This seminar was held on Saturday from 9-6 and the topic centered on buying property in foreclosure. Any property, including property where the Notice of Default has been filed, short sale properties, or REO’s, this course provided information and strategy to acquire these distressed properties with as little money as possible from your pocket.

Usually when you hear “Buy Property with No Money Down” or “I was able to buy this house that appraised for $350,000 for $5000″ you are skeptical. And rightly so, since we all have been conditioned to hear “If it’s too good to be true, it probably is”. However this seminar presented several different options for addressing several current market opportunities.

Real Estate Market Conditions

The underlying premise that makes this strategy successful can be attributed to a couple of things:

1. There is a tremendous inventory of distressed property on the market and all indications are there is more to come
2. Banks do not want to be in the position of taking property back and having to hold on to it.

Given those circumstances, it’s not necessarily the day after Christmas sale at Macy’s, but you can see the banks do have an interest in disposing of their non-performing assets, as these only serve to weigh heavily on their balance sheets.

Finding Distressed Properties

The seminar provided all of the steps involved in foreclosure and the time line. It was also reported that banks are taking up to 5 months to actually file a “Notice of Default” Once it’s filed, it provides the property owner with 3 month notification of an upcoming “Trustee Sale”, unless the debt and increasing expenses are cured. If not, then a “Notice of Trustee Sale” is filed giving the owner another 21 days until the sale takes place at public auction.

As they say in life, “timing is everything”, and it is during this window the optimum opportunity takes place. Okay, now that you know the process, how do you go about finding these properties? The instructor covered several scenarios and tactics for prospecting and speaking with owners. Homeowners many times do not know what to do or how to react to these types of situations. They need someone to help guide them and offer solutions to a troubling situation. This presents an opportunity for a win/win solution.

From a personal standpoint, I like to know all of the ins and outs before I venture into something and while this course offered many rosy scenarios and makes it sound very easy, there are potential pitfalls. That’s why I would recommend you seek expert advice on any deal you attempt to put together and have someone on your side who can offer professional assistance. There may be a reason the instructor is also an attorney. The real estate transaction offers the opportunity to be very litigious, and the law does provide certain benefits to a homeowner in foreclosure. Appearing in court is probably not the best use of your time.

Paying close attention to Pasadena foreclosures and REO’s and, can offer you the opportunity to get back into real estate. From an investor standpoint, the ratio of housing prices to rents is much more favorable than a couple of years ago.

To be a successful property owner you also have to ask yourself if you would make a good landlord or landlady. Do you have the tenacity to insist that your tenants pay on time or would you allow them to be consistently late every month with the rent check? Owning investment property is an idea that many people can see themselves doing, however sometimes they don’t think through the ups and down associated with repairs, maintenance, vacancies or making the mortgage payment on a second property every month.

Provided that you have considered the possible scenarios, what type of property should you consider, single family or multi-family?

From a risk standpoint, you may want to consider multi-family. The reason is due to the income or lack of income from a vacancy. If you own single family properties a 1 to 2 month vacancy can have a dramatic effect on your cash flow. At least in a multi- family property a vacancy is more than likely offset by the rents on the other units, so at least there is some income produced.

Generating A Profit

The thing to keep in mind when buying investment real estate is that you a purchasing an income stream. What will require the least amount of cash outlay and minimal expenses that will generate the maximum profit? Some people go into this with a blind eye to the potential costs involved when a little forethought and planning can reduce your annual expenses.

A couple of things to consider are the ongoing maintenance issues as well as the improvements you want to make before actually renting the house. An example would be a swimming pool. Pools require continual maintenance. Pumps, filters, and cleaning more than likely will be the property owner’s responsibility, insuring that these items will be maintained and won’t deteriorate or subtract from the property value. Nothing worse than walking into the backyard and seeing a green pool. Regularly scheduled maintenance can be at least $100 a month. Replacing a filter or pump can easily set you back $1000. A leak in the plaster…..well I think you get the idea.

Air conditioning is another issue. If the property you purchase does not already have it installed, you might want to consider postponing the installation. Many houses in Pasadena do not have air conditioning let alone central air. Repairs to existing systems can usually run several hundred dollars.

In the duplex I owned we had a vacancy that required some work in the unit before we could rent it again. The tenants had been there about three years and it was really nothing more than just regular wear and tear. A fresh coat of paint can do wonders. Doing it yourself can save hundreds of dollars if you have the time. The carpet was worn and dirty. The replacement carpet that was installed was a berber. It was purchased at a local home center and found on their in stock inventory rolls. Nothing fancy, but it gave a new and fresh smell to the unit and was purchased for around $1.00 / square foot.

Remember Why You Bought It

It’s only natural that once you buy a new property your intention is to fix it up and make it nice. You want something you can be proud of. Remember your primary goal is to make money. Money is made two ways in rental real estate. You can charge more rent which will be set by local market conditions or you can reduce your expenses. Develop a track record with your tenants before you consider adding to the amenities of the property. Surprises can be expensive. Lastly you may want to consider a liability policy that would provide you additional protection. A million dollar policy will cost a few hundred dollars.

I would be remiss if I did not advise you to seek the advice of an accountant or also seek the appropriate legal advice before you begin to amass your fortune. There is no substitute for having a team of professionals on your side.

More and more American’s are beginning to call on their reserves to get them through the leaner times they find themselves in today. The Individual Retirement Account (IRA)or 401K is proving to be the vehicle of choice, simply because their is no other choice. The Home Equity Loan is no longer an option as the real estate market continues to decline and homes that were once rich in cash are no worth less than the loan which secures them.

The problem is that the recent returns in the stock market have been abysmal. IRA’s that once offered a promising future have become mired in the financial wipeout known as the housing crisis. An analyst on TV recently pointed out that a case could be made for the last 10 years, in which the returns in the stock market have been flat. For every 10 year bull market we experience, it is followed by a financial donnybrook such as the S&L crisis, the dot com bust and now housing. Ten years to grow, six months to blow.

Does Cash Out = Cash In?

What is the best opportunity to maximize your investment? Real Estate prices are becoming very attractive these days and most prognosticators think they will continue this trend at least in the short term. Is it time to consider cashing out your IRA and investing it in the real estate market?

First consider the consequences. IRA withdrawal’s are subject to a 10% penalty. Extend a big “thank you” to the next government bureaucrat you see. After all, you should be ashamed for wanting access to your money. The amount you remove from the account will be subject to your income tax rate. If there is anything left, compare it to what you would expect to make or lose as you go forward with your investing alternatives.

Take a look at where your account balances were 9-12 months ago. My guess is that you could have possibly withdrawn the money, paid the tax and penalty and still be better off from where your account stands today. Do you then invest in real estate that might also provide you with the increased benefit of current income? Is the potential appreciation better in a tangible asset or are you better served with increased volatility, awaiting the next hotspot in the world or another financial scandal here at home?

Maybe you also have a variable interest rate mortgage that is resetting. You need to pay down your balance to lock in a fixed rate. The cash is slowly or quickly (based upon recent events) evaporating in your retirement account. Could you direct this money elsewhere that would provide you with a better benefit?

Before you do anything you need to speak with your tax advisor to determine how a withdrawal would affect you. We probably all need to lobby our representatives to relax some of the rules on early withdrawal, or maybe they could just provide us with the same pension they have.

Any appreciating investment gets people attention. In the late 90′s the stock market was unstoppable and investment clubs sprang from no where. When you have the entire market going up it’s easy to make money, no matter where you choose to invest.

Real estate investing is no different. Over the last several years owning real estate has become much more attractive. Its, tangible, you can drive by it and see it. Visually it’s much more appealing than a stock certificate.

People generally invest for two reasons: (1) for potential appreciation and (2) for positive cash flow. A very simple definition of cash flow is “Will the income from the property be sufficient to cover the expenses”? Finding a money making real estate investment is much more difficult given a slower market or rising interest rates.

Most would agree that from 2001 to 2005 we had historic appreciation here in Pasadena, South Pasadena and most of California. Annual appreciation of 15 to 20% was fairly common and property values skyrocketed. On the other hand you had rents increasing typically from 3 to 5%. Over time, income has decreased compared to property values.

Why would this be important?

As an investor, you hope to find a property where you can invest a smaller amount of your own money and have the tenants make your month payments (rent). Hypothetically say that you purchased a duplex (2 units) in 2003 for $350,000 and the rents were $1200 for each side for a total of $2400/month. Now in 2006, you sell the property for $775,000 and the rents have increased to $1400/side or $2800.

To finance the above example you would almost have to invest $400,000 in a down payment of your own money to produce a principal and interest payment of $2622 at an interest rate of 7.5%.

As you can see it has become much more difficult to find properties that produce positive cash flows with a 10 – 20% down payment and it could be more likely that a down payment of 50% is more likely.

There are other alternatives such as a 1031 exchange, living in one of the units as your principal residence or possibly looking at up to 4 units to minimize some risk.

Investing is also a process in which you need a clear understanding of what you hope to accomplish. Are you an investor which usually requires a long term outlook or are you a speculator hoping for a quick buck. Speculators made out very well over the last few years.

Most everything I have ever read states that over time, real estate has been a very profitable investment. Each situation should be addressed individually and consider your aversion to risk, and potential for reward.