A lot has gone right for the banks lately. Changes to accounting rules have allowed them enough breathing room to operate. Mortgage loan modifications have brought in fees. And trading activities have even helped some banks to boost profits.

Still, I believe there’s another banking shoe to drop.

Foreclosure sales are the majority of home sales these days. And when a bank sells a foreclosed home, it is a realized loss. That’s as opposed to a non-performing loan or a foreclosed home that has yet to be sold, which can be counted as an asset.

Further exacerbating this is that banks are not realizing as much profit on the sales of foreclosed homes as they’re all flooding the market with them and thus driving down prices.

Read more »

The Fair Isaac Company have announced that they will be releasing three new credit scores based on their new FICO 08 model.

1. The FICO Mortgage Score
The FICO Mortgage Industry Score is designed to help mortgage lenders improve credit decisions for both current and future homeowners. Introduced by FICO and Equifax, the score delivers significantly greater assessment of mortgage repayment risk — up to 25% or more for key population segments, compared to the base BEACON score. The score aids servicers in earlier identification of borrowers at risk, mitigating the incidence and high cost of foreclosure.

2. The FICO Auto Score
FICO have also introduced another industry-specific credit score for the auto industry. According to Tom Quinn, vice-president of scoring at FICO, the new scoring model "will identify 5 to 15 percent more potential delinquencies… For the overwhelming majority of consumers, the auto industry score will be relatively close to the [generalized] FICO score," says Quinn. "There is a percentage of the population that will be different. And that’s why lenders have opted to use the other [auto industry] score."

TransUnion has already made this score available immediately to lenders, while Experian and Equifax are planning to follow suit later in the summer.

3. The FICO Bankcard Score
The third scoring model is specifically for the credit card industry, officially named the FICO Bankcard Industry Option. This does the same kind of things are the Mortgage and Auto industry versions, by taking your credit file and first scoring it by the "broad-based" risk scorecard system, and then by one of two industry-specific overlay scorecards — one for files with derogatory information on any type of account, one for files without.  This overlay adjusts the credit bureau scores up or down. The resulting score is scaled to match the same "good versus bad" odds as the broad-based risk scores.

These three options are generally greeted with positive comments from consumer experts. The tweaking of the current "classic" FICO score can only help lenders make more informed decisions when underwriting loans.

You’ve heard it all before: “YOU can become rich with real estate!” “Live the life you want with real estate!” “Come to my seminar on how to make money from real estate!”

It seems that when you’re interested in real estate investing, you find yourself inundated by large font titles with glaring colors promising you the sun, moon and stars if you take their seminar (a bargain at $2,999), or buy their inspirational CDs (a deal at $199), or purchase their motivational DVD and book combo (practically giving them away for only $99).

When the eager investor signs up, the “guru” delivers speeches and media that are long on fantasy and short on reality. Many of these people prey on greed, pure and simple. They capture the attention of wanna-be investors who want to believe that the path to riches is easy. In reality real estate investing is paved with long, hard work — at least in the beginning.

It’s certainly true that real estate investing can improve your finances and diversify your portfolio. It is also true that there are many people who are quietly building their wealth as a result of careful investing in real estate. The fact is, most of these people worked hard, gave up many luxuries and invested wisely instead of falling for claims of easy money.

What the “gurus” will do is emphasize the life you “could” have and gloss over the work real estate investing takes. They describe themselves with as many adjectives as possible instead of actually giving you verifiable information as to their competence. Often these gurus do not have first-hand knowledge of the different methods of investing. Therefore the challenges and problems common to investing are glossed over because they simply do not have the answers. They don’t make money from your success. They make money when you buy their product.

Read more »

The epidemic of foreclosures is rising, according to newly released figures from RealtyTrac, despite a slight slowdown in activity during the month of May. Year over year foreclosures rose 18%.

Foreclosure filings, including default notices, scheduled auctions and bank repossessions were reported on 321,480 properties during the month, a decrease of 6% from April. The drop apparently developed as a result of moratoriums on foreclosures by the nation’s largest banks and mortgage companies.

“While defaults and scheduled foreclosure auctions were both down from the previous month, bank repossessions, or REOs were up 2% thanks largely to substantial increases in several states, including Michigan, Arizona, Washington, Nevada, Oregon and New York,” said James Saccacio, chief executive officer of RealtyTrac. “We expect REO activity to spike in the coming months as foreclosure delays and moratoriums implemented by various state laws come to an end.”

Ten states represent 77% of foreclosure filings, according to the report. Foreclosures are forecast to rise through the remainder of the year by Housing Predictor as a result of the financial crisis and the tight money supply. Nevada continued to document the nation’s highest foreclosure rate, with one in every 64 housing units receiving a foreclosure filing during the month.

Read more »

Real estate is a rare investment vehicle.  It provides people with a place to live while working as an investment.  What’s more, this investment offers a very powerful wealth building combination of returns.

APPRECIATION: Over the past 80 years, real estate values have continually increased. There have, of course, been some periods where values decreased, but the overall trend has always gone up. Like anything else, the value of real estate is determined by supply and demand.

So what are the factors that keep real estate in such high demand over the years? One of the main reasons is that shelter is a basic human need. People need a place to live, work, and shop where they are protected from the weather. Additionally, real estate is an investment that benefits from inflation. In periods of high inflation, real estate values go up.

LEVERAGE: One of the biggest advantages of real estate as an investment over any other asset class such as stocks, mutual funds, commodities, and government financial instruments is leverage. Leverage allows you to purchase and control a large amount of real estate for a relatively small amount of money.

For example, you could easily purchase a $100,000 property with only a 20% ($20,000) down payment. In some cases you can buy property for as little as 10% or less of the purchase price giving you even more leverage. To illustrate the power of this, consider this example:

Let’s say you bought $20,000 worth of gold, stocks, or some other investment. Then over the course of the year your investment went up 10%. Your investment is now worth $22,000, and your total return on investment (ROI) is 10%. Not bad.

Now let’s take that same $20,000 and use it as a down payment on an income property and buy a $100,000 house. Once again, let’s say it goes up 10% for the year. Your property is now worth $120,000, and your $20,000 investment has now doubled due to the $20,000 increase in your properties value. You have now made a return on investment of 100%! (This increase does not even consider the equity build-up resulting from the decreasing mortgage principal, cash flow, or tax advantages!)

Read more »

Foreclosures are up nationwide, and will continue to rise as prices continue to go down in many markets.  For some, the problem is painful.  Ask the guy down the block from you whose house is in foreclosure.

Some pundits think the rising foreclosures will bankrupt our economy, causing pain for people who lose their business or job as a ripple effect of all these foreclosures.  Others think that the rise in foreclosures is a healthy adjustment to the end of a long real estate boom, and is nature’s way of taking care of a free-market economic cycle.

Who’s right?  Time will tell, but it’s alarming to see politicians trying to fix this problem.  Here are some of their solutions:

Give People Money

Tax the rich, give to the poor.  The federal government now wants to fund programs to help people stay in their homes.

A new bill in the Senate proposes giving money to people who can’t pay their loans.  We taxpayers are confused.  If these people are in trouble because they never should have been given such a loan, why should taxpayer money be used to keep them in their homes that they could not otherwise afford?

Maybe someone in Washington has the answer to that question?

Read more »

The syndication process is simply the aggregation of capital from a group of investors to acquire property.

Real estate syndications are seeing new popularity as real estate is increasingly viewed as a fourth asset class in addition to stocks, bonds and cash.

Real estate investment trust (REITs), many of which have dividend returns of 6 percent or more, are an attractive way to invest in real estate but their publicly traded shares are subject to a significant degree of price volatility that many investors seek to avoid. By contrast, shares in a private syndicate, typically a real estate limited partnership (RELP) or limited liability company (LLC), are not priced to market on a daily basis and in addition offer the possibility of higher returns than publicly managed REITs. Finally, private real estate syndications offer some tax savings unavailable when investing in a public company.

Advantages of Real Estate Syndication

While investing in a real estate syndicate has certain disadvantages as compared to direct ownership of real estate, syndicates do offer significant benefits. These include the following:

Read more »

Seven Reasons You Want to Use Independent Contractors To Grow Your Business

There are dozens, maybe hundreds, of strategies that we’ve used successfully over the years to save our clients taxes. One such strategy is to use Independent Contractors to build your business. I’m going to cut right to chase here and just jump into this.

Reason #1: It’s easier to ramp up your business

You can contract with Independent Contractors (ICs) for short term, month-to-month work or just by project. You don’t have to worry about training them or providing tools for them to work with.

There is an assumption that they can hit the ground running. If they can’t, the worst case is you’ve tried it out for only 30 days. You didn’t have to invest time in training them and providing salary & benefits during this time. They either can perform, or not. If they don’t, they’re gone.

Reason #2: It’s easier to change the business model if you need to change quickly

If your real estate investing business goes down, it’s a lot easier to stop using an IC than it is letting an employee go. Besides the emotional issues of letting go an employee who depends on you completely for their income, there are also legal and benefit issues. You might be forced to cover the employees under the new COBRA laws. Your unemployment rates will go up. Read more »

According to the National Association of Realtors, the number of sales of previously owned homes in the U.S. rose by 2.9% in April to an annualized pace of 4.68 million. The gain, the second in three months, was spurred by foreclosure auctions and cheaper prices which attracted bargain hunters. Distressed properties accounted for 45% of all existing home sales and the median price of a home fell 15% from a year earlier. The number of houses on the market climbed 8.8% to 3.97 million in April, and at the current rate of sales, it would take 10.2 months to sell all those homes, Bloomberg reports.

At the same time, the Mortgage Bankers Association’s index of mortgage applications decreased 14.2% in the week ended May 22. The share of applicants seeking to refinance existing loans fell to 69.3%, from 73.6% in the prior week, as the average rate on a 30-year fixed-rate loan rose by 12 basis points (bps) to 4.81%, the highest level in more than two months. The average rate on 15-year fixed-rate and one-year adjustable mortgages rose by one basis point to 4.44% and 17 bps to 6.55%, respectively, Bloomberg reports.

I am sure you’ve heard the expression, “Attitude is everything.”  This is very true. Right now, it’s simply your attitude and mentality that will give you the edge over others who are trying to invest in real estate in this highly volatile market.

You’ve undoubtedly heard the importance of thinking positive and having the right attitude.  Most people are intelligent enough to know that this statement is true.  Some people reading this will argue that a positive attitude doesn’t always work.  Well, maybe not, but I know one thing for sure - negative thinking and a negative attitude NEVER works!  So your only choice and your only chance for success in this market are to pick the positive things in life and maintain a positive attitude at all times.

I once read a fortune cookie that said, “An optimist is someone who tells you to cheer up when things are going his way”.  I know that if you are reading this article, times may be difficult and you need serious answers to your burning questions such as, “How do I profit in a slow market?”  There are many answers to this question, but first I need to impart to you some relative perspective.

A History Lesson on Real Estate Cycles

About every ten to twelve years, as an average, real estate values tend to double in most major metropolitan areas.  For example, in the 1920’s, the original colonial homes sold for just under $2,500 in Long Island, New York.  Since then, real estate prices have doubled almost eight times over the last 80 years.  That averages out to a 100% increase approximately every ten years.  An interesting note to this is that about every ten to twelve years, real estate values must correct before they enter their next “doubling cycle”.    Read more »

One of the architect’s of the financial crisis issued a warning that banks still have unfunded liabilities that were not properly accounted for by the Treasury Department’s “stress tests.”

Yesterday evening, Alan Greenspan also said that “…until the price of homes flattens out we still have a very serious potential mortgage crisis.”

Lest we forget, it was the maestro’s absurd interest rate policy earlier this decade that helped fuel the housing market bubble in the first place. And his comment that systemic risk was balanced across the globe through the use of derivatives (like credit default swaps) gave tacit approval to practices that have proved to be absolutely disastrous.

Personally, if I were Greenspan, I’d keep my mouth shut and ride off into the sunset. I wouldn’t want to call attention to just how badly I misjudged the economy at the end of my term. But maybe that’s just me…

Housing starts dived downward in April, falling 12.8% compared to the previous month, to a new record low and a seasonally adjusted level of 458,000, according to data released today by the U.S. Census Bureau. On an annual basis, that qualifies as a 50.2% drop.

The drop was driven primarily by the volatile multifamily sector, where starts for buildings of five units and more dropped 42.2% to a seasonally adjusted pace of 78,000 last month. Starts for buildings with two to four units also declined 62.5% to a level of 12,000 units. Combined, the two represent a 46.1% reduction in multifamily activity last month, to 90,000 units.

“The market for multifamily homes is in a deep slump,” observed Patrick Newport, U.S. economist for IHS Global Insight. “Multifamily starts and permits both fell to all-time lows in April. The recent drops have been mind-blowing. Multifamily starts averaged 380,000 over the first half of 2008; in June 2008, they jumped to a 423,000 annual rate. They have dropped steadily since, and [last month] plummeted to 90,000 units. This sharp decline is related to financing. Some builders are overwhelmed with debt. Others cannot find funding to finance projects with positive net present values.”

In contrast, single-family starts picked up 2.8% on a monthly basis to a seasonally adjusted level of 368,000 units. On an annual basis, that figure represents a 45.6% slide, but this second monthly increase for single-family starts appears to be generating optimism in some industry watchers.  Additionally, single-family permits showed a small gain in April, increasing 3.6% to a seasonally adjusted pace of 373,000 units. (That’s 42.3% below April 2008’s numbers.) Read more »

In times of stress, communication can get out of whack quickly. It’s never been more important to get your agreements in writing, not because you expect the other party is not going to honor their word, but because you need to make sure you both know what the agreement is.

Here are my 10 practical tips for creating a agreement that both of you can agree to.

( 1 ) Get it in writing.

You can technically have an oral agreement and in many cases they are still legal. But memories fade. Save yourself a lot of hassle and get an agreement right at the beginning. The last thing you want to do is try to come up with an agreement when both sides are fighting.

( 2 ) Keep it simple.

You don’t need a bunch of legalese to make it legal. Use language you both can understand. Oh, and make sure you number the paragraphs so you can refer back and forth.

( 3 ) Make sure agreement is signed by the right person.

Although technically a representative of a company can make and sign an agreement, it’s much easier to make sure you’ve got the right person and their company title on the agreement. Read more »

The Treasury’s stress tests are now, officially, a joke…

First, the outcome looked as if all banks would need to raise capital. Then it was reduced to just three. Now it “might” be “about 10″ of the 16 banks subjected to the Treasury’s toothless stress tests that may need to raise additional capital to withstand further weakness in the economy.

And the report isn’t even supposed to be out until Thursday. The Obama administration is doing its level best to make sure the market is perfectly prepared for the results of the stress tests.

While it’s probably wise to consider the impact of the stress tests on the financial markets, I can’t say I approve of rigging the tests to achieve a preferred outcome.

The New Bailout

Bloomberg reports that financial stocks made their biggest gains in a month yesterday on “optimism about the tests.”

That “optimism” is better described as the realization that the stress tests are fundamentally flawed and the government is prepared to handle the capital issue by letting the banks convert the preferred stock the government owns from TARP loans into common stock.

Read more »

I bet you wrote down your goals in January 1st this year.  Is that all?  Did you re-think them this month and write it down again?  If you don’t know what your goals are, how are you going to measure whether you’ve reached them.  And, I would bet that if you didn’t write them down at all, you are in the same financial position as you were on January 1st.  Ouch!

Is it time for a change of strategy?  Maybe so, read on…

Take the most accurate archer, the best in the world. I guarantee that I can do a better job of shooting than he can…IF…you first blindfold him and turn him around a few times. You might think, why that is ridiculous. How is he supposed to hit a target he cannot see? Here’s a better question: How are YOU supposed to hit a target you don’t even HAVE?

When investing in real estate, in order to succeed, you need to set financial goals. Here’s how to go about it.

Read more »

During the early years of my real estate investing I ran my business as a sole proprietor because I was confused about asset protection. All the books and expensive courses only added to the confusion, and the subject of asset protection only became more frustrating for me.

Luckily, I survived with only minimal damage, but there comes a point when it is time to assess the best legal structure to use for real estate investing. This becomes increasingly important as your net worth grows.

Consider this scenario. You are sued for an accidental injury that occurred on one of your properties where you held title in your name personally. You are sued for $2,000,000.Your insurance only covers $1,000,000. That’s a very bad day.

The biggest mistake you can make in real estate is to hold title on your property in your own personal name. Title to property is public record. Anyone can look up what you own, determine its market value, and deduct what you owe to determine what they can attempt to sue you for. It’s like painting a bulls-eye on your back for prying eyes such as attorneys, creditors and even your tenants.

So what entity provides you the best asset protection? How do you limit your liability exposure? Read more »

Are we all getting sucked in by the President Obama’s charm as he tells us about the hard work and sacrifices that face Americans in the days ahead?

Should we also be disappointed in the President’s dealings with the continuing mess on Wall Street?  I think it’s time for the administration to take a hard line with companies like AIG, Goldman Sachs, Citigroup and others that have demonstrated gross irresponsibility.

We should probably include the automakers too!

Our country is in trouble when bankers can dictate policy. Isn’t that what got us in this mess in the first place?  If so, then President Obama should be changing the situation for the better of the country and taxpayer, and without regard to the self-interests of the bankers.

There is a culture between Washington and Wall Street.  The government continues to spend massive sums of money under the guise of aid for Wall Street, only leading to tax increases for America.  Where’s the measurable benefit?

Maybe it’s time for a protest against Wall Street’s lobbying and influence on the government.  Wall Street must stop robbing America, and Washington must stop helping Wall Street cover it up!  Bailouts and handouts for the sake of maintaining the status quo is only robbing the American taxpayer.

For example, taking over the troubled banks, terminating the executives, removing the board of directors, purging out the toxic assets and then selling the “clean” bank back to private investors.  Is this the only solution that Treasury Secretary Timothy Geithner can come up with?  I think the American people should be outraged!

I didn’t take the Obama administration’s campaign motto of “Change” to mean the continued placement of Wall Street interests over those of American’s.  There is an unwillingness by those in power to do what’s right.

Harvey Rosenfield, President of the Consumer Education Foundation, believes that since President Obama’s key appointments to the Treasury, the SEC and other agencies, like their predecessors, are veterans of the Money Industry that the Money Industry remains in charge of the federal agencies and keeps our elected officials in its deep pockets and, as such, nothing will change.

Rosenfield says, “If America is to recover from this economic debacle that we find ourselves in, its people must return to the principles that made it great — hard work, creativity, and innovation — and both government and business must serve that end. Washington must serve America, not Wall Street. Things will not change so long as Americans acquiesce to business as usual in Washington. It’s time for Americans to make their voices heard.”

There is a great article in this month’s Atlantic that covers how Wall Street has in essence taken over Washington. It’s highly recommended reading: Click here.

What are your thoughts?

Yesterday, I suggested that the idea of the "Stress Test" for banks was really just a marketing ploy by the Treasury to boost confidence that the United States financial system is stable. After all the back-bending, and billions in bailout funds to avoid bank failures, do we really think the Treasury is suddenly going to declare any banks insolvent?

Highly unlikely, in my opinion.

So if the Treasury is unwilling to nail any banks, what does that mean for the Public-Private Investment Program that’s supposed to buy banks’ toxic assets? What will be the motivation for selling if there are no consequences for keeping these assets and waiting for value to return?

Well, it would appear that the Treasury is playing the "opportunity cost" card. Offer the banks a premium for these assets now that might otherwise take years to achieve.

The banks win, as they free up their balance sheets and can theoretically increase lending. The "Toxic Investors" win, as they buy potentially valuable assets with very little of their own money while the Fed and Treasury subsidize the rest. And the taxpayer wins as Fed and Treasury loans are paid back.

I don’t know about you, but that all sounds a little too perfect. Something’s bound to go wrong with this neat little win-win-win scenario. And I know who isn’t going to get shafted - the investors who partner with the Treasury to buy these assets.

That’s because they simply won’t be taking on much risk at all, and they potentially make a lot of money.

Every real estate investor knows that investment property provides more tax benefits than almost any other investment.  Therefore, maximizing those tax deductions only makes good business sense.

Let’s take a quick look at the most important tax deductions available as an owner of investment property:

1.  Mortgage Interest
Your largest deductible expense is likely to be interest.  There are two types of interest that you can deduct.  The first is mortgage interest from any mortgage loan on the property.  This includes Home Equity Lines of Credit (HELOC) and other loans secured by your property.  The interest deduction applies to any of these loans provided that they were used to acquire and/or improve your investment property.

Additionally, credit card interest can also be deducted for goods and services used in the operation of your rental property.  Closing costs and points paid by you to close on your mortgage loan is also deductible.

2.  Depreciation
Depreciation is simply the loss in value of your income property over time due to physical deterioration, age, and normal wear and tear.  Fortunately, the IRS allows you to depreciate income properties over their “useful” life.  This is defined as 27.5 years for any residential property (1 to 4 unit properties) and 39 years for commercial properties.  Depreciation can provide you a significant and welcomed deduction every tax year!

3.  Insurance
Premiums paid for insurance policies are tax deductible expenses too.  This includes, but is not limited to, fire, theft, flood, and landlord liability insurance.  Also, health and workers’ compensation insurance for your employees (if any) can also be deducted. Read more »

With the large number of foreclosures to hit this country over the last few years, con artists have come out of the woodwork  to prey on those in trouble — including real estate investors.

The number of schemes, and those being caught and charged, can be found in the news and on many internet website like Mortgage Fraud Blog (www.mortgagefraudblog.com).

This short 2-minute video by Freddie Mac teaches you how to spot a foreclosure scam and find out how to avoid becoming victim to home foreclosure fraud.

Do you know someone who’s been victimized?  Do you think this problem is getting worse?