Tuesday, December 4, 2007

A Potential Investor's Questions

I spoke to a potential investor recently, and he had a few general questions about purchasing an investment property. In case anyone else may have similar questions, I have posted his questions and my responses below.

If you have any of your own questions, feel free to contribute them, and I will do my best to post the answers promptly.

1) Is there a rule of thumb that tells what percentage of your gross income you should not exceed in order to qualify for a loan as an investor?

Answer - The sum total of all your expenses (mortgage, food, clothing, insurance, etc.) should not exceed 50% of your gross income.

2) Given that I have a certain amount of equity in my primary residence, is there a rule of thumb about how much I may be able to use as leverage for the purchase of an income property?

Answer - No, there is no rule of thumb - the current situation in the mortgage industry is complex and driven by the large number of foreclosures in real estate market. Although it is unlikely for an investor to qualify for a 100% loan, if you can prove your income (this is called a "full doc" loan in mortgage industry lingo), and you have a very good FICO credit score, you may be able to finance 90% of the purchase price.

3) If I choose to purchase a new property and keep my existing home, what is the best way to proceed?

Answer - You must evaluate your position carefully and proceed based on your own financial requirements and objectives; there is no single solution that fits each investor's unique requirements. However, one option would be for you to lease your existing home, thereby converting it into an investment property. Once you have a signed lease, (and you have equity, a good credit score, etc.,) then you should be able to obtain a loan to purchase the new primary residence.

NOTE - When you convert a property from a primary residence to an income property, in addition to reporting gain or loss from the rental each year, you should also consider CAPITAL GAINS tax implications for the future. When you eventually sell an income property, you must pay the capital gains tax if it is sold at a profit - unless you do a 1031 exchange and "trade" up to a more expensive income property.

Thursday, November 29, 2007

Bid on a Foreclosure? Hmmmm. Maybe not.

With all the attention in the media about the problems in the mortgage industry, is it time to invest in a Foreclosure?

In a word - no.

Bidding on a home in the process of foreclosure can be a risky financial gamble.


1) Foreclosure is a long process - it takes six months (at least)

2) The total debt (that you inherit if you buy) is often greater than market value

3) Home owners who lose their homes often do real damage before they leave

So - what you may want to consider instead is REO property!

Thursday, November 15, 2007

How does foreclosure work?

When you borrow money from a lender to purchase a home, the Public Trustee in the County where the home exists creates a "Deed of Trust". This is done to protect the lender - if the borrower defaults on a loan that is secured by a deed of trust, an attorney for the lender will foreclose on the defaulted deed of trust.

The process begins when the lender's attorney files the Notice of Election and Demand for foreclosure and the accompanying documents with the public trustee. Within 10 days, these documents must be recorded to initiate the process.

1) The timeline begins at this point, when the notice of default is recorded.
2) Within 10 business days, a notice of default is published and mailed to the appropriate parties.
3) Within 3 months, the sale date is set.
4) Property is sold to the highest bidder at public auction on the sale date.

The borrower has the right to cure, or bring all payments up to date. In most cases, the borrower will not be able to do this and the foreclosure process continues.

Most foreclosures have a list of debtors waiting for payment, and they each have a place in line on the list. By the time a home has gone to foreclosure, it usually means that both first mortgage and second mortgage holders exist, and the total debt on the property is more than the value of the home.

Since the borrowers are almost always "upside down" - they owe more than the home is worth - most foreclosures do not end in a sale. In this case, the more junior lien holders lose out, and the first mortgage holder becomes the owner. Then the property goes back on the market to be sold as "Real Estate Owned" (by the bank).

REO properties are bank owned properties. They are placed on the market and sold in the normal real estate process.

For information on REO properties available in the Denver area, visit my Web Site: WWW.LOMHEIM.COM