Friday, December 15, 2006

10 Cheap Home Value Boosters

With all the rehab I've done, I think I have a pretty good idea of what fixes you should make to a house to get it to sell quicker and for a higher price. However, just to show you can never know everything about a subject, an article on MSN taught me a few new tricks. Some things I didn't know:

Tip #2: I normally replace the appliances in my houses, but if the existing ones are still in good shape except for cosmetics, I didn't know you could just flip the panels over.

Tip #5: Add a closet to a den to make it another bedroom. This is an interesting one. It adds another bedroom, but it decreases the bathroom-to-bedroom ratio. I wouldn't want to turn a 3 bed, 1 bath into a 4 bed, 1 bath, but turning a 3/2 into a 4/2 might be worthwhile.

The other stuff they list is pretty much standard info.

Thursday, December 14, 2006

Trading One Job For Another

I've been thinking about this for a while, but when I read the latest post on one of the real estate investing blogs I follow regularly, I had to write about this.

I follow several blogs of people who got started in real estate investing. Over the past several months, three of them have decided to get their real estate license and become Realtors. It seems to me that this is just trading one job for another. I will admit there are some advantages to being a Realtor, but I don't think they are advantages that couldn't be gotten other ways - such as having a working relationship with a good Realtor.

I remember an article I read in the Arizona Republic earlier this year about the glut of real estate agents. Referring to the real estate boom, the article stated:

Suddenly, helping other people buy and sell houses looked like an easy way to make money, maybe a lot of money. How hard could it be? With investors amplifying demand, houses practically sold themselves, often for thousands of dollars more than the asking price.

People poured into the real estate business: The number of licensed agents in the state increased from 53,478 in July 2002 to 80,210 at the end of March [2006], according to the state Department of Real Estate. But now that the market has cooled and the prospect of quick money is gone, the newbies are starting to pour out, brokers and agents say.

It goes on to say that 80% of new agents quit within a year and 90% quit within 3 years. From my point of view, being a Realtor is even worse than having a 9 to 5 job because agents tend to work a lot of weekends and are on call basically all the time.

I really do hope that all my blogger friends enjoy success as Realtors. Perhaps their REI-based viewpoint will help them succeed where others so often fail. For me, however, I'll stick with being an investor.

Tuesday, December 5, 2006

2006 Financial Year In Review

The end of the year is fast approaching and it is looking like I'm going to be too busy for the remainder of the month to get much going in terms real estate deals, so I thought I'd look at how I did in 2006.

Real Estate:

I rehabbed only one house this year. My goal was to do at least two, so I fell short there. In my defense though, I was asked by my investors to stop for a while until I could conference with them. That took me out of the market for a bit. I am still waiting on the additional funds they said they would invest, but those funds are coming from a probate trust and it is taking longer than expected for that to settle.

I had wanted to buy at least one rental property this year and I did not achieve that goal. However, I did make an investment that provided two firsts for me: my first out of state real estate investment and my first commercial property investment. I have invested in part of a $1.75 million dollar first mortgage on package of commercial properties in Louisiana. Income from that investment has been on-time and there have been no problems so far.

Personal Finance:

I increased my financial education by attending a meeting in March of other real estate investors and fellow RichDad.com community members. That was an eye-opening experience and actually led to the commercial investment I just mentioned.

I experimented with person-to-person lending via prosper.com. I've pretty much soured on that concept: two of my loans are delinquent and two are current. However, it was an interesting idea and I thought it was worth a try. I might be ok for other people, but it's not for me.

The blogosphere also taught me a new investing technique called reverse merger arbitrage. I'm two for three on these deals so far and am up about a thousand dollars. I've got two more plays in the works and I think this will be a technique I continue to use throughout the next year and beyond.

This year also saw the retirement of our only car loan, which was paid off a couple months ago. The $300 a month that was going to that is now going into our savings account to be used for our next investment. I also continued to save 15% of both my and my wife's paychecks, which will also go towards our next investment. Of course we continue to pay into our 401(k), although only enough to get the full company match.

Next year:

I have a couple of goals for next year. First, I want to rehab at least two properties. This is the same goal as last year, but this time I'm going to achieve it :-) I think I've got the contacts now of people who can get work done in a timely manner, so the only thing that may cause me to miss this goal is if the houses take longer than expected to sell.

I also want to either buy a rental property or make another real estate-backed paper investment, similar to the one in Louisiana. I haven't decided which yet. I like the rental property because of the tax benefits it gives, but the paper investment requires a lot less effort on my part. Time available to me may be an issue because my daughter is turning three and there seems to be more and more things to do with her that require my time. (That's not a complaint though!)

Tuesday, November 28, 2006

Home Sales Up, Prices Down

Back in September, I wrote about a news story that said home prices had declined for the first time in 11 years. Today, there is another story out: Home sales are up, but prices are down.

The National Association of Realtors has announced that sales are up one half of one percent - the first rise in eight months. However, the median price of a home has dropped 3.5% from last year, a record decline. They also state there is still seven months worth of inventory for sale. (If you look back at the story from September, you'll see back then there was 7.5 months of inventory, which was a record backlog.)

So home sales are up by the tiniest amount, prices have dropped by a record amount, and some people are saying this means the market is stabilizing. Personally, I have to agree with what economist Joel Naroff said in the story: "The housing market is far from the bottom." The story makes no mention of the fact that, not only have housing prices continued their decline from September, but the decline is accelerating.

Once again, real estate investors really need to stick the basics to have success in this market, whether you are rehabbing or renting. Your money is made when you buy, so make sure you get a good deal.

Thursday, November 16, 2006

Whitney Houston Faces Foreclosure

From CNN: Whitney Houston's New Jersey mansion is set to be sold at a sheriff's sale on January 4th because she is more than $1 million behind on the mortgage and still owes this year's property taxes.

Now that's an auction I'd like to be at!

Wednesday, November 15, 2006

DLCV Reverse Split Just Days Away

This press release from Dolce Ventures indicates their 304.44 for 1 reverse split should be completed on or about November 16. This is the arbitrage play I wrote about earlier. If you are making this play, I would start checking your brokerage account daily. Based on my experiences with Schwab, once the split happens, you'll probably see their ticker symbol, DLCV, in your account replaced by a number. About a week or so later, depending on your brokerage, you should see the new ticker symbol in your account. (I don't know what the new symbol will be, but the new company name will be Sino Gas International Holdings, Inc.) Again, if you own less than 15,222 shares, your shares should not be affected by the reverse split. You may want to call your brokerage's reorganization department to make sure they handle this correctly. It helps to have their SEC Schedule 14C filing in front of you when you call so you can refer the person you are talking to to the official document.

Credit Report Corrections

A couple of months ago, I requested our annual free copy of my wife's credit report from Equifax. There was nothing seriously wrong with it, but there were several old accounts that I wanted removed. I filled out the correction forms and sent them back. By law, Equifax has to respond within 30 days. A couple weeks after I sent in the corrections, I got a letter back from Equifax saying the three accounts they listed were verified to be correct and no changes were made to the credit report. The problem was, the three accounts they listed did not belong to my wife! In fact, they did not even show up on her credit report at all!

Someone obviously made a mistake. I decided not to do anything. First of all, dealing with credit agencies is a major pain in the rear. Practically everything has to be in writing and they most likely would want to talk to my wife instead of me, since it was her credit report I was talking about. Second, their letter said nothing in her credit report was changed. Given that, I figured we were pretty safe. I didn't want to open a can of worms over this and since the errors I was trying to correct in her report were very minor to begin with, I decided to just let this one go.

So yesterday I received another letter from Equifax, this time giving me the results of their investigations. They correctly identified the accounts I had requested corrections for and they did in fact remove four accounts from her report and two others they marked as closed. (One of the things I complained about was accounts that were closed were showing as open, but with a zero balance.) They also included a new copy of her credit report and all looks good. Those three accounts they said were hers in their previous letter were not listed. Although their response took longer than the 30 day limit set by law, I'm just happy they got everything sorted out.

Thursday, November 9, 2006

Thoughts On HomeVestors

Sorry no posts for so long. Life has been pretty busy lately. We went to California Thursday and spent Friday at Disneyland. It was the first visit for my almost 3 year old daughter and she really enjoyed it. Got back into town on Saturday and spent most of Sunday in the hospital emergency room because my wife's back locked up and she can barely move. She's been home in bed all week and I've been taking care of her and my daughter. Needless to say, I'm pretty busy these days.

I thought it was somewhat ironic to have received a mailing from HomeVestors when we got back from California, given what I do. It was obviously a mass mailing and it was asking if I was interested in a CASH OFFER for my home. The letter says they pay most closing costs (I wonder what they don't pay) and they pay cash and can close quick. Basically, they do what I am doing. However, they are a franchise, which means whoever is running the business has to pay a franchise fee to the parent company and likely an ongoing fee which may be a percentage of their profits. This obviously means they have a lot of overhead. I expect the fee is quite large, given the large amount of advertising they do. I have to wonder if it pays off though. I mean, if they sent me a mailing, they are most likely just mailing to all houses in an area, which isn't very targeted. I would think you'd get much higher response rates if you sent mailings to people in foreclosure or somehow otherwise targeted your audience.

With the costly overhead of being a franchise and the not-so-savvy marketing I see, I can't help but think I can give people a better deal for their house than these guys can.

Thursday, November 2, 2006

Shaun's Real Estate Adventures Honored

I am pleased to report that this blog was selected as one of The Top 35 Real Estate Blogs by BiggerPockets.com, a special interest media and publishing company focused on real estate investing. The list was posted at the end of August, so this might be old news to some, but I just found out about it :-) Thanks to BiggerPockets for the honor! Their site has a blog plus lots of other good stuff and I recommend taking the time to see what they've got to offer.

Tuesday, October 31, 2006

Hitting Home

As I was driving home yesterday, I was listening to the Randi Rhodes Show on Air America and she was talking about the economy and interest rates and how many people are starting to have difficulty meeting their adjustable rate mortgage payments as interest rates rise. Now intellectually, I've known this was happening for some time, but hearing the people that were calling in to her show really made it much more concrete for me. People were calling in from all over the country - Florida, Michigan, Washington. All were telling similar tales - they got an adjustable rate mortgage or an interest only mortgage and over the past couple months, their payments have risen steadily, in some cases more than doubling, leaving them with payments they can't meet. And most stories had another common thread. Real estate agents had encouraged them to buy as much house as they could afford. Mortgage brokers had pushed interest only mortgages or, worse, negative amortization mortgages to get them the lowest monthly payment. Very little, if any, time was spent explaining what would happen if interest rates went up and it was just assumed that the value of their houses would continue to follow the recent trend of exponential growth, leaving them free to refinance any time in the future.

With declining property values, they are now trapped in a mortgage they can't afford to keep and can't get rid of. Add rising medical and medical insurance costs to the mix, and you've got people who are in serious financial straights.

Most disturbing was the fact that these weren't all financially stupid people. I mean, there were some who you could tell didn't have a basic grasp of economics, but there were a surprising number of self-employed people, white collar workers, and educated, middle class people facing these problems.

Randi suggested that interest only and negative amortization loans should be outlawed. I don't believe that interest only mortgages should be outlawed; as a real estate investor, I know they have their usefulness. But I can't really think of a good reason why negative amortization mortgages shouldn't be, apart from the generic opposition to having more government invention in our lives.

I don't have all or even some of the answers for how to fix this, but I do know that, as a real estate investor, I can help these people. As the real estate market drops, now is the time investors can make money but at the same time, I don't think we should be so concerned about profit that we hurt these people even more. We have the ability to create a win-win situation that helps these people and lets us make a fair profit at the same time.

Thursday, October 26, 2006

Sick Days

I've been sick the last couple of days with a bad cough that has prevented me from sleeping for the last two nights. Needless to say, I'm in no shape to do any sort of real estate deals right now. I was able to see a doctor yesterday and got some medicine, so I should be on the road to recovery. Of course, the prescription cough medicine has codeine so that knocks me out a bit too.

I saw on the news today that new home sales are up for the second straight month, but prices are down. Builders are giving massive incentives and lowering prices to move their inventory. Some people point to the sales increase and claim the housing decline has bottomed, but I have my doubts.

Wednesday, October 18, 2006

Phoenix Area Radio REI Show

Gregg Reichman of Active Finance Group will be on KFNX 1100 AM today and every Wednesday for the next 3 months from 2 PM to 3 PM. He will be discussing current real estate market conditions, wholesale real estate, foreclosures, and hard money financing. If you want to call in and talk to him, the number is 602-277-KFNX (5369). Active Finance Group is closely affiliated with BuyAZForeclosures.com. Both companies specialize in foreclosures and wholesale properties in the greater Phoenix area.

Tuesday, October 10, 2006

Possible Reverse Split Arbitrage Play

I was searching the SEC filings database and came across this possible reverse split arbitrage play: Dolce Ventures, Inc. This stock trades on the "pink sheets" under the symbol DLCV.

The company will be undergoing a 304.44 for 1 reverse split with shareholders owning less than 15,222 shares being unaffected by split. For more details, read the company's SEC filing. Pertinent details are in the section titled "The Reverse Split" (surprisingly enough). Here is an excerpt:

At the time of the Reverse Split, holders of outstanding shares of Common Stock will receive one share of post-Reverse Split Common Stock for each 304.44 shares of pre-Reverse Split Common Stock held as of the close of business on the date the Amendment is filed. No fractional shares of Common Stock will be issued in connection with the Reverse Split. All fractional share amounts resulting from the Reverse Split will be rounded up to the next whole new share. In connection with the Reverse Split, the Company's Board of Directors, in its sole discretion, may provide special treatment to shareholders to preserve round lot holders (i.e., holders owning at least 100 shares) after the Reverse Split. In the event the Board determines to provide such special treatment, shareholders holding 30,444 or fewer shares of Common Stock, but at least 15,222 shares of Common Stock, will receive 100 shares of Common Stock after the Reverse Split, and persons holding less than 15,222 shares of Common Stock would not be affected. The terms and conditions of special treatment afforded to the Company's shareholders to preserve round lot shareholders, if any, including the record dates for determining which shareholders may be eligible for such special treatment, will be established in the discretion of the Board of Directors.

The last quote I can see shows a price of $0.013 per share. Now for the bad news. The split should take effect 20 days after the date of mailing the notice to the shareholder's of record at the close of business 10/16/06. You need three days for a stock trade to "settle," so you must buy any shares today (Oct. 11) if you want to be a shareholder of record in time. The company will also be changing its name on this date, and most likely, will change its stock symbol too. I do not know what the new symbol will be, but the new name will be Sino Gas International Holdings, Inc.

As always, do your own due diligence before investing. This is neither financial advice nor a solicitation to buy or sell any security. Any number of things can happen with these plays, so I recommend only investing what you are comfortable losing.

Monday, October 9, 2006

Another Reverse Arbitrage Deal Completed

A while back, I completed a stock deal that gave me a 2,567% ROI in 212 days. This was accomplished through the magic of reverse merger arbitrage - a play where you buy a few shares of a stock that is going to undergo a reverse split with special handling for odd lot shareholders. See my previous post about this for more details.

The deal I just completed was for far less in terms of dollars, but again provided an astounding ROI: 364% in 59 days, which works out to an annualized rate of 2,251%! Here are the details.

VTUD, a stock that trades on the "pink sheets" (OTCBB), had announced a 1 for 40 reverse split with special instructions that, after the split, no shareholder would have less than 100 shares. The reason given for this split was to increase the per-share price so that the company would be more attractive to potential buyers. Full details about the split can be found in this SEC filing. The reverse split was effected last week and the stock now trades under the ticker symbol VNUN. Today, the new stock was reflected in my brokerage account (it usually takes a while after the split happens for the brokerages to get the new stock from the company) and I sold.

I purchased 30 shares of the stock at $0.05 per share plus a commission of $12.95, for a total cost of$14.45. After the split, I had 100 shares, which I sold today at $0.80 per share plus a $12.95 commission, for a total of $67.05. My net profit was $52.60 in 59 days. I could have made a couple more bucks by only buying 1 share instead of 30. However, I choose 30 shares because that was a number used as an example in the company's SEC filing and, if I had to argue with my broker about how I should have 100 shares after the split, I wanted a crystal clear example. Besides, at five cents a share, the extra 29 shares only cost me $1.45.

Now I know I said I would alert you guys to any more reverse arbitrage opportunities I found, but there was a big unknown with this play that caused me to not tout this one (although it was discussed in the comments of my other post): the company wasn't actually merging with anyone yet. The reverse split was just being done to make the company more attractive to potential buyers. So there was much more uncertainty about what the post-split stock price would be. And this proved to be a valid concern. A true 1 for 40 split would mean the post-split price should be 40 times greater than the pre-split price. My 5 cent stock should have been worth $2.00. The stock was instead trading around $0.80 for the last couple days and that's what I sold for. This uncertainty also stopped me from making this play in the four or five different brokerage accounts I have and instead, I only did this in one account, thus limiting my gains further.

So, dollar-wise, I didn't make tons on money on this. However, I did get a very nice ROI and picked up some more experience with these penny-stock plays.

Back In Business!

I had a brief talk with my investors this weekend. That had previously asked that I hold off on purchasing any more properties until we could have a meeting. After all was said and done, they have decided not only to continue with the buy-fix-sell strategy I have been using, but to also add some more money to the game.

As many of you know, I work on an all-cash basis. When I started out a couple years ago, prices were quite a bit lower than they are now. With the recent appreciation the Phoenix area has seen, my bankroll, even with the profits from my previous deals, has lost some buying power. Right now, I'm on the border between being able to buy newer houses in good parts of town and older houses in not so good areas. I prefer the newer houses and those are getting tougher to find in the price range I am working in. So my investors have decided to allocate another $25,000 or so to help with this issue. They've got some other financial matters to clear up this month and once those are wrapped up, they will invest the money with me.

Wednesday, September 27, 2006

Home Prices Decline For First Time In 11 Years

I'm sure you've all read the articles that appeared on Monday that said, for the first time in 11 years, existing home prices fell. (If you didn't, you can read about it here and here.)

What struck me about these articles is the different views the so-called "experts" have. In the first article, we have this:

"This is the price correction we've been expecting," Lereah said. "With sales stabilizing, we should go back to positive price growth early next year."

In the second article, we have this:

At the end of August, there were so many unsold homes on the market that it would take seven and a half months to sell them all at the current sales pace. The association said that was the biggest backlog since April 1993.

What's even more confusing is that the two pieces of information come from basically the same source. David Lereah is the chief economist for the Realtors Association and the second quote comes from the Realtors Association itself. So if there is still seven and a half months of backlogged inventory, that means it will be at least mid-April before we're back to normal inventory levels. As any first year economics student can tell you, surplus inventory means less demand and less demand means lower prices. I think Lereah is being overly-optimitic.

And all this does not even begin to take into account the uptick of foreclosures and mortgage defaults that will be happening as variable rate mortgages start to adjust upwards, something we're already seeing the first signs of now.

I know one thing from experience: when people start prediciting a market has hit bottom, it hasn't.

So what does this mean for a real estate investor? As long as you know the basic rules of REI and stick to them, you should be ok. The most important one is that money is made when you buy a property, not when you sell. Don't buy something that is losing money and expect appreciation or tax savings to bail you out. Become more selective in your purchase criteria. It is becoming a buyer's market, so take advantage of that.

Wednesday, September 20, 2006

Market Flushes Out The Not-So-Serious

Yesterday afternoon, I had a guy over to give me an estimate on cleaning my carpets. He was the owner of the carpet cleaning company and we got to talking and it turns out he used to invest in real estate. When I told him I had sold my rental a while ago, he said "So you got out while you could, huh?", referring to the recent market slowdown. Well, no, I got out because it made sense to me at the time.

He went on to tell me that he had 9 houses at one point. He was flipping properties using 100% financing (bank loans, not hard money). He's got one property left that he's got rented on a lease option, He owes $750,000 and said it just appraised for $725,000. That's not good - especially if his lease option contract states the sales price will be the appraised value (which I have seen a lot of contracts specify).

I didn't bother to tell him that I was still working real estate. It was obvious to me that he was one of the ones who made a quick buck in the real estate boom and was now leaving the party as things slow down. His strategy seemed to be "buy and pray for appreciation." During the boom, this worked, but nowadays, it won't.

All in all, I'm glad to see people like him leaving the real estate investment arena. It's less competition for me and it will help the market return to "normal" valuations. This is apparently happening across the state, as I got a call yesterday from my Realtor informing me that her husband (who is part owner of buyazforeclosures.com, a company that buys and sells foreclosures) is getting back into the property wholesaling business because spreads, the difference between what a house can be bought for and what it is worth, are getting bigger now.

Monday, September 18, 2006

A Little Of This, A Little Of That

Not too much has been going on with me and real estate lately. I've made the decision to invest some money in my own house - finally. We've been living there for three years now and still have temporary paper blinds on some windows! So we're in the process of getting in-ceiling speakers installed (the house is pre-wired for surround sound and the cables are sticking out of the ceiling on big nails), having an entertainment center built, and a new fireplace mantle installed. Much of this won't happen until after the first of the year, but we have to set things in motion now. The good news is that we no longer have a car payment (got that paid off last month), so the money that was going towards that will be put towards these improvements and / or savings. I'm also still getting passive cashflow from my commercial investment and I got word on Friday that this month's payment has been mailed. I'm also due for two payments this month from some other foreclosure investment LLCs I'm in, so September is looking good from a cashflow perspective. And, of course, I'm still putting 15% of our paychecks in savings for future investment opportunities.

I got word from my investors that they'd like to talk with me before I start working on another property. They have no problems with my performance, but I think they are a bit worried about the housing market and don't want to get caught in a collapse. It's probably just a case of getting worked up from the doom and gloom media reports that you see almost daily about the collapse of the housing market. As I've always said, as long as you buy correctly, you should be safe. Hopefully, I'll talk with them in a week or two.

I'm still getting calls occasionally from people who want to sell their house. Since I haven't met with my investors yet, I can't help them, so I've been referring them to another investor I know. I got an email from him the other day saying thanks for the referrals and if any of them work out, he'd pay me a referral fee. That's nice, especially since I didn't ask for one!

I also ordered my free annual credit report from Equifax to make sure there were no errors. I was pleasantly surprised to find there were none! I think this is the first time I have gotten a credit report with no errors! Of course, Equifax had some errors in the past that I had to have them correct, but at least those corrections were made and no new ones were introduced. Still waiting to receive my wife's credit report. Hopefully, it will be as error free as mine.

Wednesday, September 6, 2006

Builders Are Practically Giving Away Homes!

Well, not really, but I did see an amazing offer last weekend. I have some relatives who are looking to move to Arizona from California and they were out here last weekend to look at houses. They looked at some resales, but also looked at one new build development. The house they liked was the biggest in the development, about 2,300 square feet. It was priced at $395,000, but the builder was offering an $85,000 incentive. With that incentive, the house was actually cheaper than their smallest model. In looking at their community map, it seems pretty clear why they are offering such a big incentive. Very few of this model have been sold. They probably want some diversity in their community, so they are trying to sell this particular model so the neighborhood has some variety. Oh, and another incentive they were offering was free granite countertops.

I also found out an interesting bit of info from the salesperson. This particular model is a two story house and, when discussing the various lots available, she told us that the city of Chandler does not allow two story homes on a corner lot. I've never heard of that and I can't really think of a reason why they would have this restriction. The only thing I can think of would be visibility, but you can instead have required setbacks from the street for the house. Does anyone have any other ideas?

Tuesday, August 29, 2006

AZ Republic Article On Teaching Sellers

Brian over at How To Invest In Real Estate posted a story from the Arizona Republic about how sellers are basically clueless about the current real estate slowdown and are still looking to sell their homes for the inflated prices of the last two years. Realtors are having to educate them on the current market dynamics and find ways to make them realize they may need to lower their price, not once, but several times.

But one line in the article really jumped out at me and made me question the knowledge of most Realtors:

You can't count on city or town medians or appraisals but have to look at what comparable homes in the neighborhood are selling for, they said.

No shit.

As a real estate investor, this is the first thing that was drilled into my head. It should be the most self-evident statement ever to anyone remotely involved in real estate, yet at this meeting of 200 members of the Southeast Valley Association of Realtors, they had to specifically point this out.

And these are supposed to be real estate "professionals".

Friday, August 25, 2006

Another Prosper.com Update

I've already mentioned I've grown disappointed with Prosper.com and will not be lending any more money through there. I've noticed now that they have added a new feature called "Community Payment" which I'm not sure I like. The concept is simple: if a member of a group is behind on payments, other group members can chip in and make a payment on the overdue loan. This helps keep the group's rating up by cutting down on the number of late loans the group has, which can scare away other lenders from that group.

As a lender, I should be glad for this. If the borrower can't pay me, at least someone else will. In fact, this has just happened. One of my loans is 2 months late and I received a community payment. The amount was only $1.43 and after all the late fees and service fees, I only get $0.21, which is still better than nothing (although not by much).

But on another level, I am against this idea. The point of Prosper, I think, is for people to help other people get back on their feet by lending them money. But part of getting back on your feet means learning and accepting fiscal responsibility. The community payment option gives borrowers less of a reason to accept that responsibility. I think it is also a huge source for potential abuse. If you find a group whose members tend to make community payments for others, why not join that group, borrow money, and default on the loan? The community payments will stretch out even further the amount of time it takes for a loan to go to the collection agency and thus, hurt your credit score.

Tuesday, August 22, 2006

First Payment From Commercial Project Received

I received my first payment yesterday from the large commercial project in Louisiana I invested in recently. Also had an update on the progress from the property owners. They have hired a new property management company and that company is actually moving into the building, which is a plus. This company managed the building for over a decade before the previous owner took over and had the property at 80% occupancy. They are currently at 40%, but they feel they can get it up to 80%. On the bad news front, three air conditioning units went out and they will cost the owner $30,000 to repair.

In looking at my last post on this topic, I realized I forgot to mention one important fact: My ROI on this investment is infinite! Yes, I am getting a 12% return, but the money I put into this project came from a line of credit that is costing me 7%. I get each payment, use some to make my line of credit payment, and pocket the rest. While it looks like this means I am actually making 5% on my money, I am not. Because none of the money generating the income is my money, I have zero dollars in the deal. This means I am getting money each month with none of my money invested, which gives a return on investment figure of infinity! Of course, there is some risk involved in this and I do have reserves set aside in case things go south, but it's hard to beat an infinite return!

Monday, August 21, 2006

Bonus Cash!

I spent the weekend in Las Vegas, where I won about $500. Unfortunately, my wife lost the same amount, so it was a push overall. Still, it's good to come back from Vegas with the same amount of money as when I left!

But the bonus cash I am talking about is not from Sin City. It's from Security Union Title Company. When I checked my mail when I got back into town, I had a refund check for $44 from this title company. The accompanying letter says the refund is a result of an investigation by several states into the reinsuring practices of the company to "captive reinsurers." They claim the reinsurance agreements did not increase the title premium and without it, the charge would have been the same. Hmm.. Really? Then why are they paying refunds? And doesn't calling them refunds imply they were over-charging in the first place?

Thursday, August 10, 2006

Reverse Merger Arbitrage Works!

Wow.. I just completed a deal that gave me a 2,567% ROI in 212 days. That's an annualized ROI of 4,419%!! And it's perfectly legal! Anyone can do it!

I sound like a bad infomercial. I better explain.

Thanks to Gualberto over at The Art Of Money blog, I learned about a stock investing technique called reverse merger arbitrage. He's explains the concept here. How it works is you buy shares in a shell company - a company that has no operations and is basically created just to be sold. The shell company has a stock symbol and is typically traded on the "pink sheets", the over the counter market (as opposed to on the NASDAQ or NYSE). These stocks are typically trading at pennies per share.

Why do this? Because the whole reason for this company's existence is to be sold to another company. The buying company wants to become a publicly traded company and issue stock. However, it is very expensive to put together an IPO - you need to pay a company to issue the stock, you need to get regulatory approval to be listed, you need to go through audits, etc. Rather than deal with all this, it is cheaper and easier to simply merge with another company that is already listed as a public company. Hence, the buying company buys out the shell company. Often, at the completion of the sale, they will change the ticker symbol and do a reverse split on the stock to raise the price from pennies to dollars.

Normally, a split or a reverse split does not change your investment amount. If you have 100 shares at $1 per share, after a 1 for 50 reverse split, you'll have 2 shares at $50 per share. In both cases, you have a total of $100 worth of stock.

But many times, the reverse split will include special treatment for small shareholders. For example, if you have less than 100 shares, they might say your shares will not be affected by the reverse split. This is probably done to preserve "round lots" and prevent the company from having to pay out any cash to shareholders. For example, without the special provision, if I had 99 shares before the 1 for 50 reverse split, I would end up with 1 share plus cash in the amount of 49/50ths of one share (or $49 in this example). But if the company has specified that holders of less than 100 shares are not affected, then, after the split, I am left with 99 shares still. But, and this is where the magic happens, because the reverse split affected everyone else, the stock price is now at $50. So I have 99 shares of stock at $50/share where before I had 99 shares at $1/share!

Hard to believe, but it's true. This happens. It's legal. It works. The drawback, of course, is that there is an upper limit on how much profit you can make - typically only 99 shares worth. But even so, that's one heck of an impressive return. But if you have several accounts, you can do this in each account.

Here's what I did. Back in December, Gualberto posted about a potential arbitrage opportunity with QRUS. That was going to be a 1 for 10 reverse merger with shareholders of less than 100 shares being unaffected. I bought 99 shares of QRUS at $0.30/share. Time passed and no news came. Nothing happened. It turns out, that deal fell through and the merger never happened. However, I held on to the stock, figuring another merger would come along soon. Sure enough, in July, Gualberto posted about a new merger involving QRUS. This time, the split was going to be 1 for 50, meaning I could make an even bigger profit!

Again, time passed and there was no news. (You'll find it's somewhat difficult to get news, or any information at all, on companies trading on the pink sheets.) One day, I received an information packet in the mail explaining the split. I took this as a good sign that the merger was going to take place, since I didn't get one of these for the failed merger. (Why incur the expense of printing and mailing the things if it's not going to go through?) Unfortunately, the only date listed for when the split would happen was "at least 20 days after" the information packet was first distributed. So I've been watching the stock daily and checking Gualberto's blog daily for news. One of his readers posted a press release saying the split was to happen on 8/2 and that the new ticker symbol would be DFXN. Sweet!

The next concern was that my broker, Schwab, would handle the reverse split correctly. Well, August 2 came and went and nothing happened. My account showed that my shares of QRUS were replaced by a number, no symbol. I called and was told that the stock was undergoing a reverse split and that Schwab was waiting for the new shares to arrive from the company. I explained to the broker about the special treatment for those holding less than 100 shares. He had never heard of such a thing. I was transferred the Schwab's Reorganization Department and they had never heard of such a thing either. So time went by and I was a little anxious about whether or not Schwab would handle the split correctly. Both the broker and the Reorg Department said I would received 1 share plus cash. This was not what I wanted. But I was hopeful things would work out since they said they were waiting for instructions from the company. Presumably, the company would know the special conditions of their split and would instruct Schwab to handle things accordingly.

Today, a week after the split, I logged in to my Schwab account and saw 99 shares of DFXN. The last trade price was $11. I got a real time quote and saw the bid was $8 and the ask was $11. I put in a sell order for $10.50 and waited. Nothing happened for about 30 minutes. The stock was somewhat volatile, trading between $8 and $14 over the last week and I didn't want to get too greedy and end up holding on to a $2 stock, so I changed my order to sell at the bid price of $8. The shares were immediately sold.

So, to recap, I bought at $0.30 a share and sold at $8.00 a share. Put another way, I turned $29.70 into $792 (not counting some trading commissions).Pretty darn impressive! And this was done in my Roth IRA account, so the profit is tax free!

I don't know how Gualberto finds out about these opportunities, but I check his blog daily for news of upcoming mergers. Next time, I'm doing this in 5 different accounts to really jack up my profits.

Monday, August 7, 2006

House 3: Lessons Learned

Each project gives you tons of opportunities to learn, so if you can't find at least some new things you've learned, you're doing something wrong. I certainly got lots of opportunities to learn on this project! My lessons:

Location, location, location! Of course, this is the cardinal rule of real estate and I thought I knew it. In fact, I do know it. Where I was lacking was my ability to properly judge a neighborhood. I knew when I was investigating the property that it was in a low income neighborhood. That means the crime rate will likely be high. I did not expect to be broken into four times! There were several homes on the same street that looked very nice and well-kept and the cars parked on the street were newer models and in good shape, so I thought the area wouldn't be so bad. I know better now.

Repairs. This is a mixed bag for me. I really like the handyman I used. He completed the job quickly, had regular hours, and went out of his way to help me on the times when the property was broken into, even after he was technically done with the job. On the other hand, others have suggested that his prices were a bit on the high side. Next time, I'll do some more research before hiring someone. This guy's service will be hard to beat though.. He was also a licensed contractor, as opposed to the handyman I had used on the last two houses. I really can tell the difference in work quality and professionalism and I'll be sticking with licensed contractors from now on.

I also learned a bit about what to replace. The property had an evaporative ("swamp") cooler in it. It was old and broken, so I replaced it with a new one. But the buyer wanted air conditioning and I ended up giving her some money at the sale to get that installed. I don't have any idea what it costs to install air conditioning in a house, but I'm sure it's cheaper than putting in a new evap unit and then installing air conditioning!

Security. Because of the neighborhood the property was in, I should have paid more attention to security issues. I always made sure all the doors and windows were locked and I did change the locks as soon as I owned the place, but there was more I should have done. The property backed up to an alley and had a double wide gate in the backyard. It took me a couple months before I realized I should put padlocks on that. I'm convinced that went a long way towards stopping the break-ins. Around the same time, I put up some temporary paper blinds in the front facing windows. I also bought two desk lamps and timers and set them in the house so there would be some lights on during the evening. The padlocks, blinds, lamps, and timers are super cheap when compared to the costs of repairing vandalism damage. And I still have the lamps and timers, so I can use them at the next property.

Oh, and just one last time, here's the post with the Before and After pictures.

House 3: Final Results

Here are the final numbers on House 3:

Purchase Amount


Fix Up Costs

- $29,443


- $303


- $517

Costs Subtotal
- $168,543

Selling Price


Selling Costs
Property Taxes
- $491

Income Subtotal

Misc. LLC Expenses
- $400


Time Property Held

168 days

Total Return (ROI)


Annualized ROI


Misc. LLC Expenses include the costs of running the business - a fax line, office supplies, etc. While not technically related to this property, this is the only property I've sold this year, so the profits of the entire LLC are really the same as the profits made by this one property.

Not the best ROI in the world and definitely below what I was shooting for. However, I'm reminded of an old adage of stock traders - never complain about a profit. If you compare these results to those of the last house I flipped, it's not so good. On the other hand, I owned the house for a shorter period of time and at least $3,000 of expenses were due to break-ins. If I hadn't had to spend that, my annualized ROI would be up around 12.5%. A lot of my profits from the last house were due to the red hot real estate market - since I had to hold the property longer, I was able to benefit from the run up in prices. In the current cooler market, I didn't get the rapid appreciation to help improve the ROI. My selling costs were also higher. To move the property quickly, I paid the buyer's agent 4% instead of the customary 3%. That cost me an extra $1,950. I also contributed 3% towards the buyer's closing costs and prepaids. This was another $5,850 that I paid on this sale that I didn't pay on the sale of the last house. However, given the relatively poor neighborhood, I knew when I bought the place that I would be required to contribute some money to the seller at closing since they would likely be cash poor.

My next post will go into the lessons I've learned from this property.

House 3: Done Deal!

I spoke with my escrow agent this morning and he confirmed the buyer's loan did fund on Friday and the docs got recorded, so it is now official - the property has sold! (He didn't get back to me on Friday because he had a family emergency and had to leave the office.) He said he was wiring the funds to my account this morning. In fact, I just checked and the funds have already hit my bank!

Today, I called the power and gas companies and had them take the services out of my name, something that will actually take another 1 to 2 days. I also faxed my insurance agent and cancelled my insurance on the property.

Now I need to start crunching the numbers and figure out the exact ROI. I'll post the info as soon as I have it!

Friday, August 4, 2006

House 3: Signing Complete!

When I showed up at the escrow office this morning, the buyer was still signing her documents. I took the opportunity to give her the keys to the property. Technically, I should wait until the loan has funded and the documents have been recorded, but I don't want to have to make another trip to the property or escrow office. I signed my paperwork and left. They are going to send the docs to the lender by courier in an attempt to get the loan funded today. If not, it will be Monday. I figure if the buyer has the keys, she might start moving in over the weekend and a property with someone living in it has a much lower risk of being vandalized than a vacant one. I'm not worried about the loan not funding. Once the lender has sent loan docs, it's pretty much a done deal.

After the signing, I went to the property one last time to pick up my lockbox (I actually still have a set of keys, should something go horribly wrong), my two lamps, and timers. Still no vandalism, so that's good.

Once I have verified the funds have hit my bank, I'll get the utilities taken out of my company's name.

Thursday, August 3, 2006

House 3: Signing Tomorrow!!

Woo-hoo! The title company received the loan docs and we are scheduled to sign tomorrow morning! The buyer is signing at 8 AM and I am signing at 9 AM. The title company will courier the loan docs to the buyer's lender in hopes that they will fund the loan tomorrow afternoon. If not, it'll have to wait until Monday. (Damn - I didn't catch that the closing date was a Friday!) But all is good!

As usual, I found one error on the preliminary HUD statement. This time, it was in my favor, but I still faxed the title company a correction. They had the sales commission listed as 4%, but we raised it to 5% (4% to the buyer's agent) after the first escrow fell through.

A very quick check of the figures shows I should make somewhere around $6,000 from this deal. Pretty crappy in terms of ROI, but considering all that happened, it's nice to see I should still make a profit. I'll post a more detailed accounting after the funds are in my account and I have a chance to do a full analysis.

Wednesday, August 2, 2006

House 3: Two Days To Closing

I stopped by the property this morning and was pleased to see it was in the same state as I left it last week. I might get out of this thing without any more vandalism yet!

Spoke with the escrow company. They are working on my file now. They do not have loan docs for the buyer, but they have been told they will arrive tomorrow. (Of course, we all know that doesn't mean it will happen.) I was supposed to get the preliminary HUD today to review, but it hasn't arrived yet.

Friday, July 28, 2006

House 3: Looking Good

I received another addendum today from the buyer that details the air conditioning info and purchase price increase I talked about earlier. The lender also wanted the contract to include instructions to the escrow company that the $2,500 be made payable only to an air conditioner licensed contractor. Apparently the lender doesn't want the borrower to get any cash back at closing. It doesn't matter to me one way or the other. I was also told that the lender had requested a final list of charges, which means they are working on finalizing loan docs. This is good!

The buyer's mortgage broker today also mentioned to my agent that the termite inspection report indicated some dirt around the base of the house that should be moved and said we "would have to address that." "Excuse me," my agent told him, "but that should have been addressed during your inspection period. We're not doing anything about it." She suggested he pay for someone to move the dirt. He said he'd get back to us on that. Tough luck fella. Contracts have deadlines for this very reason.

Closing is scheduled for one week from today!

Tuesday, July 25, 2006

Giving Up On Prosper.com

I'm going to give up on Prosper.com. I think they have a good idea, but it doesn't really work for me. I have a couple problems with it:
  • The 3 year loan period. I realize this is to help the borrowers to give them a lower payment, but right now, I prefer loans of 1 year or less.
  • Small payments. I am unwilling to lend large amounts of money on unsecured loans to people. A small loan amount combined with the 3 year repayment period equates to tiny monthly payments to me.
  • I don't think their peer review system works. They push "groups" as a way that people will police each other to help prevent loan defaults. Supposedly, if a group member is behind on loans, the other group members will encourage the late payers to make their payments so that the group as a whole looks good to other lenders. I don't see this happening. With my one late loan, there has been no response from the borrower to the one polite email I have sent. The borrower belongs to a group and the group leader also was a lender to this person. His emails have not been answered either. She is still a member of the group too. I can see people using Prosper only one or two times - it's not like eBay where one person will be conducting many transactions. As a result, the "feedback" or community policing has little to no effect. If people want to take the money and run, they will. This is especially true of high risk borrowers. Their credit report is already not good, so I don't think the threat of another ding will deter them too much.
For people wanting to get into hard money lending, Prosper is a good starting place. It is an unsecured loan, but you can start lending with just $50. You will get the experience of lending and receiving payments, the headaches of late payments, and all the other little details and worries that are part of money lending, all for a low entry cost. If you like it, however, I suggest leaving Propser and moving on to making larger loans through private parties secured by tangible assets.

House 3: Buyer's Inspection Report

They managed to beat the deadline. They had 10 days to inspect the property and get me a list of what they wanted fixed. At 9:30 PM on the tenth day, they faxed it. As usual, it was just a copy of the inspector's report with a note saying they wanted everything fixed. (Actually, there was one minor thing they didn't want fixed, but it was basically everything.) Anyway, we counter-offered back with crediting them $1,500 at closing for them to fix the stuff themselves. After talking to their agent, we found out the buyer really wants air conditioning. (The property has a brand new swamp cooler that I had installed, but the buyer wants A/C.) The appraisal came back $1,000 higher than the selling price, so we decided to up the selling price by $1,000 and I'll credit that back to her as well. She will then use the $2,500 to get air conditioning installed.

Friday, July 21, 2006

How Do They Stay In Business?

I am continually amazed by the fact that escrow companies are able to stay in business. They have about the worst performance record for any industry I have ever dealt with. (And this includes dishonest cabinet makers.) It is even more mind-boggling when you consider all their instructions, every single thing they have to do, is in writing! They cannot do anything based solely on a verbal order. How hard is it to follow written directions?

As of yesterday, I had not received the earnest money deposit from the aborted sale of House 3 that I was told would be coming my way. So this morning, I called the title company to find out what was going on. Neither my title agent nor his assistant had any recollection of speaking to my real estate agent about this. They said they would call me back while they did some research.

About 45 minutes later, they called back telling me they found my fax instructing them to release the deposit to me and asked me for an address to send it to. They also said the amount was $1,000. This is what I thought it was, but whoever my agent spoke to earlier told her it was $500. I never bothered to look up the correct figure on my own, figuring the escrow company wouldn't make a mistake when dealing with actual cash. Anyway, supposedly a check for $1,000 is going out to me today.

But I am still uneasy because the same property is in escrow at the same title company with a new buyer. Their earnest money deposit is also $1,000, so the potential for a mix up is quite large. I made sure they understood that the current escrow was not to be cancelled, just the old one. We'll see how it goes.

Thursday, July 20, 2006

House 3: Still In One Piece (Updated)

I stopped by the property this morning and it is still in good shape. I think two things are helping keep the vandals at bay: the padlocks I put on the back gate and all the construction going on in the neighborhood. The construction has caused some streets to be closed and I had to take a rather circuitous route to get to the property. I'm glad the house is under contract now. Viewings for buyers would probably be low due to the construction.

I still have not received an official Buyer's Inspection Notice yet. Technically, this means the buyer isn't asking me to fix anything the inspection turned up. However, I am wondering if everything is ok with my agent. I haven't seen her online recently and she hasn't responded to my email of a couple days ago. Both things are rather unusual. I called her this morning and got her voicemail, so I am still a bit up in the air.

Update: Heard from my agent, who is on vacation. She has a friend checking her fax daily, however, and she has not received anything yet. The buyer has 10 days from contract acceptance to notify us of what they want fixed and that deadline is fast approaching. In fact, I signed the final counter offer on the 10th. My agent hasn't faxed me the seller-signed copy of the counter offer, so I don't know when they signed that. We gave them until the 11th to sign it and I've got a post here dated the 12th, saying the house was sold, so I'm guessing they only have 1 or 2 days to get us the form. Otherwise, I don't have to fix anything!

Tuesday, July 18, 2006

The Next Venture Has Begun

As I alluded to earlier, I have started a new venture that is pretty exciting. Things have been finalized now and I am willing to discuss some details.

Several months ago, I attended a get-together of several people from the richdad.com message boards. I came out of that meeting very fired up on apartment investing and got started on educating myself on that subject. I haven't gotten very far in that respect, but I have put another one of the important points from that meeting into play - partnering.

Les, one of the presenters and participants at the meeting, is someone whom I have had some limited contact with over the past 4 years. He has recommended a couple of investments to me that have done pretty well, he has a great reputation, and after spending a weekend talking and listening to him, my comfort level with him is fairly high. So when it became apparent that I wasn't going to be ready for apartment buying in the near future, I decided to look at other investment opportunities. I contacted Les to see what he had available. Most of the projects he had were medium- to long-term investments that were expected to generate large capital gains, but no cashflow. Since I am looking for cashflow right now, I eliminated these. There were two that did provide cashflow and, after reviewing them, I decided on one.

My investment is part of a $1.75 million dollar first mortgage on a commercial renovation project going on in northern Louisiana using hard money loans. The project consists of two office buildings, a parking garage, and a parking lot. The project has been going on for 6 months so far, with an estimated 6 to 18 months remaining. At this time, the principals will refinance to a conventional loan and pay off the hard money loans. One office building has a 30% occupancy rate, the other 5%. However, the building with the 5% occupancy rate already has a positive cashflow, so there is huge room for profit there. The people doing the rehab feel the other building can be brought up to market occupancy and rates in a short amount of time. (One reason the occupancy is so low is the previous owner was planning to convert the top two floors to condos, so they weren't even attempted to be rented out.) The renovations they are planning will improve the existing office space, allowing higher rents to be charged - going from around $5 per square foot to $8 - $10 per square foot.

My investment is actually a separate contract between Les and myself. He had a large amount of his own money invested and I am buying out most, but not all, of his position. My investment is for $150,000 at 12%, with interest only payments for 6 to 18 months, after which the principal amount is due. There is no prepayment penalty. The project has a history of on-time payments. The contracts were faxed on Friday, the money was wired, and I am now a hard money lender on some commercial property! This is my first investment with the "big boys" and so far, I am impressed. Les is the total professional and doesn't keep you hanging - less than 1 week elapsed from the time I decided to invest until the process was complete.

Several things excite me about this investment. First, it a large amount of my money. The houses I have written about to date are investments for a group of investors (except for the very first one, which was also solely my investment) who have basically hired me for a percentage of the profits. I am using their money. This investment is all mine. Second, it commercial property. And lastly, it out-of-state. Although I have a couple investments in companies in the San Francisco area, they are relatively small, so I consider this my first real out-of-state investment in real estate.

Saturday, July 15, 2006

House 3: Another Update

I've received a copy of the inspection report summary. Nothing too out of the ordinary, considering the house is 50+ years old. Some things were found that the first inspection report found and some things were noted that weren't in the first report. I have yet to hear anything from the buyer regarding what, if anything, they want me to fix. I expect that will come Monday or Tuesday. I also received a copy of the earnest money deposit check.

One nice surprise is that I'm getting the $500 earnest money deposit from the last sale that fell through. (Hmm.. looks like back then I wrote the buyer put down $1,000 earnest money. It was really just $500.) If you recall, the deal fell through because the buyer couldn't get financing. With the new contract Realtors are using, this actually is not categorized as breach of contract and therefore, the earnest money deposit can go back to the buyer. We submitted a Cure Notice when we reached the scheduled close of escrow date. This gives the buyer an official notice that they have 3 days to correct the situation (i.e. find a new loan) or they are in breach of contract. But this buyer never responded to the notice! According to my agent, this means the title company has no official reason why the buyer has backed out and, therefore, the earnest money is forfeited to me! All the buyer had to do was let the title company know in writing that they could not get a loan and they would have gotten their deposit back. Oh well. I guess this is just another piece of evidence that the buyer's mortgage broker and agent were not very experienced. And I'm not feeling sorry for this person either. It's been almost exactly one month since the deal fell through. That's plenty of time for them to contact the escrow company and ask for their deposit back.

Thursday, July 13, 2006

House 3 Update And The Next Venture

Escrow has been opened on House 3 and the inspection is supposed to be happening today. I will be getting a fax of the signed contract and the earnest money receipt sometime today. I'm glad to see the inspection is happening just one day after escrow was opened. The buyer is not selling a house to buy this one, so perhaps she is hurrying to get into the place before the first of the month so she doesn't have to pay August rent. (Not to mention collecting the $50/day credit I am giving her for closing early).

In other news, I am embarking on new REI venture that is exciting and somewhat scary... I won't say much now because nothing is finalized, but I will say it involves commercial real estate in another state.

Wednesday, July 12, 2006

House 3: Sold!

My counter-offer was accepted and the property is now in escrow again!

Tuesday, July 11, 2006

House 3: Two Offers Received

While I was in Las Vegas last weekend, my Realtor got two offers for the property. One was for full price with a 3% seller contribution. The buyer pays for the home inspection and I am to pay for a home warranty at a cost not to exceed $350. The buyer put up $1,000 earnest money and is getting a 100% loan. The good news is, even though the contract says the buyer wants to close around mid-August, the agent said they would be willing to close sooner if possible. So we counter offered with using my title agency (for discounted title insurance for me), the earnest money is to be non-refundable after the inspection period, and a clause that said the seller will credit $50 per day to the buyer for each day before the specified close of escrow date that we close but the sales price goes up by $50 for each day after the specified close of escrow date that we close. No response yet to the counter offer.

The second offer with almost identical to the first except the sales price was $5,000 below the list price. We didn't even bother responding to that one.

On a side note, my agent told me the only properties she is seeing offers on right now are those in the $215,000 and under price range.

Friday, July 7, 2006

For The 30 And Under Crowd

I came across the Penny Foolish blog, written by Kira, a young recent college grad just starting out on her financial education. What caught my eye was the Festival of Under 30 Finances she is putting together. (More info here.) She is soliciting articles about financial issues relevant to people under 30 years old. I think this is a great idea and I hope it is a success! If you have something relevant to contribute, please submit it to her.

Wednesday, July 5, 2006

House 3: Security Update

I stopped by the property this morning on the way to work. We had a monsoon last night with not a lot of rain, but lots of wind, at least where I live, and wanted to make sure the property was ok. I also needed to make my weekly visit to check on it and make sure it hasn't been broken into again. The fact that I had a dream a couple nights ago that someone had broken in and graffiti-ed the inside also had me a bit nervous.

I was pleased to see everything looked good. Over the weekend, I used the free $25 Lowes gift card I got when I bought the stove to purchase another padlock for the back gate and five paper temporary window blinds. I now have window coverings on all the front-facing windows and all the windows on the side of the house. I need about 4 more blinds to cover the windows in the back of the house, but I'm not as concerned about those as I was about the ones in the front.

Looking back, I think the backyard is where people were getting into the house. Of course, the window they got in through was facing the backyard, but I finally realized that, because there is an alley behind the house, vandals were probably getting in through the gate in the backyard. The gate is rather large and has two openings. The whole thing slides open wide enough so you can drive a car in. This is how the stolen car got in. The other gate is a standard width gate set into the sliding portion. The last time I was there, I only locked the sliding gate because I only had one padlock. The pedestrian gate I did not lock, but there was a latch that I shut and the only way someone could unlatch it would be to break through the fence. Since the fence has wooden slats, this is a possibility. So this time I also put a lock on the pedestrian gate so it could not be opened either. The backyard is also fairly large, so I don't think you could look over the fence into the uncovered windows and see the place was empty with a fair degree of certainty. Either way, I am still going to put some more blinds up, but all in all, I feel better about the security of the place. Also, the blinds give the house much better curb appeal.

Unfortunately, the streets in the neighborhood are still all torn up for construction, so buyer traffic may suffer. The house next door, which is being remodeled, has wood over the front windows one of the pieces of wood has had a big face spray painted on it. That probably won't help my place sell either.

Tuesday, June 27, 2006

House 3: Squatters Begone!

I stopped by the house this morning and, as I was unlocking the front door, I noticed there were sheets hanging over a window to the right of the door. Hmmm.. I didn't put those there. I opened the door and saw several things:
  • The window on the other side of the room to the backyard was open.
  • There was a red car in the backyard.
  • Through a doorway to the right, I could see a bicycle leaning against the wall and a bunch of clothes on the floor.
I closed the door, got back in my car, drove to the end of the street and called the police. Two officers showed up 50 minutes later and I met them outside the house. I told them what I saw and that the house should be empty. They went inside and were in there for about 10 minutes. They came back out with a woman and sent her on her way. They ran a check on the car in the backyard and discovered it was stolen, so they called a tow truck to come haul it away. While waiting for the tow truck to show up, the policeman suggested I run out and get some gloves to clean up the stuff inside. He also said the house looked familiar and did a worker have something stolen from here recently? I said yes, that was this house..

I ran down to a corner drug store and bought some gloves and when I got back, I took my first look inside. The squatters had set up house in the add-on room that has the window air conditioning unit. The floor was covered with clothes, about 7 backpacks, 10-15 porno magazines, and other assorted debris. The windows all had sheets hung over them, which I took down and used to bundle up the garbage.

The rest of the house was ok. It looks like they got in through the open window I saw, which was a window that doesn't really lock properly. They had some soap and shirts hanging in the bathroom and some soap in the kitchen, along with an open box of crackers and a bag with spices and various food mixes. There were a surprisingly large number of tools - wrenches, pliers, etc. I spent about 15 minutes throwing everything out. Since I was just out at the property last Tuesday, I know the squatters couldn't have been staying there very long.

The tow truck finally showed up and, since the car didn't have any wheels on it, they told me they would have to drag it off the back patio and that it might leave marks in the concrete, which I said was ok. A short while later, the owner of the car, a 2004 red Mustang, showed up. Needless to say, he was pretty dispondent over the state of the car. Turns out it was stolen 5 days prior. It took about 2 hours for the guys to haul the car away.

Before I left, I double-checked all the windows, doors, and locks. There was no vandalism at least, although there was a grease spot on the new carpet near the kitchen. I also put a padlock on the gate in the backyard. The neighbor across the street was mowing his lawn, so I went over and spoke with him. He didn't speak english very well, but I think I was able to convey that the house was supposed to be empty and if he saw anyone in it, I would appreciate it if he called me, day or night. He agreed and I gave him my business card.

Having taken care of the house, I then called my Realtor and told her the story. She thought it was pretty funny :-) Anyway, I told her to put the words "motivated seller" in the MLS listing and to drop the price $3,000. She actually reminded me of a selling tactic I learned in the past, but forgot about with all the commotion today: We upped the buyer's agent's commission from 3% to 4% and only dropped the price by $1,000. It's still a net $3,000 deduction to me, but hopefully the extra agent incentive will get some more potentials buyer through there. As Freakonomics so smartly points out, selling real estate is all about motivating the buyer's agent.

Wednesday, June 21, 2006

Prosper Loan Late

One of my four loans on Prosper is late on the payment. Right now, it's at a less than 15 days late status. Payment was due on the 16th. Interestingly, this was the loan where an early payment was made before the first month was even up, lending some credence to her claim that she intended to pay the loan off in 1 year instead of the normal 3. The borrower is rated HR, meaning High Risk and total loan amount was for $3,500 at 20.75%. My exposure here is $200. Actually, $185 if you count the principle already paid.

House 3: Checkup

I stopped by the property yesterday morning just to check on it. Everything looked OK. There were no broken windows, the window AC unit was still there. The outside porch light was on, but I left it on, figuring it may be playing a role in keeping vandals at bay. My two desk lamps were still there and the timers they are connected to were still working and set to the right time. The laundry room door was unlocked, so some potential buyers must have been through looking at the place and forgot to lock it after checking the back yard.

I also picked up some trash and newspapers in the front yard. I hate those free newspapers that get delivered each week! If you don't pick them up, you might as well stick a big VACANT sign on the lawn. In an attempt to avoid another weed incident, I also sprayed weed killer on some weeds in the front and back. The heat is killing most of them, but there were some that looked surprisingly healthy. I have no idea where they are finding water to grow.

Wednesday, June 14, 2006

House 3: Back On The Market

My agent heard from the buyer's mortgage broker today. Apparently, the reason for the delay in the loan docs was the buyer had a late payment on his credit report. He said it was the bank's fault and initially, the bank agreed. However, after further investigation, the bank changed its mind and decided it was the buyer's fault after all. That dropped his credit score and he no longer qualified for the loan. The mortgage broker says they can get it cleared up in 15 to 30 days, but I'm not going to wait that long. The house went back on the market today. If the buyer gets his loan situation straightened out before it sells to someone else, he can buy it. Otherwise, it's first come, first served.

Tuesday, June 13, 2006

House 3: Escrow Update

We were supposed to close escrow today. Actually, the original close date was last Tuesday, but we extended it a week. My agent has called the buyer's agent and has not gotten a response. She also called the buyer's mortgage broker and asked what was going on. She got the usual mortgage broker answer - "Oh, there were some problems that weren't the buyer's fault but they are all cleared up now," etc., etc. My agent then asked if we were going to close tomorrow. He said no, it would probably be next Monday. This is not acceptable. I do not want to hold this property over another weekend and I've already extended the closing date a week.

My agent is putting the property back on the market and is sending the buyer's agent a cure notice to give them three days to close or lose their earnest money.

I am so sick of lenders and/or mortgage brokers waiting until the last minute. They've had 5 weeks to get this loan ready and they haven't done anything.

Monday, June 12, 2006

House 3: Still No Buyer's Docs

We're supposed to close escrow tomorrow. As of 1:45 PM today, the escrow agent still does not have docs from the buyer's lender and no one there is returning his phone calls. This does not make me happy. I asked my agent to contact the buyer's agent and have them start pestering their lender for loan docs as well.

I did stop by the property this morning and it's still in good shape. The window AC unit has been installed. No more vandalism has been seen.

Wednesday, June 7, 2006

House 3: Sale Documents Signed

I went to the title company this afternoon to sign all the documents. There were several errors on the HUD - as expected. First, they had my agent's commission as 3% when it should be 1%. They also left out the $350 I am kicking back to the buyer for a stove to replace the one that was stolen. Then, they charged me $525 for a termite treatment. This was never mentioned to me and it is not in our contract. The escrow company charged me because the paperwork from the termite company said to bill the homeowner. They apparently meant the new home owner, since I did not authorize this and have never heard of the company. They also incorrectly charged me $325 for a home warranty. My counter-offer, which was accepted, says the buyer is to pay that. So altogether, there was $4,750 in errors in the HUD. It pays to go over these things closely.

The only other surprise was that the close of escrow date is the 13th. I thought it was the 8th. My concern there is that I have to hold on to the property over one more weekend. I may be a bit paranoid, but three break - ins over two months will do that to you. The new window AC unit is being installed today, so there is the potential for more theft. Hopefully, though, it will be ok.

Actually, I do have one more concern - the title agent said he had not yet received the loan docs for the buyer. They were supposed to arrive on Monday. I'm a bit uneasy about that.

Unfortunately, it looks like I will not be making much on this property. That's not great, but I do want to get rid of it and at least it looks like I won't be losing money. I'll post a detailed post mortem of the project after everything settles.

On an unrelated note, I saw Bruce Springsteen in concert twice last weekend - here in Phoenix on Saturday and in Los Angeles on Monday. Great shows!! And in L.A., we went to Mimi's Cafe for dinner before the show and on the way out, bumped into Steve Perry of Journey coming in. Meal in the sky keeps on turning...

Thursday, June 1, 2006

House 3: Closing Delayed - But That's Good

When I spoke with my Realtor last night, I got some good news. The appraisal on the house came back at $195,000, not $193,000 as we were expecting. And the buyer's mortgage broker says the lender is okay with that, so I don't have to drop the price as much as I thought. My agent is getting the paperwork to me so I can sign off on the new sales price.

The title company says buyer's loan docs are supposed to be in on Monday, but to be safe, we are pushing the closing date back three days to Thursday. In light of this, I'm rescheduling the appointment I had today to next Wednesday.

I forgot to mention that when I drove by the property two days ago, I noticed that it looks like the house next door is being renovated. This is good news for me - I'm hoping any vandals will be attracted to that place instead of mine.

Wednesday, May 31, 2006

House 3: My Signing Scheduled

I hadn't heard back from the escrow company by mid-afternoon, so I decided to give them a call. Turns out, my escrow officer is out of the office the rest of the day because his grandfather's health is failing. His assistant has "put my file on top of his desk" and I've made an appointment to sign the papers at 11 AM tomorrow. We close on Monday, but I'll be out of town then and my Friday is rapidly filling up as well, so I'm running out of time to sign.

I still have not heard back from my agent, either by email or phone, as to the status of the buyer's loan and appraisal. I'm a bit nervous that things are going to fall through. If you recall, we will likely need to adjust the sales price of the property based on what the appraisal comes back at. This has still not been done, yet I am supposed to sign docs tomorrow morning.

Oh... It appears I never posted about that, although I referred to it yesterday. So no, you don't recall.

After we educated the buyer's help that their strange contract addendum was not required, they went ahead and started the appraisal process. The next day, we found out the buyer's mortgage broker spoke with several appraisers and all of them said they would not be able to justify the $205,000 price. The highest any of the appraisers could go would be $193,000, based on a quick examination of comps in the area. Since at this point, I am just looking to get rid of this place, I agreed that my absolute lowest sales price would be $193,000. I will still kick back 3% plus the $3,000 to cover the stuff in the home inspection, plus $350 for a new stove. The buyer agreed to this and the appraisal was ordered. We put the $3,000 and $350 in writing but were holding off on adjusting the sales price in writing until the final report came back from the appraiser. That was about a week ago and I have not heard anything since.

Tuesday, May 30, 2006

House 3: Less Than 1 Week Left

I spoke with my escrow officer today to see if the closing, which is scheduled for Monday, is on track. Unfortunately, his response was a bit disappointing. He said the file was on his desk and he was planning on starting work on it in a day or two. This is what I hate about title companies. They've had this file for three weeks and they haven't done a thing with it yet. What will happen is they will suddenly need stuff done at the last minute and the buyer and seller will have to scramble like crazy. But the good news is I know to expect this now and shouldn't get too stressed out when it happens. The only problem here is I will be out of town on Monday, so I need to get my signing done before then. I told this to the escrow officer, who originally wanted me to come in on Friday, and he said he'd give me a call tomorrow to set up an earlier signing time.

I was hoping to learn something about the loan status of the buyer, but haven't heard anything on that. I'll need to talk to my agent. We also need to put the lower appraisal-based purchase price in writing.

I also stopped by the property on the way in to work this morning and was pleased to see the place is still standing :-) No more break-ins or vandalism, either. Hopefully, this will continue until at least right after escrow closes.

Tuesday, May 23, 2006

House 3: Increased Police Patrols

I called the police department today and spoke with an officer in the Community Response Office and told them what has been going on at my property. They filed a request for increased patrols in the area. This doesn't mean they will guarantee increased patrols, but it does mean that whenever the police have some extra time, they are supposed to spend it patrolling the neighborhood. Hopefully, that will help cut down on the crime.

Monday, May 22, 2006

House 3: Can't Get Rid Of It Fast Enough

My handyman called me Sunday afternoon. This was not a good sign, since he was finished repairing the window and back door on Friday. He was in the neighborhood and drove by the house just to check it out and he saw someone had pulled out the window air conditioner unit from the converted carport. He said it didn't look like they broke into the house, but just pulled it out from outside. He's stopping by today (Monday) to board up the hole and, the day escrow closes, he'll put a new unit in. No sense in putting another one in now, just to have it get stolen again.

In the meantime, I'm going to buy a couple cheap lamps and some timers and put those in the house to at least give the impression someone is living there. If all goes well, I'll only have this place for 2 more weeks, so I just need to hold the thieves at bay until then. Of course, I don't think there is anything left to steal, so now it's just vandalism I'm worried about.

I'm also going to call the police department and ask for increased patrols in the neighborhood.

Wednesday, May 17, 2006

House 3: Burgled Again!

My agent called me yesterday with the results of the buyer's inspection. The buyer basically faxed over the inspector's report and wants everything fixed. That's not going to happen. But the scarier news was the inspector called and told us the house had been broken into. They only stole the new stove that I just put in - that's about all that is in the house anyway. That by itself isn't a big deal. What scared the crap out of me however, was what else the inspector told us: whoever stole the stove, turned on the gas outlet and left it open! The place smelled of gas when the inspector showed up. I am incredibly lucky I still have a house to sell.. Thankfully, the last time I was there, I turned off the pilot lights on the two gas wall heaters - one of which is on the opposite side of the wall from the gas outlet. The water heater pilot light was still burning, but the inspector said there was inadequate ventilation in the water heater cabinet and that actually kept the gas out. The thieves got in through the back door at the laundry room by kicking it in. The inspector shut off the gas and locked the place up the best he could.

I checked it out this morning and it was not as bad as I feared. The stove was gone and the back door was kicked in, but the door itself appears fine. The door jamb is splintered and that will need to be replaced. No gas smell was present, but I turned off the pilot light on the water heater, just to be safe.

Now, on to the list of stuff the buyer wants fixed:

The roof shows signs of unprofessional repair and cracking. It shows exposed nails and is missing some drip edge flashing on one side. In addition to getting these things fixed, the buyer wants a roof certification.

The plumbing is mixed copper and galvanized pipes. The water heater had corrosion on pipes and valves. The TPR overflow pipe did not extend to a safe location outside. (Deja vu - this is very similar to a problem I had with the heat pump condesate drip pipe on the first house I sold.) Two supply pipes were not clamped to the wall.

Two rooms did not have cooling or heating at time of inspection. (Meaning there are no vents in those rooms, not that the airflow into those rooms is blocked.) The evap unit only worked at the high cool setting.

The main power lines to the building are in contact with tree limbs - contact the utility company to fix. The GFCI outlet and kitchen did not test properly. The conduit at the main panel is not clamped to the wall. Three pronged outlets did not test as properly grounded.

There was broken glass at one bedroom window. Bathroom door jamb had damage. The room laundry room door jamb was damaged. The rear sliding door dual pane only has one pane. The back windows at the room addition were missing latches.

The laundry sink faucet leaked. The dryer vent was damaged.

The kitchen cabinet doors have damage.

Some of this stuff is the most ticky-tack stuff I've seen. For instance, the kitchen cabinet doors. All I can see is one door that has some wood chips out of it. However, this was painted over and it was in this condition when the house was for sale. And the reason there was glass at a bedroom window is because someone threw a rock through it. Yet, the report does not mention the hole in the window!

Anyway, the buyer is cash poor - hence the 100% loan to purchase and the 3% seller's contribution he wants from me so he can pay his mortgage broker and others involved in the process. I did a recorded documents search on the buyer and came up with nothing, so I don't have much info about him. However, he is obviously cash poor, so I instructed my agent to make the following offer: I will fix the back door jamb and the broken window. I will give the buyer $350 at closing for a new stove. I will also give the buyer $3,000 at closing to fix everything else. I'm hoping this guy will realize he can do the work himself and pocket a nice chunk of change. We're presenting this offer verbally first, to see if it will fly. If it does, we'll write it up. If not, I'll submit a list of things I will and won't fix.

This will probably be the last time I buy in a lower income part of town.

Thursday, May 11, 2006

House 3: May Fall Through (Updated)

I just found out that the buyer's lender found out this property was a flip and they want an addendum to the contract. The addendum states that I will sell the house for whatever the appraisal comes back at (or $205,000, whichever is less) AND I will still contribute 3% of the price.

There is no way any seller in their right mind would agree to this. Suppose the appraisal comes back at $175,000? I'm not going to agree to sell the property for an unknown amount determined by some stranger that is paid by the buyer. That conflict of interest seems pretty clear to me. My agent thinks the buyers will have to back out if I don't agree, but so be it. I rejected the addendum and my agent is moving the listing status back to active.

Update: Things are changing by the minute. My agent talked with her broker about this addendum and we all agree it's poorly written and there is no real need for it. The addendum actually states that if the appraisal comes back for less, than I will still contribute 3% towards the selling price. It doesn't actually specify a selling price and leaves things very vague about what happens should the appraisal not match the selling price. But this is unnecessary because the standard sales contract already includes a clause where if the appraisal doesn't match the sales price, the parties can renegotiate or cancel the sale.

How funny! I just got another call. Turns out, the buyer's agent didn't know that the standard sales contract was contingent on the appraisal! They are happy with that and are ordering the appraisal now and are moving forward without the addendum. I asked if this was a new agent and my agent said it was. And it was the buyer's mortgage broker that asked for the addendum to be written in the first place. So it appears we were just dealing with some uninformed people. Once things were explained, the problem went away.
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