money back(2-6 weeks or longer). Your Realtor will be pissed because he/she drug you around to 20 houses, and you couldn’t complete the deal.

You don’t get any offers accepted….. Most likely you are having a problem comp’ing the house, or the repairs. Your offers are coming in way to low, and the bank is just laughing at you.. hehe Your realtor is going to start getting irked at all the work and no payoff.

You find a seller…. You are going to need to spend time with them, hold their hand, explain the process. You may spend 1-2 hours, or more, dealing with a seller to get them to the point of signing a deal with you. Then you are going to have a lot more time holding their hand throughout the process. You plan to hold their hand right?!?! Most people who sell to us are dealing with stressful extenuating circumstances. You need to understand this and help them feel comfortable with their decision. I know this process is about you making money, but you need to understand that you are doing a far better service for the seller. You are helping them offload a burden, in most cases. You may very well have to listen to a 3 hour speech about how the family pet died and it’s been a downward spiral ever since… DEAL WITH IT!!!

20 hours a week to preview and submit offers on bank owned homes to get 1 deal UNDER CONTRACT. Half a 40 hour work week to get 1 deal under contract. Don’t forget the time you will be spending marketing and dealing with buyers and sellers. Don’t forget the time you will be working with your Realtor(if you aren’t one). There is a lot of time involved in wholesaling. Doesn’t stop me, but I don’t have delusions of grandeur. There is no get rich quick scheme in wholesaling… Lots of hard work will pay off in the end..

80% of the things I do in real estate do not make money!

Anyone heard of Pareto’s Law, or Pareto’s Principle, or sometimes called the 80/20 Rule? The 80/20 Rule means that in anything a few (20 percent) are vital and many(80 percent) are trivial. So 80% of the work I do each day is trivial compared to the 20% of the work I do which makes my clients and myself money!

A lot of my real estate tasks are very easy, but take time to complete. I don’t have the time, but I also don’t have the money to hire someone full time. Answer: hire a virtual assistant! There are lots of companies out there that offer virtual assistants. I use odesk.com. Click the link so I get a referral fee(shameless plug).

A little background info:I send out letters to possible leads for many of my real estate deals. Problem is that finding these leads can take 1-3 hours per day. It’s not tough work, but it is time consuming.

Here is my BIGGEST recommendations when hiring a virtual assistant…

1) Write a step by step process of what you want done. Be as descriptive as possible, include screenshots where possible

a. (“ALT+Print Screen” to capture screen shots of active application and then paste them into mspaint to be modified or your word browser).

b. I generally use a program like primopdf. To print my instructions as a PDF document, and include the instructions as an attachment when I post my job for applicants to review and give me a good price. Everyone can read PDF documents, but not everyone has Word, etc. NOTE: DO NOT GIVE OUT USERNAMES AND PASSWORDS IN YOUR DOCUMENTATION. Especially the documents you attach to your job posting…

c. Be prepared: this can be time consuming(on the front side), and you need to keep this document up to date(for the longterm). Once you have it done though, you won’t need to do it again in the future. Reason for this: If things fall through with this VA(Virtual Assistant), having this document up to date makes it pretty quick and easy to get things off the ground with another VA.

d. Be aware if you are giving secured information. See #2 below. I try not to give my VA account any info that can come back to bite me. It’s not that I don’t trust him/her, but well I don’t… hehe NOTE: DO NOT GIVE OUT USERNAMES AND PASSWORDS IN YOUR DOCUMENTATION. Especially the documents you attach to your job posting…

2) Be prepared to modify your process. Either you will find better ways to do things, or you will find limitations and have to overcome them with the VA. Tip:I found docs.google.com to be a great place to store documents/spreadsheets that both I and the VA would be needing. We share an account(they are free to set up, and if my VA goes postal on me, he/she is contained). and we can both be logged in at the same time, using the same account, working on things.

3) Make a list of around 10 essay type questions to ask of the potential candidates while doing your interviews. You ARE going to get people from foreign countries applying, and you will want to judge their writing language skills(English, etc). You may want to have a conversation with them over the phone(skype, etc) as well.

4) Be prepared to get inundated with applicants. Just pick out 10-15 and shoot them your 10 essay questions, and then go from there… When I posted my first job, I had 15 applications in 15 minutes, 100 in 24 hours, and 200 in 48 hours…

5) Take it slowly once you hire someone.. They are going to have questions, and you are going to have a learning curve and have to iron a few things out… Short term it takes time, long term, it can be AWESOME!!!

Anyway, I have found Virtual Assistants to be an awesome way to get me working on the 20% things that make money. I sometimes procrastinate offloading more work to my VA, because I don’t want to go through #1 and #2 above, but in the end it is well worth the up-front time spent…

How to flash troublesome eave-to-wall intersections.

Lee’s Notes: I have had roofs on my mind lately. Water can be VERY damaging.  This was an interesting article I found about flashing. A lot of amatuer roofers don’t understand flashings either. I see a lot of avoidable damage caused by improper flashings. I like to read Fine Home Building Magazine by Taunton. So here is a story they recently printed online.

The exterior of a house presents plenty of opportunity for leaks. A common problem area is the point where the gutter on a single-story roof eave dies into a two-story wall. Roofers or siding contractors often install step flashing that allows roof water to slip behind the gutter and get behind the siding and even the housewrap.

I use redundant layers of flashing integrated into the housewrap to keep water from getting behind exterior cladding; a kickout flashing directs water into the gutter. The process might seem overcomplicated at first, but the minor expense in time is much better than having to tackle rot repairs down the road.

1. Housewrap creates the foundation. Ideally, I like to start by installing a 3-ft. by 3-ft. sheet of housewrap (or even better, a piece of self-adhesive roof underlayment) to the wall before the first truss or roof rafter is placed against it. The sheet acts as a backup at a vulnerable junction. When I can’t place the sheet ahead of time, I sometimes can sneak a piece of housewrap back there after prying the truss or rafter back just 1⁄16 in. and pulling any nails in the way.

2. The next-best starting point. If I can’t get some sort of weather barrier against the wall at the end of the eave, I apply a piece of housewrap that runs vertically from just below the soffit to at least 3 ft. down the wall, 6 in. horizontally through the inside corner, and at least a foot beyond the end of the eave.

3. Flexible flashing tape seals the eave end to the wall. I use a wide piece of flexible flashing tape to bridge between the subfascia and the wall. I cut the tape so that it laps onto the housewrap above and 3 in. above the roof sheathing.

4. Thinking ahead. Once the flexible flashing is set, I apply a piece of housewrap along the wall where the fascia hits. This piece isn’t absolutely necessary, but later, it becomes easier to cover the wall completely with a final sheet of housewrap.

5/6. Protect the flashing tape. Although flexible flashing tape is pretty durable, it’s best to protect it with metal flashing and to treat it as a backup for water leaks. I fold a piece of metal flashing for the inside corner between the subfascia and the wall. A vertical cut about 2 in. to 3 in. long helps it to fold onto the roof sheathing. I then add a second piece of flexible flashing tape to cover the open corner of the metal flashing, and I fold it down onto the subfascia.

7. There’s optional backup protection, too. I build in 110-mph to 120-mph hurricane zones, so if I install a membrane beneath the step flashing and underlayment, it’s cheap insurance against a catastrophic event. I run a 12-in.- or 18-in.-wide strip of plastic-surfaced membrane from eave edge to ridge.

Trick of the Trade: The first piece of flashing should be a kickout diverter

8. After lapping the first piece of roof underlayment up onto the wall by about a foot, I install a kickout diverter flashing that redirects water into the gutter so that it won’t channel behind the siding.

The model I’m using is made by DryFlekt (www.dryflekt.com); it costs about $11 and is available in right- or left-hand models in white, ivory, or brown plastic. (Prefabricated copper versions are on the market, too, and cost about three times as much.) I line up the inside corner of the diverter 1⁄2 in. to 3⁄4 in. lower than the edge of the drip edge-essentially equal to the distance you overhang the first course of shingles.

9. Bigger step flashing is better. I recommend 12-in.-wide step flashings bent for a 5-in. roof leg and a 7-in. wall leg. The narrower step flashing just isn’t wide enough to protect the intersection fully.

10. Finish with tape. Finally, the housewrap can be laid up on the wall to cover the top of the kickout diverter and step flashings. I cut the wrap at the turnout in the diverter and seal the top of the cut with housewrap tape. The tape adhesive might not last the life of the cladding, but it’s a good precaution. Remember that there’s a layer of housewrap underneath that will keep the water from getting to the sheathing.

Things to consider if you need to sell and you owe more than your house is worth.

Lee’s Notes: I’ve written several articles about what to do if you owe more than your home is worth.  What i see a lot of is that people can probably sell for close to what they owe, but when you figure in the closing costs, Realtor fees, taxes, etc. All of a sudden a home owner could have to come to the closing table with 10-15k or more! If you don’t have it, but can’t afford to stay in the home, here is a couple of things you need to consider.

If you’re thinking of selling your home, and you expect that the total amount you owe on your mortgage will be greater than the selling price of your home, you may be facing a short sale. A short sale is one where the net proceeds from the sale won’t cover your total mortgage obligation and closing costs, and you don’t have other sources of money to cover the deficiency. A short sale is different from a foreclosure, which is when your lender takes title of your home through a lengthy legal process and then sells it.

1. Consider loan modification first. If you are thinking of selling your home because of financial difficulties and you anticipate a short sale, first contact your lender to see if it has any programs to help you stay in your home. Your lender may agree to a modification such as: Refinancing your loan at a lower interest rate; providing a different payment plan to help you get caught up; or providing a forbearance period if your situation is temporary. When a loan modification still isn’t enough to relieve your financial problems, a short sale could be your best option if:

• Your property is worth less than the total mortgage you owe on it.
• You have a financial hardship, such as a job loss or major medical bills.
• You have contacted your lender and it is willing to entertain a short sale.

2. Hire a qualified team. The first step to a short sale is to hire a qualified real estate professional and a real estate attorney who specialize in short sales. Interview at least three candidates for each and look for prior short-sale experience. Short sales have proliferated only in the last few years, so it may be hard to find practitioners who have closed a lot of short sales. You want to work with those who demonstrate a thorough working knowledge of the short-sale process and who won’t try to take advantage of your situation or pressure you to do something that isn’t in your best interest. A qualified real estate professional can:

• Provide you with a comparative market analysis (CMA) or broker price opinion (BPO).
• Help you set an appropriate listing price for your home, market the home, and get it sold.
• Put special language in the MLS that indicates your home is a short sale and that lender approval is needed (all MLSs permit, and some now require, that the short-sale status be disclosed to potential buyers).
• Ease the process of working with your lender or lenders.
• Negotiate the contract with the buyers.
• Help you put together the short-sale package to send to your lender (or lenders, if you have more than one mortgage) for approval. You can’t sell your home without your lender and any other lien holders agreeing to the sale and releasing the lien so that the buyers can get clear title.

3. Begin gathering documentation before any offers come in. Your lender will give you a list of documents it requires to consider a short sale. The short-sale “package” that accompanies any offer typically must include:

• A hardship letter detailing your financial situation and why you need the short sale
• A copy of the purchase contract and listing agreement
• Proof of your income and assets
• Copies of your federal income tax returns for the past two years

4. Prepare buyers for a lengthy waiting period. Even if you’re well organized and have all the documents in place, be prepared for a long process. Waiting for your lender’s review of the short-sale package can take several weeks to months. Some experts say:

• If you have only one mortgage, the review can take about two months.
• With a first and second mortgage with the same lender, the review can take about three months.
• With two or more mortgages with different lenders, it can take four months or longer.

When the bank does respond, it can approve the short sale, make a counteroffer, or deny the short sale. The last two actions can lengthen the process or put you back at square one. (Your real estate attorney and real estate professional, with your authorization, can work your lender’s loss mitigation department on your behalf to prepare the proper documentation and speed the process along.)

5. Don’t expect a short sale to solve your financial problems. Even if your lender does approve the short sale, it may not be the end of all your financial woes. Here are some things to keep in mind:

• You may be asked by your lender to sign a promissory note agreeing to pay back the amount of your loan not paid off by the short sale. If your financial hardship is permanent and you can’t pay back the balance, talk with your real estate attorney about your options.
• Any amount of your mortgage that is forgiven by your lender is typically considered income, and you may have to pay taxes on that amount. Under a temporary measure passed in 2007, the Mortgage Forgiveness Debt Relief Act and Debt Cancellation Act, homeowners can exclude debt forgiveness on their federal tax returns from income for loans discharged in calendar years 2007 through 2012. Be sure to consult your real estate attorney and your accountant to see whether you qualify.
• Having a portion of your debt forgiven may have an adverse effect on your credit score. However, a short sale will impact your credit score less than foreclosure and bankruptcy.

You hired a contractor and now you want to change something?

Lee’s notes: It happens to all of us. You order something to be built/repaired/whatever.. The process is in full swing, and someone mentions “Hey wouldn’t it be great if…..”  So you decide, how bad could it be(price wise), I’ll ask them to fix/add/whatever this at the same time! Ummm, it can be bad…. Your contractor may be on tight timeframes. He can get your home done in a week, and onto the next house.. Yet this new change you want will set him back a day or two… Or you think, bah, this vessel sink is only $250, that’s not too bad, lets add it! Course the plumbing has to be rerouted to accomodate the new sink, and the counter/cabinet underneath it has to be redesigned or modified.. now all of a sudden your $250 addition is pushing $1000, or more!

I always tell people, try and avoid making changes half way into the process… It’s going to cost you.. Below is an article I found that will help you work a change order to make sure you and your contractor(s) are happy.

Change orders can help avoid dreaded lawsuits.

As an attorney practicing law in the construction arena for more years than I care to admit, I’ve learned that nothing can send lawyers scurrying away like a dispute between a homeowner and a contractor over changes. These lawsuits are expensive and emotionally charged for both parties. Despite the legal outcome, neither party ever really wins. A well-written change order, however, can benefit both the contractor and homeowner by ensuring they have a record of construction changes, how much they cost, and who pays for them.

Start with the written contract

No matter the size of the project, a contractor should always prepare a written general contract, which should be read, understood, and signed by all parties. The contract should outline the responsibilities of both the contractor and homeowner and spell out the basic terms of the project. The contract then becomes a rule book that can be relied on when a problem of procedure arises.

The general contract also should address the requirement and general form of any change order. The contract should state clearly that change orders must be in writing and be signed by all parties before the changeorder work is begun. Additionally, the general contract should mandate that any change order provide the basic terms of the changed work at issue, including a description of the work, the nature of the change, the extra cost and time involved, and the schedule of payment.

Communication is the key

Here’s a typical exchange:

Contractor: “Mrs. Smith, I reviewed each of these work items and their costs with your husband while you were on that business trip to Chicago. He told me the changes he wanted, I told him the price, and he told me to do the work.”

Mrs. Smith: “Well, I don’t buy it. I asked you to review these things with me! By the way, did my husband sign anything agreeing to the price increase, which I think is outrageous? How can you justify such an increase in cost just by changing the decking to this stuff called ipé, adding a few cabinets, and reframing the bedroom doors?” Contractor: (in the voice of the great Homer Simpson) “Doooohhhhhhoooo.”

“Change orders should be seen as opportunities to communicate rather than as a hindrance to the business relationship.”

That dialogue illustrates there is no quicker way to ruin a working relationship than a failure to communicate. Change orders should be seen as opportunities to communicate rather than as a hindrance to the business relationship. Think of the change order as a contract within the general contract, providing the homeowner with necessary information to decide whether to move forward with a change. If you’re a contractor, don’t wait until after you’ve invested time and energy in completing a change to see if a problem arises.

The dialogue also demonstrates the importance of obtaining the approval of both homeowners, particularly if they both signed the general contract. More important, all concerned parties should sign the change order. This sometimes-difficult step is the contractor’s proof that the change order was communicated to the homeowner.

For the homeowner, it’s proof the contractor had promised a specific change to be completed at a specific date.

Assume nothing

Many contractors mistakenly believe that their client under stands the nature and complexity of the change, the cost of the change (including the reason for any increased costs), how the change will extend the duration of the project, and the contractor’s expectation of timely payment. In the vast majority of lawsuits, at least one of these assumptions is in error.

The days of conducting business on a handshake are gone. If the homeowner objects to the formality of the change order or presents the Mr. Nice Guy syndrome indicating that “We’ll work out all the details later,” alarms should go off. A response like this should be met with increased diligence and effort toward getting the change order signed. A detailed change order also can protect the homeowner from a contractor who may be better at promising than delivering.

“Never assume that the homeowner understands construction or the pricing of construction. . .”

The language in the change order must be as specific as possible concerning each of these elements: description, cost, duration, and payment. Never assume that the homeowner understands construction or the pricing of construction, even if you’re a contractor dealing with a weekend warrior who spends most of the time trying to convince you how much he or she knows about construction.

It’s much better to be safe and extremely detailed than to find yourself in court with a scant paper trail. When the change order lacks basic information, the order must fully identify the missing elements, state why those elements are missing, and detail a plan for providing the missing information.

I also recommend that all parties keep copies of the change orders in chronological order, identifying the parties, the date, and the name of the project.

Keep it professional

A well-written change order not only clearly communicates all the basic terms of the changed work, but it also reminds the homeowner, in a professional and nonconfrontational manner, of the nature of the relationship.

A residential contractor works in a unique arena. The construction or renovation of a person’s home is a highly personal and emotional endeavor. In the eyes of the homeowner, the contractor often takes on a bigger role than just builder or craftsman; the contractor is seen as a friend and confidant to guide the homeowner through this endeavor.

“Strict adherence to the rules of change orders provides a reminder to both parties that home construction is business. . .”

From the perspective of both the contractor and the homeowner, the primary focus of the relationship should be business. A friendship can blossom, but the business nature of the relationship must be maintained throughout the project.

While taking emotionally charged depositions from both homeowners and contractors, I’ve often heard the dreaded line, “You don’t understand; we were good friends, and then he turns around and does this to me.” Maintaining a business relationship prevents the homeowner from placing unfair responsibility on the contractor, and it helps prevent a feeling of betrayal if things go wrong. Strict adherence to the rules of change orders provides a periodic reminder to both parties that home construction is business and that discipline by all parties is required to conduct the business successfully.

Keeping honest people honest

An older attorney once told me, “A thief is a thief.” Even though many problems I deal with relate to a lack of communication, I have seen people who are flat-out dishonest. The best intentions and the best-written change orders will not avoid a dispute with an ill-intentioned party. But equipping yourself with good intentions and wellwritten change orders can give you some of the tools for a satisfying outcome, regardless of the intentions of the other parties.

Green Thinking – 50 Watt Light from a Water Bottle?!?

I like to cruise the green sights, cause I am a green thinking individual. I was recently interviewed by Indianapolis Star for green rehabbing, but I dont think they liked what I told them, so they never printed the ad. That is a different story.

I found this video on the web, and it shows taking an empty two-liter bottle, filling it with water, two capfuls of bleach, and a cover to protect the lid from the sun. Supposedly it gives off the light of a 50w bulb. Now I would assume your mileage would vary, what with overcast/rainy days, and dont forget the need to make sure the roof doesnt leak.. Still a very interesting idea for a storage bard, etc.

New Rules for Private Lending on Indianapolis Real Estate!

I have an investing mentor who is based out of Cincinnati. She works with a lot of private lenders(people who make short term loans to rehabbers in real estate). It can be a great way to get a nice return on your investment, but it can also be a bad investment. Like anything, if it sounds to good to be true, then it prolly is… I work with private lenders, and have a pretty good reputation with them, but there are those people out there who are not good honest people. If you are considering private lending, then you should read the report below. If you want to speak with me about investing in Indianapolis Real Estate, then give me a call, and I can help explain the process and work with you, if you deem me and my deals worthy!

New Rules for Private Lending

As soon as a great new strategy is developed, it’s a pretty sure thing that some idiot is going to come along and ruin it for the rest of us.

Take for instance, private lending, the serious investor’s favorite way of financing rehab acquisitions over the short term. With the right lender, borrower, and deal, it’s a win-win for the investor who needs cash to close and renovate a property and the lender who wants a relatively high return (8%-10% to very experienced investors, depending on LTV and whether the loan is in first position or not). The investor gets money for repairs—almost impossible to come by in the conventional market today—and the lender gets high security and a passive income.

Unfortunately, I am increasingly hearing about private lenders who are losing part or all of their investments through borrower mistakes and outright fraud, and that means fewer opportunities for the rest of us—and, eventually, increased government regulations on these deals.

I have been teaching both lenders and borrowers how to protect themselves in these transactions for years, and I am of a mind to stop doing so, because it’s too easy for inexperienced (or financially unstable, or plain old crooked) investors to talk inexperienced lenders into deals that aren’t favorable for the lender.

Because ethical behavior always begins at home, it’s time to adopt new rules for dealing with private lenders (or with borrowers, if we are the lenders) in all of our businesses, and to understand where the pitfalls of this otherwise-awesome strategy lie.

First, it’s important to understand that only about 50% of the “safety” of a private loan lies in the property itself. We focus on the loan to value of the property as the primary “protection” that a lender has. The other half lies in the borrower’s ability and intent to repay the loan.

Unfortunately, I’ve seen a number of cases recently where lenders have found themselves in the unenviable position of either foreclosing on a property that they never intended to own, or, in the case of some lenders in 2^nd position, actually losing money on a deal that was pitched as “secure”.

Here’s an example of how this can happen. Let’s say an investor/borrower purchases a property that really is worth $200,000 after repairs. If the repairs should cost, say, $40,000, and the borrower has it under contract for $100,000, a loan of $100,000 is, on the surface of it, very secure. In other words, if the borrower doesn’t make so much as the first payment, the lender can repossess the property and  be reasonable sure of selling (or auctioning, in the case of an actual foreclosure) the property to recover his investment.

However, there are several things that can go wrong with this scenario. First, in some states, lenders are not permitted to recover the costs of foreclosure at the sale. They can get the principal, any unpaid interest, and sometimes reasonable penalties, but the cost of hiring the attorney or paying the trustee to file the paperwork and attend the auction is a cost that the lender eats.

Second, it IS possible for an inexperienced investor to DECREASE the value of the property through bad repairs or stupid decisions. If the lender repossesses—through foreclosure or “deed  in lieu of foreclosure”—the property after it’s been gutted back to the studs, he may be taking back a property that now needs $50,000 in work rather than $40,000—and is thus worth $90,000 in a quick sale rather than $100,000.

And never mind the poor second mortgagee, who may well have loaned $40,000 to the same borrower for repairs, only to find that the property is worth less than the balance on the FIRST mortgage, much less the first and second, when the payments stop coming in.

Private lenders who are lending to relatively new investors need three things to make up for the lack of experience on the part of the borrower: first, a higher interest rate to cover the risk (why do you think hard money lenders GET 14-16% interest? It’s because there’s a high risk in lending money to every Tom, Dick, and Harriet who has a deal!). Second, a lender lending to such an investor needs some experience of his own to compensate for the borrower’s lack thereof; going over this borrower’s rehab plan to make sure both the repairs and the costs make sense is one way to avoid the “Oh my God, why did he gut perfectly good plaster walls?” syndrome later. And third, this lender needs to be willing and able to monitor repairs, and have some measure of control when and if the rehab gets out of hand.

Private lenders who don’t have these things would, in my opinion, be best served by lending money at the bottom end of the interest rate spectrum to very seasoned, very experienced investors with good reputations and solid businesses. An experienced investor whose property is destroyed by an uninsurable meteor strike will still be able to make his lender whole by taking the profit out of the next deal, or flipping some houses, or drawing from a business line of credit, or whatever. An inexperienced investor, faced with a loss of any sort, is much more likely to throw his hands up and let the lender deal with the mess.

Second, we need to stop tempting our borrowers (and ourselves) with large sums of cash. I refer here to lenders who loan money for purchase and repairs, whether it be as part of an all-inclusive first mortgage or a repair second. The temptation to dip into such a fund for personal expenses, other deals, emergencies and so on is huge even for the most ethical, well-intentioned borrower—and, unfortunately, not all borrowers are ethical or well-intentioned.

A few years back, there was a case here in Cincinnati wherein a local investor—we’ll call him Gary—was cutting a giant swath through the private lenders in town, offering them high interest rates (12% plus points) for “repair seconds” on properties he was acquiring.

The high rate should have been a tip-off, given that Gary claimed to have renovated over 200 houses in the past 5 years, but he managed to borrow something in the range of $1 million from dozens of small lenders, $10,000-$40,000 at a time. Eighteen months later, I started getting calls from some of those lenders asking what to do about the fact that Gary was months behind in his payments. As the story unfolded, it turned out the he was behind to everyone—banks, first mortgagees, credit cards, even the lender on his own home. The proceeds from the repair seconds had not been used to repair the properties at all; it had been spent on repaying the last lender, whose money was spent on keeping Gary in the lifestyle to which he had become accustomed. The lenders to whom I spoke recovered NONE of their investments—the properties that secured them were not worth, unrepaired, the balance on the first mortgages, much less the seconds. Gary evaporated into the night, leaving a bunch of burned, broke lenders in his wake who will probably never be rehabilitated.

Now, don’t get me wrong—I think that repair seconds can be a safe and profitable investment for the lender. But handing any borrower a wad of cash and hoping it will be used for the intended purposes is just foolish. The correct way to handle cash outside of that needed to purchase a property is the way banks do—to put it into an escrow account to be released to PAY for repairs as they’re completed.

This, clearly, creates a layer of complexity that many private lenders and borrowers are not used to. First, a checking account must be set up especially for the money, and the signatures of both the borrower AND the lender (or his representative) should be required for withdrawals (thus keeping either party from draining the account).

Second, a reasonable system has to be set up to release the funds in a timely fashion. I’ve seen this done as a schedule (the borrower gets an initial “get started” draw of $5,000, then gets 25% of what’s left when the furnace and roof are installed, another 25% when the kitchen is done, another 25% when the bath and carpet are completed etc). I’ve also been involved in a deal where the out of town lender appointed an experienced local to check the property (and the invoices) prior to each draw.

Overcomplicating this system, or making it difficult for the borrower to proceed with the work in a timely fashion, helps no one—but creating a plan that works easily for everyone and, most importantly, leaves the unspent repair funds in liquid form in case the renovations are never completed, is an important safety measure for both the lender and the borrower.

One note: this, of course, applies to second mortgages that are intended for repair of properties, of course. If the second is for the purpose of pulling equity out of a fully repaired and operational property, there’s no reason to escrow the money—just to make sure that the value of the property supports and protects the value of all mortgages against it.

Third, it’s important to trust, but verify. Even when working with an experienced investor/borrower, it’s important not to get complacent about the basics of safe private lending. Even when lending to (or borrowing from) someone with whom one has worked before, it’s crucial that all the paperwork be in place, all the numbers be right, and all the safety measures be solid.

The bare essentials for protection of the lender include: a title search showing that the lender will be in the expected position as a lienholder; a lender’s policy of title insurance, generally paid for by the borrower; a proper hazard insurance policy showing the lender or lenders as loss payees; a recorded mortgage that correctly outlines the terms of the mortgage; and, if the lender is not experienced enough to determine value, a professional appraisal.

In my opinion, several other things should be added to this list for the protection of the lender, including: a personal signature by the borrower(s) on the mortgage note (as well as his signature as owner of his entity); and an escrow agreement or modified land trust that allows the lender to take possession of the property without foreclosure in case of the borrower’s non-payment. In addition, when working with a new borrower, I think it’s a good idea for the lender to do a records search to make sure he hasn’t ripped off others in the past.

It is so important to make sure that all of the I’s are dotted and the T’s are crossed with risking your money (or someone else’s). Things change in people’s lives, and the most important thing I can say to you is, make sure that everyone in the deal is fully protected from loss.

And one last piece of advice for private lenders: if there are facts that you can’t verify, or something seems “wrong”, or “too good to be true”, or if there are parts of the deal or his business that your borrower wants to keep you away from, trust your gut. When an “experienced” investor suddenly wants to borrow your money at 12% interest when 8% is the going rate, and wants you money in cash for “repairs”, and seems to be borrowing an awful lot of cash from an awful lot of people, don’t let the fact that it’s not standard operating procedure to pull a copy of her credit report keep you from doing so anyway. Don’t let the fact that he’s a trustee with your association and seems incredible confident stop you from doing ALL of your due diligence. Don’t hand over the cash until you know you’re as protected as you can be.

How the other half lives. Duplexes where the twin is abandoned!

Lee’s notes: I found this article, and found it interesting, so figured i would post it… What do you do when a conjoined twin dies?!?

How the Other Half (of the Paired Townhouse) Lives

What happens to houses joined at the hip(ped roof) when one half is abandoned by its occupants  and left to the elements? A photo essay by Camilo Jose Vergaga in Camden, New Jersey, explores the stark juxtaposition of living architecture and deserted buildings – paired homes where one remains in use and the other has fallen deeply in disrepair.

According to Vergaga, the remaining occupants encounter various problems when their former neighbors exit the picture. Burst pipes, potential fires, decaying materials and unwanted squatters are just the start. Sometimes the remaining resident simply turns their adjacency into a storage site or trash receptical for their unwanted old goods.

Vergaga points out that in poor neighborhoods, as opposed to middle-class ones, when someone is taken to the hospital or otherwise leaves their home the neighbors and police tend not to watch out for the place in order to prevent problems. As the population of Camden continues to decrease these mismatched pairs only grow in number.

Camilo José Vergara a Chilean writer and photographer now living in New York who is well known for his urban decay photography. In many cases, he makes return trips ot the same destinations to document changes overtime. He has also won a number of awards for his photography and has been exhibited in museums around the world. In one of his most compelling but controversial stunts, he proposed turning a huge portion of downtown Detroit into an intentional spectacle of preserved urban ruins.

Want a half bath, but only have enough room for a toilet?

I have a flip house we have recently put on the market.. It’s a 1950’s bungalow, and it has 1 full bath… 3 bedrooms, and a 2 car garage, but that one lousy bath! hehe

It’s hard to explain, but you enter into the home in the living room, and there is a closet jutting out about 4 feet by 3 feet on the wall to the left. It’s like someone put a cabinet behind the front door, but more finished(drywall and normal closet door). So basically there is like 6 feet of wall space that kinda doesnt make sense.. Good place for entertainment center I guess, but not much else.. ANYWAY, my father(my general contractor) has been harassing me for over a month to add a half bath in place of that 3′ x 6′ area of the living room. You know, wall it out and put a door on the hallway for entry… I’ve just been thinking it wouldn’t make sense.. Not only would it put 2 bathroom doors next to each other in the hallway, but it would be pretty tough to put a sink vanity and a toilet in a 3′ x 6′ room.

So tonite, I was trying to find the end of the internet, and I happened on a product which turns the tank/top of the toilet into a small sink basin… Is this my solution?!?!  Would it really make a useful bath? I mean on the one hand you could do your “business” and wash your hands, but would people accept that as a “half” bath?! I doubt it, but it is an intriguing question and thought process… Would people feel comfortable brushing their teeth over the toilet?!? It’s clean “cold” water, but I think people might get squeemish… Not to mention, I would tend to think there is probably quite a few people who would think it was dirty water.. You know, those same people who think there really is a nigerian princess out there with gobs of money they are willing to give away!

A lot of “experts” say when you are rehabbing/flipping homes, you need to do one thing that throws the house over the top…. Could this be that one thing?!?!

I sent the site to the old geezer(my dad), let’s see what he thinks.. hehe I wont ask the wife, or my mother, cause I know they will tell me HECK NO!!! hehe