REAL ESTATE INVESTINGREAL ESTATE INVESTING

• Real estate investing involves the purchase, ownership, management, rental and/or sale of real estate for profit. Improvement of realty property as part of a real estate investment strategy is generally considered to be a sub-specialty of real estate investing called real estate development. Real estate is an asset form with limited liquidity relative to other investments, it is also capital intensive (although capital may be gained through mortgage leverage) and is highly cash flow dependent. If these factors are not well understood and managed by the investor, real estate becomes a risky investment. The primary cause of investment failure for real estate is that the investor goes into negative cash flow for a period of time that is not sustainable, often forcing them to resell the property at a loss or go into insolvency.

CRITERIACRITERIA

• What’s my criteria?

Does it have the right features for resale or rental?

In practice criteria narrows an investor’s choices to the properties that represent

When the property you find matches your criteria what you get in return is something with predictable value.

CRITERIACRITERIA

• You have to begin with a picture of what type of real estate investment you’re going to make.

• Close your eyes and try to imagine the property that you’ll begin your real estate investment with…can you see it. How many bedrooms does it have? How many bathrooms does it have? Is there a basement? Can you see the neighborhood? How much are you willing to pay for it? These are just a few of the questions you should be asking your self before you begin your journey.

YOUR NETWORKYOUR NETWORK(LEVERAGING)(LEVERAGING)

• Your network is who helps you in your investing

• Utilizing the skills of qualified professionals you can accomplish more than going it alone

• Useful additions to your network: REALTORS, loan officers, attorneys, insurance agents,

YOUR NETWORKYOUR NETWORK(LEVERAGING)(LEVERAGING)

• Your network is your highly trusted, highly valued team, and like any professional team you have star players and you have reserves. Many will come and go. As a real estate investor it’s important to align yourself with qualified realtors, loan officers, attorneys, appraisers, contractors, municipal employees, and other investors, just to name a few.

TermsTerms• Terms include everything from the offer price, down

payment, interest rates& conveyances, occupancy, and closing costs.

• Terms are where a great deal can be created from even the most modest criteria.

• A skillful negotiation of terms can lead to a better equity position, improved cash flow & sometimes both.

• Terms are about maximizing financial value.

• MAKE MONEY GOING IN!!!

INVESTMENT STRATEGIESINVESTMENT STRATEGIES

DON’T GO IN BLIND!!!

YOUR INVESTMENT STRATEGYYOUR INVESTMENT STRATEGY

• Buy& Hold v. Buy & Sell

• Your strategy is contingent on whether you’re looking for a long term investment and cash flow or you’re looking for your strategy to be more short term such as “flipping”. In today’s real estate market both strategies seem like viable solutions.

IV. Exit StrategiesIV. Exit Strategies

• FLIPPING • Flipping is buying an under priced property and then

quickly reselling it at market value. Homes are typically sold below value by uninformed sellers or those in distress (like job loss or foreclosure). Often a property is sold under market value because it is a "fixer upper". Sometimes they require very little such as paint and carpet and other times they have mold, asbestos, or foundation issues. These inherently hold more risk and more work, and therefore often have substantial profits.

Outside forcesOutside forces

• Real estate business cycles are about cyclical fluctuations of quantities and prices of construction, sales, permits and inventories of real estate properties.

Supply &Demand/ InventoriesSupply &Demand/ Inventories

• Supply and demand is an economic model based on price, utility and quantity in a market. It concludes that in a competitive market, price will function to equalize the quantity demanded by consumers, and the quantity supplied by producers, resulting in an economic equilibrium of price and quantity. An increase in the quantity produced or supplied will typically result in a reduction in price and vice-versa. Similarly, an increase in the number of workers tends to result in lower wages and vice-versa. The model incorporates other factors changing equilibrium as a shift of demand and/or supply.

Supply &Demand/ InventoriesSupply &Demand/ Inventories

• Real estate markets are considered to be “normal” when there is 6 months worth of inventory. This is a number that most of the Chicago land area hasn’t seen since May/June of 2006. With inventory numbers peaking last October-December at levels around 24 months for most areas.

• Technically what that means is that it would have taken 24 months to sell every home on the market if no new homes came on the market and the buyers continued to purchased homes at the exact same rate.

• The way real estate inventory levels are calculated is by taking the total number of listings that are “For Sale” and dividing that number by the number of homes that are “Under Contract”. For example if there are currently 500 homes for sale and 50 home currently under contract then you would have 10 months of inventory.

4 MAJOR COMPONENTS OF A 4 MAJOR COMPONENTS OF A REAL ESTATE CYCLEREAL ESTATE CYCLE

MARK-DOWN PHASE

ACCUMULATIONPHASE

DISTRIBUTIONPHASE

MARK-UPPHASE

ACCUMULATION PHASEACCUMULATION PHASE

• This phase occurs after the market has bottomed& innovators and visionaries begin to buy figuring the worst is over.

• Valuations or values are very attractive• General market sentiment is still very

”bearish”• For every seller that has thrown in the

towel someone is their to pick up a healthy discount.

Mark-up phaseMark-up phase

• At this stage the market has been stable for a while and is beginning to move higher

• The early majority are getting on the bandwagon to invest now

• As this phase begins to come to an end, the late majority jump in and market volumes begin to increase substantially

• The “greater fools theory” now prevails, valuations climb well beyond historic norms, and logic & reason take a back seat to greed

• WHILE THE LATE MAJORITY ARE GETTING IN SMART MONEY INVESTORS ARE UNLOADING!!!

Distribution phaseDistribution phase

• In this phase sellers begin to dominate

• This part of the cycle is identified by a period in which the bullish sentiment of the previous phase turns into mixed sentiment

• When this phase is over the market reverses direction

Mark-down phaseMark-down phase

• The most painful for those who still hold positions

• Many still hold on because their investment is now worth less than their original investment.

• This is a buy signal for early innovators & a sign that a bottom is imminent, it is new investors who will buy the depreciated investment during the next accumulation phase and enjoy the next market.

WHERE ARE WE NOW?WHERE ARE WE NOW?

• with real-estate prices nationally now down about 30% from their 2006 peak and showing signs of turning up, the prices aren't likely to go much lower. Every real-estate market is local, and so there may be a few exceptions. Overall, though, I can't imagine a better time to buy than right now.

NEXT PHASE OF THE REAL ESTATE AND HOW IT NEXT PHASE OF THE REAL ESTATE AND HOW IT AFFECTS YOUR REAL ESTATE INVESTMENTSAFFECTS YOUR REAL ESTATE INVESTMENTS

• MARK-UP PHASE• Many experts and studies conclude that we’ve reached

the “bottom” of our current real estate cycle. As we discussed earlier savvy investors used the accumulation phase for exactly what it’s called “to accumulate investment properties” with historically low interest rates, an epidemic number of foreclosures, and highly motivated sellers. It’s during the mark-up phase when they begin to unload these properties on less innovative investors.

BOTTOM LINEBOTTOM LINE

• Smart investors who recognize the different phases of the real estate market cycle are more able to take advantage of them to profit. They are also less likely to get fooled into buying at the worst possible time.

WHERE TO FIND INVESTMENT WHERE TO FIND INVESTMENT PROPERTIES?PROPERTIES?

• Realtor (MLS)

• Periodicals

• Courthouse

• Attorneys’

• Word of Mouth

• Canvas Desired Neighborhoods

WHERE TO FIND INVESTMENT WHERE TO FIND INVESTMENT PROPERTIES?PROPERTIES?

• Typical sources of investment properties include:• Market listings (through a Multiple Listing Service or

Commercial Information Exchange) • Real estate agents • Wholesalers (such as bank real estate owned

departments and public agencies) • Public auction (foreclosure sales, estate sales, etc.) • Private sales

WHERE TO FIND INVESTMENT WHERE TO FIND INVESTMENT PROPERTIES?PROPERTIES?

• Today you don’t have to look for foreclosures, they’re all around you. What you’re really looking for is the best deal! In my opinion the best deal can only be considered after an analysis of your wants, needs, capacity, and capabilities. This can only be determined after asking yourself these questions.

II. Property acquisition venues II. Property acquisition venues and methodsand methods

FORECLOSURES/PREFORECLOSURES

TAX SALES BPO’S/REO’S

WHOLESALE AUCTIONS

SHORT SALE LEASE OPTIONS

INVESTMENT PROPERTY INVESTMENT PROPERTY ACQUISITIONACQUISITION

• There are numerous methods to investment property acquisition. The bulk of these methods stem from some form FORECLOSURES!

PRE-FORECLOSURESPRE-FORECLOSURES

• When a property owner fails to make their mortgage payments for a number of months they are in default. The first step of the foreclosure process (which typically takes a number of months) that the lender will take is to file the notice of default. This is a public document that is recorded. The property owner will contract to sell the home conditioned upon the lender accepting a lesser amount than what is owed on the mortgage. Note that there are no similarities between a real estate short sale and selling a stock short.

• In many jurisdictions, including the United States, the seller is responsible for taxes on the amount of the mortgage left unpaid after the sale as ordinary income.

• The Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec 20, 2007, generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. The original effective date was through 2009 but in October of 2008, legislation extended the relief through 2012. Use IRS form 982 to handle the debt relief provision.

TYPES OF FORECLOSURETYPES OF FORECLOSURE

• JUDICIAL FORECLOSURE -allows the property to be sold by court order after the mortgagee has given sufficient public notice. When a borrower defaults, the lender may accelerate the due date of all remaining payments. The lender’s attorney can then file a suit to foreclose on the lien. After presentation of the facts in court, the property is ordered sold. A public sale is advertised and held, and the real estate is ordered sold.

• NONJUDICIAL FORECLOSURE – some states allow nonjudicial foreclosure procedures to be used when the security instrument contains a power of sale clause. In nonjudicial foreclosure, no court action is required.

FORECLOSURESFORECLOSURES

• *Illinois is a judicial foreclosure state

FORECLOSURESFORECLOSURES

• * There is no statutory right of redemption in Illinois. In Illinois a mortgagor in default who wishes to exercise the equitable right of redemption to avoid loss of mortgaged real estate may do so for a period of 7 months after the date of service on the mortgagor or after the first publication date, whichever is later. The time period can currently be shortened to as little as 30 days after a judgement has been entered if the property has been abandoned or vacant.

REO’SREO’S

• Real estate owned or REO is a class of property owned by a lender, typically a bank, after an unsuccessful sale at a foreclosure auction. A bank will typically set the opening bid at a foreclosure auction for at least the outstanding loan amount. If there are no bidders that are interested, then the bank will legally repossess the property. As soon as the bank repossess the property, it is listed on their books as REO – Real Estate Owned – and is categorized as an asset (non-performing).

PITFALLS OF INVESTING IN PITFALLS OF INVESTING IN REO’SREO’S

• Investors say, they are not without their own set of complications, including damage from an unhappy former owner. Some agents recall irate borrowers pouring cement down the toilet to mess up the plumbing, or intentionally flooding the house to inflict water damage and mold. If a property has been sitting empty for a while, there’s a chance it might have missing appliances, dead landscaping or damage from squatters.  So it might be a good idea to bring a contractor along to find out what kinds of repairs are needed and what they will cost before you make a bid. Experts suggest that for every dollar you spend on repairs you should knock $2 off the price of the home. “You shouldn’t do the work for free”.

PITFALLS OF INVESTING IN PITFALLS OF INVESTING IN REO’SREO’S

• Investors caution that while you want to look for a fixer, you don't want to choose a place that needs to be gutted, because you will have a hard time getting financing for it.

• Conduct a little research with the home’s last listing agent, if you can. Some REOs have wound up in foreclosure multiple times, because there’s something wrong with the property or its location.

• Sometimes there’s a reason the property went into foreclosure. Just because it’s a foreclosure doesn’t make it a good buy.

SHORT SALESSHORT SALES

• A short sale means the seller's lender is accepting a discounted payoff to release an existing mortgage. Just because a property is listed with short sale terms does not mean the lender will accept your offer, even if the seller accepts it.

• Be aware that the seller need not be in default -- to have stopped making mortgage payments -- before a lender will consider a short sale. A lender may consider a short sale if the seller is current but the value has fallen. The seller may have over-encumbered, owe more than the home is worth, so a discounted price might bring the price in line with market value, not below it. Do your research before making an offer to purchase. Your agent can find out who is in title, whether a foreclosure notice has been filed and how much is owed to the lender(s). This is important because it will help you to determine how much to offer.

PITFALLS OF INVESTING IN PITFALLS OF INVESTING IN SHORT SALESSHORT SALES

• There’s a lot more paperwork for the owner to prove his insolvency, and if there is a second mortgage on the property, you have to persuade that lender to remove or reduce its lien, something that may or may not happen. Short sales do not wipe out these junior liens. What you are going to find is many potential buyers go into a short sale, then the bank won’t say ‘yes’ or ‘no.’ This can go on for six months where they won’t give you an answer.

PITFALLS OF INVESTING IN PITFALLS OF INVESTING IN SHORT SALESSHORT SALES

• It can be a good deal if it works, experts say. But getting the bank to agree can be a lengthy and aggravating process both for the seller and the buyer.

LEASE OPTIONSLEASE OPTIONS

• This is made up of two parts: A lease, or rental agreement, and an option. They may be written together as one contract or as two. The Lease is simply a rental agreement between the owner and the potential lessee (tenant). Often these leases will be "triple net lease" leases (NNN) in which the lessee is responsible for paying for the taxes, insurance, maintenance, and upkeep of the property. The lease payment is typically 5-15% higher than rent might be for the same property. This type of lease can be structured so that the lessee can take the tax benefits as if he were the home owner.

WHOLESALINGWHOLESALING

• Wholesalers typically make smaller profits but buy and sell properties in large quantities. They may buy 50 homes at a time from a bank and then sell them for a small markup to move them quickly and do it again.

• A more common wholesale approach among creative real estate investors is to secure properties with no money down and do a "quick flip". Typically the property, or owner must be distressed in some way for the deal to make sense.

• Wholesalers work on some sort of distress either by the owner or the property. Distress can come in many way such a s divorce, job relocation, unemployment, severe damage to the property etc... Once a propery is gained at a significant discount the buyer quickly sells at markup of the buying price. Typical amounts range from $5,000-$15,000

AUCTIONSAUCTIONS

• In a public auction, the bidding procedure varies from state to state. The opening bid at an auction is based on the total amount owed to the foreclosing lender and may include fees incurred because of the foreclosure proceedings.  If no one bids above that amount, the foreclosing lender will take possession of the property.  In some states, bidders are required to bring the full amount they want to bid in the form of cash or cashier’s check. In other states, bidders are required to bring a certain percentage (10 percent is common) of the bid amount and pay the remainder of the amount within a certain period of time.

TYPES OF AUCTIONSTYPES OF AUCTIONS

• Types of auctionsAbsolute: The highest bidder wins the auction, regardless of price. The same as an auction without reserve.With reserve: An unpublished price the seller has set for the property. It can be different than the minimum bid. The seller can accept or decline a winning bid within a specified amount of time after the auction.Subject to lender approval: A lender, who either owns a foreclosure or who has financed a developer, must agree to sell the home for the amount of the winning bid. 

TIPS FOR BIDDERSTIPS FOR BIDDERS

• -First go to an auction as an observer to get a feel for the fast-paced process.-Read the auction’s terms and conditions sheet and the contract, and consider showing it to an attorney before the auction. Most auction companies post the documents on their websites.-If possible, inspect the property. Most are sold “as is.”-Research the neighborhood and comparable sales so you don’t spend more than you should for a house.-Bring what’s required if you are going to bid. Most auctions require bidders to put up a cashier’s check for a certain amount to show their true interest. 

PITFALLS OF REAL ESTATE PITFALLS OF REAL ESTATE AUCTIONSAUCTIONS

Foreclosure auctions are a quick process, so when you find out a property is coming up for auction, you don't have much time to research it. If a property sells at auction, all liens are wiped clean, but you are liable for any property taxes. That could wipe out any savings. There's no home inspection. Some of the houses are sold sight unseen. And if you're the winning bidder, it's yours -- there's no going back.

PITFALLS OF REAL ESTATE PITFALLS OF REAL ESTATE AUCTIONSAUCTIONS

At an auction, you have to bring a cashier's check for a down payment, and then you might have 24 hours to come up with the rest of the cash. Getting a traditional mortgage on a foreclosure would be extremely difficult. You would need to have different sources -- your own cash, access to trusts or hard-money lenders (which can charge exorbitant interest rates).

AUCTIONSAUCTIONS

• Once a bid is accepted, some states transfer ownership immediately or within a few days. In other states, it may take a month or more for the sale to be confirmed by a court or accepted by the lender. Some states have redemption periods for the owner, in which case the owner can buy the property back from the bidder if they pay the full amount paid at the auction, plus applicable fees.

AUCTIONSAUCTIONS

• Foreclosed homes are sold in "as is" condition, without warranty, and may carry outstanding liens.  If the trustee did not evict the current owners, the auction purchaser may be responsible for doing so, following local legal procedures.

ANNUAL SALE(TAX SALE)ANNUAL SALE(TAX SALE)

• If the taxes on a property have not been paid by the due date of the second installment, the county collector can enforce the tax lien & request that the circuit court order a tax sale

ANNUAL SALE(TAX SALE)ANNUAL SALE(TAX SALE)

• SUCCESSFUL PURCHASERS PAY:• ALL OUTSTANDING TAXES• INTEREST• PUBLICATION COST• PROCESSING CHARGES• COUNTY TREASURER INDEMNITY FUND FEE

Scavenger Tax Sale Scavenger Tax Sale Under Illinois law, the Under Illinois law, the

Treasurer's Office is required Treasurer's Office is required to conduct two types of tax to conduct two types of tax sales in which delinquent sales in which delinquent property taxes are sold.property taxes are sold.

SCAVENGER SALESCAVENGER SALE

• The biennial Scavenger Sale (conducted in odd-numbered years), offers taxes on properties that have delinquencies on two or more years that were not purchased at the annual tax sales. In Cook County, the sale has traditionally taken place in the fall or early winter months.

SCAVENGER &TAX SALESSCAVENGER &TAX SALES

• For a complete understanding of the distinctions between these sales and how to proceed to tax deed, read 35 ILCS (Illinois Compiled Statutes) 200/1-1, et. seq. This information can be found in any law library.

SCAVENGER & TAX SALESSCAVENGER & TAX SALES

• Those interested must meet a set of qualifications to participate in the annual tax sale. They must complete registration materials and provide collateral or a bond. The registration materials include rules for the conduct of a tax sale.

• The first is the Annual Tax Sale, held once a year, sometime after the Second Installment. If property taxes for the immediately preceding tax year are delinquent on a parcel, they are offered for sale to tax purchasers at the Annual Tax Sale. The sale might be held any time from the fall of that year to the spring of the following year.

ANNUAL SALE(TAX SALE)ANNUAL SALE(TAX SALE)

• Q: ANNUAL TAX SALE: Where and when can tax purchasers register? A: Tax purchasers register online on the Annual Tax Sale website.  A link to this website will be available on cookcountytreasurer.com approximately thirty days before the sale commences.  Potential tax purchasers must read the Annual Tax Sale Rules and Regulation available on the website prior to registering for the Annual Tax Sale.  There is also a Frequently Asked Questions section on the Annual Tax Sale website.

REDEMPTION PROCESSREDEMPTION PROCESS• The investor must wait a specified period of time (referred to as the "redemption period"), during

which time the lien (plus interest and any other fees) may be repaid. Usually the lien holder is not permitted during this period to contact the property owner (or anyone else having an interest in the property, such as the mortgage holder) to demand payment or threaten foreclosure, or else the certificate can be forfeit.

• In some jurisdictions, the lienholder must agree to pay subsequent unpaid property taxes during the redemption period in order to protect his/her interest. If the lienholder does not pay such taxes, a subsequent lienholder would "buy out" the prior lienholder's interest.

• Once the redemption period is over, the lien holder may initiate foreclosure proceedings. The proceedings (the costs of which must be paid by the lien holder, though a redeeming property owner may be required to pay them as part of redemption) may result in either acquiring title to the property (normally this will be a quitclaim deed and not insurable title), or a tax deed sale of the property where the lien holder has the right of first bid (and may participate by making additional bids if s/he so chooses). During the period between the initiation of proceedings and actual foreclosure, the property owner still has the opportunity to repay the lien with interest plus the costs incurred to foreclose.

• If the lien holder does not act within a specified period of time as defined by state law, the lien is forfeit and the holder loses his investment. Also, a lien issued in error of state law is repaid, but usually at a far lower interest rate than had the lien been valid.

PITFALLS OF TAX LIEN PITFALLS OF TAX LIEN INVESTINGINVESTING

• Payment is usually required at purchase or within a very short time afterward (often no more than 24–72 hours). Failure to pay the full amount results in all lien certificates purchased by the investor being cancelled, and may result in the investor losing his/her deposit and/or being barred from future sales.

• In many states, further actions must be taken to protect the lien holder's rights after purchase of a lien. Failure to comply exactly with these requirements may make the lien worthless.

• Tax liens on "choice" properties are quickly purchased by major institutional investors having sufficient time and resources to research valuable properties versus worthless ones, and who can afford the occasional poor choice. Smaller liens often involve properties that are generally worthless (such as odd strips of land). (In addition, Florida does not allow auctions or sales of tax liens of less than $100 on homesteads.) In "random" and "rotational" jurisdictions, investors have even less control over which liens they purchase.

• In "bid down the interest" jurisdictions, valuable properties are usually bid to the lowest rate possible greater than zero percent. (For example, Florida permits the interest rate to be bid down to a minuscule 0.25% – though it guarantees a minimum 5% return – while Arizona allows the bid to be as low as 1%.) Similarly, in "premium" states, valuable properties are bid up above the means of an average investor.

• Unlike a certificate of deposit, tax liens are illiquid. They cannot be "cashed in" (resold to the taxing authority), but must be held until either they are repaid or the holder takes action to foreclose. (It is possible, however, to assign one's interest in a tax lien to another party.)

PITFALLS OF TAX LIEN PITFALLS OF TAX LIEN INVESTINGINVESTING

• Some experts tout tax lien sales as a means of acquiring property at highly discounted prices. In practice, except for very rare instances, liens of any value are redeemed well before the property can be foreclosed (especially where a mortgage is involved; the mortgage holder is secondary in line to a tax lien holder but, upon payment of the lien, the mortgage holder would then become the primary lienholder). Where tax deed sales are used to foreclose, numerous bidders participate, thus making the chances of actual acquisition remote. For example, in one Illinois county with a population of over 500,000, the County Clerk's office said only 3 residential properties were not redeemed in 35 years.

• If someone is successful in attaining the deed to the property, the property might have environmental problems for which the new owner will be responsible. Depending upon the state in which the property is located, this could be very disadvantageous; the investor might have to pay a large amount of money to have the problem taken care of, or might be fined daily until the problems are fixed.[1]

• Deeds obtained are usually quitclaim deeds, which do not provide insurable title. The owner would then have to file a quiet title action to obtain marketable title to the property, which involves additional cost.

• There may also be other governmental liens (such as weed liens or demolition liens) that the investor must pay off when attaining title to the property. These are not part of the lien sale and remain even if the lien holder acquires the property.

• If the owner of the property declares bankruptcy, the bankruptcy court may lower the interest rate to be paid, or may discharge part or all of the lien, leaving the lien holder with nothing.