LeapfrogServices LLC Blog – February/March, 2013
I want to start this blog by announcing that Leapfrog Services LLC has moved into the commercial real estate arena! It is a lot of work; the preparation has kept me busy these last several weeks. My sincere apologies to those of you who visit our web site and read my last blog…thanks for your patience!
Foreclosure is a delicate subject. I postponed writing this blog--to really think about what I wanted to say. As a real estate investor, I promise to tread lightly and with compassion. I will be careful not to step on any toes; hoping to offer some insights that may help you gain new knowledge. Armed with the right knowledge, a homeowner can make better and more informed decisions.
The harsh reality is this: many Americans are facing foreclosure. These homeowners need help [now] while dealing with an array of emotions. Before the housing bubble burst (2006-2007), most renters made the leap to homeownership. The mistake bankers made was to lend to people who could not afford a mortgage. That's like giving the keys of a Mercedes Benz to a 5 year old! These folks probably had no money saved, no contingency plan and either marginal or bad credit. Most people live paycheck to paycheck, so having a house with no contingency plan to keep the mortgage paid on time (even paying a month in advance, for example) is a no-no.
DISCLAIMER:IF YOU ARE FACING FORECLOSURE, PLEASE DO NOT TAKE MY ADVICE AS GOSPEL; RATHER DO YOUR OWN HOMEWORK AND RESEARCH FOR YOURSELF. One way to prevent foreclosure is to understand that it occurs in three stages:
Phase 1: The homeowner is being foreclosed on by the lender. The owner is in default on his mortgage (or deed of trust). Phase 2: The property is put up for sale to the public through an auction. Phase 3: After the auction, typically the bank has taken back the property. It is officially listed as a Sheriff’s Deed, Deed in Lieu of Foreclosure or REO (Real Estate Owned).
What thoughts come to mind when you hear the word foreclosure? Do you envision the sheriff coming to your home, advising that you and your family must leave the premises immediately? Is he throwing your belongings outside on the front lawn for neighbors or passersby to take? What steps can you, as a homeowner take to avoid a foreclosure? Does the very word itself frighten you?
If any of the above factors apply to you, don’t panic! A few things you can and must do is understand the process to avoid becoming a victim. Most homeowners don’t understand how foreclosures or mortgages work. Having this knowledge BEFORE you buy a home is vital.
Rule #1: To quote Robert Kiyosaki, YOUR HOUSE IS NOT AN ASSET! It is the lender’s asset and your LIABILITY. Know the difference between the two!
Rule #2: Never buy more home than you can afford. Some Americans enjoy showing off with bigger and better toys. But they never consider the long-term consequences or have a contingency plan.
Let’s say you bought a typical 3 bed/2 bath house. Instead of qualifying for an FHA mortgage, you opted for a 30-year ARM (adjustable rate mortgage) with a balloon payment at the end of it. If you did your homework at the beginning BEFORE your home search, did you consider the long-term consequence(s)…can you afford it?
What if you lose your job? Get sick or divorced? Is a contingency plan in place? Do you have at least 6 months to a year's worth of salary set aside to keep your payments current? In other words, an emergency fund.
Rule #3: If you've been late or missed a mortgage payment, the lender or bank IMMEDIATELY begins the foreclosure process. Most homeowners don’t realize this; thinking that if they miss one or two payments, they still have 60-90 days to get current. While that may be true [technically] in some states overall, late payments will affect your credit. Know which laws are applicable in your state.
Rule #4: This process puts the homeowner in pre-foreclosure. If you fail to contact your bank or lender, they begin the process by issuing a Notice Of Sheriff’s Sale. This is the time to turn your situation around. If you bought too much house at the beginning (whether in square footage or amenities), consider this alternative: a lease option.
If you don’t like the idea of renting a portion of your home (say, a bedroom or the basement to a stranger), consider a lease option. In some states, it is known as rent-to-own and incorporates two things: a real estate investor [like me!] agrees to an option (the right to purchase a property in pre-foreclosure for a specific price for a certain period of time and a lease agreement). The timeframe is agreed upon and written into the lease option contract between the real estate investor and the homeowner. In essence, it is creative financing!
In this scenario, the homeowner is living somewhere else; therefore the property cannot be occupied. The investor advertises to find their tenant/buyer who after qualifying (through credit/criminal background checks/character references), signs a lease to rent the property for a year. The seller’s (homeowner) advantage is that they can sell the property quickly. The properties must be nice homes in desirable, sought-after neighborhoods with little to no equity; needing very little to no repairs.
Should the tenant/buyer be late on any rent payments during the year, their option to buy the property becomes null and void. Note these tenant/buyers have bumps in their credit. Leasing for a year gives them time to improve their credit by making payments on time; thus qualifying for a mortgage at the end of the lease period.
For example, I negotiate to pay the seller $235,000. The house is worth $250,000 and I have a one-year option. Houses in the area are appreciating 5% a year. The seller wants $1,100 per month but will credit the tenant/buyer the full $1,100 towards the purchase price.
I sell the home to my tenant/buyer for $262,500 (5% above the $250,000 market value) on a one-year lease option.
In essence, the rent I charge my tenant/buyer will be higher than what the seller is asking to cover the mortgage with the difference being my fee. Ideally, all things being considered, it should be win/win for all parties.