Types of Real Estate Investing Deals

Want a list of different types of real estate deals to chose from? If you do, then read the article below.  It goes through a detailed list and explanation of deal types.

In this edition we’ll focus on defining and understanding what types of deals make up the real estate investor’s landscape, how to recognize them, and how to put money in your pocket from them.Here is the list, in no particular order…1) Free and Clear–>This is a property that has no underlying loans. That is,the seller owns it “free and clear” of mortgage liens. These properties possessthe widest latitude of exit strategy (once I’m in, how do I get out).

Normally, the greatest profits are derived from purchasing the property with sellerfinancing (below) and then rent forever, or to sell on a wraparound mortgage(below) with a long term.Pros: About 33% of the properties in the US are owned free and clear.Cons: Sellers are typically not motivated and the properties are older and requiresubstantial monies to refresh. Marketing expenses can be higher on these deals,because the sellers are generally not motivated.

2) Seller Financing–>These deals should be on the top of your Most Wantedlist. The idea is to buy the property and have the seller become the bank, whereby you pay them regular loan payments, with terms created and agreedto by both parties. High Equity properties or Free and Clear properties are perfect for the potential of seller financing. The title of the property would be inthe buyers name, with a mortgage held by the seller.

Pros: You can buy with seller financing and you can also sell with owner financing,on the same property. It is possible to get very low interest rates when buyingand then sell at above prevailing interest rates.Cons: Sellers are typically not motivated and the properties are older and requiresubstantial monies to refresh.

3) Subject-To–>These deals should be near the top of your Most Wantedlist. The idea is to buy the property from a seller, whereby the loan stays in the seller’s name and the title to the property goes in your name. You make the underlying loan payments to the banks. These deals make it possiblefor you get keep the house yourself (to live in), to re-sell it to a new buyer usinga wraparound mortgage (below), or to assign (below) the deal to a third party.

Pros: In a nutshell, you end up with a property with all of the benefits and withnone of the legal responsibility. These deals are for sellers who can’t sell and buyers who can’t buy. There are literally millions of potential deals now. Youcan rent these, sell them on a wrap, or assign to a third party buyer. Cons: Sellers need to be motivated and third-party buyers need assignment fee cash.

4) MPO/MAO–>The Maximum Profitable Offer or The Maximum AllowableOffer represents the maximum amount that an investor should offer on a property.The offer varies greatly if the property is to be purchased for a flip or a rental.The offer should include all costs associated with the transaction.Pros: The MPO is a very powerful concept, in that it allows the investor toinclude a “safety cushion” of profit for when things go awry. We builtWhat2Offer to determine Kick-Butt offers in seconds, on most any property situation. Try it NOW for a FREE TRIAL. Cons: Accurate numbers are difficult to determine without underlying program.

5) Wholesale–>Wholesale means that the price is below the full value (Retail),such that a savvy real estate investor would buy the property. The idea is to buy at Wholesale, fix and then sell at Retail. The other option is to buy at wholesale and then pass the deal onto another party for a fee (Assignment). Pros: Most true wholesale deals are easy to pass on to third parties. Cons: Significant discounts are needed for the wholesaler and the retailerto make a profit, so deals are more scarce.

6) Assignment–>An assignment occurs when you pass a deal onto a third party. For example, you send out marketing and the seller contacts you. After some back and forth, you strike up a deal with the seller and then both parties signthe purchase contract. You then assign this deal to a new buyer. In so doing,you have assigned the contract and a fee can be collected.Pros: Literally thousands, if not millions, of buyers in the Subject-To endbuyer population pool. Additionally there are lots of cash buyers as third party investor buyers. Cons: Assignment fees come out of the total profit in the deal.

7) Retail–>This involves selling at “full market value.” The idea would be tobuy properties at wholesale and then sell (after fixing?) at retail. From the old adage buy “low” and sell “high.”Pros: Selling at Retail CAN produce larger profit spreads.Cons: The selling risk is also the high, because you are trying to sellto picky retail buyers.

Exit Strategy–>This is your strategy on what you are going to do with a property after you purchase it. A good real estate business model hasat least 3 strategies: Deals that provide money fast; Deals that providebig payoffs; and deals that provide for retirement income.

Fast Payday Strategy

a) Assign your contract for a fee without taking title.b) Take title for only minutes until you re-sell.c) All cash deals where any underlying loan is paid off.”Subject To” deals where the underlying loan is not paid off.Big Payday Strategya) Get ownership and free equity without using your own cash or getting a bank loan.Then, sell to an owner occupant with the intent to cash out now or within 6 months.b) Buy bank owned properties for pennies on the dollar.

c) Buy free equity “subject to” existing loans.d) Create free equity by discounting or short selling (below) the 2nd mortgage and taking over the 1st “subject to.”Retirement (Long Term) Strategya) Buy or finance properties with 15 year or less amortizations then rent until you pay them off. i) Buy “subject to” an existing 15 year amortizing loan (example 9 years left) and rent until free and clear. ii) Buy free and clear houses and structure paying seller’s on a 10-15 year amortizing loan and never sell, rent until paid off.

Wrap–> A “wrap” is NOT a sandwich! It is short for wraparound mortgage.The basic idea is that a wrap mortgage “wraps” up the underlying mortgagesinto a new wrap loan. The creator of the wrap normally suggests the loan terms,the interest rate, and the principle amount. For example, if a property worth$ 150,000 had a first of $ 100,000 at 5%, payable to some bank. A wrap loancan be made for $ 120,000 at 7% interest. The underlying loan is made to the bank and and the new wrap note is paid to the seller.

Flip–>This is the term for quickly turning over a property from a sellerto a new end buyer, with a short amount of hold time. This is the oppositenotion of the long term hold investor.

Hold–>The amount of time required to complete a property transaction.For fix and flip deals, it is normally in the range of 150-180 days.

Short Sale/Foreclosure–> A complicated, pain-in-the-butt legal process, in which investors may still be able to get good deals. Foreclosure laws vary significantly by State–so learn your local laws. Below is a working glossary of the terms and meanings of this venue.

DELINQUENCY: The day after a payment is due, a loan is DELINQUENT. For example, if the grace period runs until the 16th of each month (as it does for most conventional and FHA loans) payments made from the 17th to the end of the month results in the loan actually becoming DELINQUENT for a short period each month.DEFAULT: A loan is IN DEFAULT as soon as any payment has been due and unpaid for more than 30 days. Lenders normally have collections departments established to handle owner’s of loans in different stages of default.FORECLOSURE: The legal process by which a lien holder repossesses a property.FORECLOSING

ATTORNEY: Attorney representing the foreclosing lender. A knowledgeable attorney can be a great asset in getting short sales through the system.

NOTICE OF ELECTION AND DEMAND (NOD or NED):This is the result of legal action taken on behalf of the lien holder. This notice serves to inform the borrower and the public that their property has entered the foreclosure process and will be sold at an auction at some specified date (about 110 to 120 days henceforth). Foreclosure lists are normally generated from “NOD” lists.

PUBLIC TRUSTEE: My state has a third party representative in between the lender and the borrower (and the public) in a deed of trust state. They conduct the public aspects of the foreclosure process. After the NOD (also commonly called NED) is filed, the homeowner generally has to work through the appropriate county public trustee to work on their loans. Each county has a Public Trustee’s office whose charter is to notify the public and, receive cure payments, and to conduct auctions. Most states do not have public trustees.CURE: An amount of money determined by the bank and the bank’s attorneys needed to pay all arrearages on the delinquent loan. Successful curing will result in a withdrawn NOD, and a re-instated mortgage.AUCTION: A foreclosure sale. An auction is the public sale of a mortgaged property, following foreclosure of the loan secured by the property. In today’s market, it’s typically the 1st lien holder who promulgates the typical auction and ends up with the property.and now some key Bank Personnel/Terms.

SERVICING COMPANY: Most entities that we think of as “banks” or “lenders” are actually service providers, that are servicing a loan for some third party. The actual lien holder could be a group of investors (Wall Street) or even a country. Short sales are typically transacted through the service provider.

DATA COLLECTOR: Level one person at a servicing company (bank). After a short sale package and offer has been sent in, their responsibility is to ensure that all of the short sale documents are appropriate. They forward the package to the assigned mitigator for determination. These people can be the most challenging people to interface with through the entire transaction.

LOSS MITIGATOR: Level two person at a servicing company (bank). After a short sale package and offer has been sent in, they “mitigate” the bank’s loss by following a set of mathematical computations (internal to the bank). Most of the time, a loss mitigator has approval authority of a short sale offer. Sometimes the losses are sufficiently large that the short sale approval process may involve the management chain as well as the investor.And finally some Bank Workout Options:These service providers have more options than just short sales. Below are a list of the more common options and their relative meanings:Reinstatement–Catch-up on late payments and bring the loan current–can also be called a “Cure.”Forbearance–Take the total of the arrearages and divide this number by six or twelve months.

Homeowner has to be able to pay this amount monthly PLUS their regular monthly payments. Low probability of success, and bank’s do not favor these.Loan Modification–Basically a “re-casting” of the loan. The bank reps will take the total of the arrearages and pile it on to the principle (the bank can even alter interest rates). Homeowner must qualify for this option. Sometimes the bank will discount the interest rate and even the principle balance. Currently there is over a 50% default rate on modifications that are zero to eight months old.

Short Sale–The bank takes less than what is owed. The lien holder may seek monies owed.Deed in Lieu–Sign over deed and give keys to bank and walk away. Junior liens normally kill this option. This option is sometimes called “Cash for Keys.”Foreclosure–A repossession of the property by the lien holder (1st normally). These properties are known as REOs (Real Estate Owned).To Your Success,Tom & SveinWhat2Offerdotcom.

Tom Farwell and Svein Groem are the owners of What2Offer