A construction-to-perm loan is your second new construction financing option.  You are more likely to see this type of financing for single-family home developments.  In this situation, the builder is selling you the lot and a home plan he will build for you.  You, as the investor, are required to obtain financing to pay for the lot and construction.  A construction-to-perm loan provides you with financing during the construction process and once the home is complete, the loan modifies into a permanent end loan.

The advantage to securing your own financing is you need substantially less money out of pocket, at least initially.  In this case you are not giving the builder a deposit of 10 percent to 20 percent.  Your actual out-of-pocket costs can be exceptionally low.  Some lenders may allow you to finance your project by lending you a high percentage of the home’s projected appraised value when completed.  This can substantially decrease an investor’s down payment costs.

As an investor with limited funds available, this can provide you with a substantial saving; however, when you obtain your own financing, there are additional risks.  The first risk is interest payments.  A typical construction loan will have an amount of interest charged by the lending institution to pay for construction costs.  Some lending institutions may allow you to roll these interest costs into your overall loan.  This will minimize your out-of-pocket exposure on the transaction.  However, should the construction period run longer than expected, which happens very frequently, you might incur additional interest costs or lender penalties.

The next risk is additional building and materials costs.  If the builder runs into additional costs, such as higher than expected site preparation costs, increased impact fees (taxes), or unexpected increases in building costs, you can be sure these costs will be passed on to you.  So although securing your own financing will have lower intial costs, it might be offset by higher carrying costs during construction.  Always keep reserved funds in place to allow for the unexpected.

The third risk is responsibility.  When you secure the financing for the property, the ultimate responsibility for paying that loan is on your shoulders.  The bank expects that loan to be paid no matter what happens.  If you select an unscrupulous builder, who either fails to build, or takes far longer and incurs far more costs to build than originally projected, the bank will still hold you accountable for that loan.

Key Advantages to Construction-to-Perm Loan

• Less money out of pocket
• End loan is already in place
• Savings on closing costs

Excerpt taken from Making Hard Cash in a Soft Real Estate Market, Chapter 15, Pages 153-154.

When qualifying a good buyer for a lease option you are looking for someone that had a blip in their credit and now they are on their way to financial stability.  When you look at someone’s credit, see if they are on their way up or not.  You can see what they have paid recently and what is still behind.   This will show up on their credit report.   Learn to read credit reports and get set up on a system that works for you.  If you don’t know which system to use, talk to others in your real estate investors group.  They will know which companies provide which services in your area.   You can also work with a mortgage broker to run credit and do the lease option approvals.

Once you have approved a tenant for your lease option home; all you have to do is draft the paperwork and have them sign it all.  You need not give more than 12-18 months to the buyer on an option. This timeframe is most often enough for a good option tenant to get a mortgage.  If at the end of the time period they just need a few more months or they want to extend, it is your option to decide if that is what you want to do.    This is when you can also renegotiate.   Maybe the homes in that area appreciated more than you expected, then you would want to extend, but increase the purchase price somewhat.  You could also ask for another $500-3000 option fee, to extend the option.  You can also raise the rent slightly.   There are times I have given my tenants an extension for free, because of circumstances.

For more information on How to Qualify a Buyer  you can check out my book Investing in Real Estate with Lease Options and Subject-to Deals.

Screening a buyer for a lease option is extremely important and yet some of us investors still go by instinct or illegal decisions.   There are two areas to discuss on screening;

1)       Detailed Screening

2)       Fair Housing.

‘We liked them’, some investors will say to me.  There are too many really good liars in the world and those of you that feel you can ‘read’ people and relying on that are in for a rude awakening.  Many of my worst situations came from my own ignorance of believing in people.   We should all screen people as if we were blind and deaf.   We would then screen them strictly on the facts and not our opinions or prejudices.

Screen a tenant by reviewing the application in my course.  Have them fill it out.  Check it for accuracy.  Make sure they did not lie to you.   If someone lies to me, they are denied the occupancy.   Check their name – get a copy of their driver’s license.    Check their employment – I confirm the pay amount, hours they work and time on the job.   Check their banking information, you might need it later.  Also check their landlord history , the current land lord may want to get rid of them, but the previous has nothing to hide.  Call them both!   Confirm it is the real landlord by one of two ways; check it on county records, or call person and say a different amount of rent than on the application.

Fair Housing:

Fair Housing is an entire seminar in itself.  Realtors around the country have half to full day training sessions on this topic alone.   Fair housing rights when violated can cost owners hundreds of thousands of dollars.  This is not an area where you want to mess up.  The bottom line is this: select a tenant on their application alone and nothing else. There are federally protected areas and there may be some state protected categories also.  Each state has their own protected areas, so check your state for the details.  The way to be really safe is don’t judge anyone by the way they look or talk. This is why I say that we should be blind and deaf to select a tenant.  If we would just evaluate on the application process alone, then we would stay out of trouble.  Then the selection would be based truly on the facts not our gut feel or our instincts.  Besides, many times we think our ‘intuition’ is that someone is ‘good’ and they later are not so ‘good’.   Stick with the law and you will be safe.

As you can see screening a buyer for a lease option is highly important. For more information on How to Screen a Buyer and putting your standards in writing you can check out my book Investing in Real Estate with Lease Options and Subject-to Deals. Stay tuned for the next topic How to Qualify a Good Buyer.

Share with me some of your tips on How to Screen a Good Buyer in the comment section!

What can you do in today’s real estate recession?  How can you still make money as a real estate investor?  What works?

I know a lot of you are probably wondering about the answers to these questions.  The nature of real estate investing is very different than it was just a few short years ago.

If you want to find some answers and learn how to do profitable deals in this market you should check out this webinar this upcoming Tuesday night (January 19) at 8 PM EST.  I will be talking with Kris Kirschner about the current real estate market.

We’ll be looking at what techniques actually work RIGHT NOW and what you can do in this market.

There will be no sales on this webinar – it’s all about info.

This is a very special webinar and one you don’t want to miss.  Kris Kirschner is a genius in real estate who knows what is working right now in the market and how to invest even if you have no experience at all.

Space is limited for this webinar, so you’ll want to register now.  The webinar is free so if you are interested in real estate investing in today’s market you don’t want to miss this.

It’s this Tuesday, January 19 at 8 PM EST.  To register go to (click on the link)

http://www2.gotomeeting.com/register/452844410:
See you there! – Wendy

Check Here for Your Time Zone:
Tuesday, January 19, 2010
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Down markets are without question one of the best times for real estate investors. Down markets contain the best opportunities and the greatest ability to make money. Any truly successful real estate investor will tell you that they do more deals and make more money in down markets than they do in up markets.

Here is what Billionaire J. Paul Getty had to say about investing in down Market:

“If you want to make money, really big money, you do what no one else is doing. Buy when everyone else is selling and sell when everyone else is buying. This is not merely a catchy slogan. It is the very essence of successful investment.”
J. Paul Getty – Billionaire

While the opportunities are great in down markets, investors need to be aware of some of the deadly mistakes that can occur.
Here are the Top Three:

1. Not Getting Cash Flow
Cash flow is king, especially in down markets. It’s harder to get cash flow in seller’s markets, and even in some areas of the country, in a buyer’s market, because the prices are still too high for area rents. In down markets it’s very important to make sure your properties provide cash flow. You can’t count on appreciation in the short term in down markets. If a property cash flows, you can hold it forever, no matter what the market does. So, if it stays a down market for a while, you are okay because it cash flows. If the market goes back up, you can make money off appreciation too. Sell it then if you choose. The choice is yours then, because you’ve got the cash flow. CASH is KING!

2. Making Excuses
I touched on this before. If you want to succeed in real estate, you have to set aside the excuses and do it. Excuses are typically hidden in reasons why you can’t do it now. “I’m too busy.” Or the fear to take action by over analyzing every deal, “This property makes $5 less per month in cash flow than I really want.”
You’ve got to take action now. Picturing in your head all of the money you’ll make and the better life you’ll have with real estate investing is only fantasizing. If you want to make money in real estate; get started, take one step and then another. No one expects you to do it all at once or even do everything right, just get started.

3. Not Using a Proven System
There are some things in life we have to learn for ourselves. Making every mistake possible in real estate, just to learn the right way to do something is not one of those times. If you try that route, it will take you so much longer to get anywhere. You will literally be years behind, if you don’t give up entirely. A proven system is someone else’s road map that you can use to learn a real estate technique.
Proven systems give you the opportunity to skip the “getting lost” part. They move you forward at a much quicker (and safer) rate than if you tried to do it all on your own. It doesn’t matter what type of investing you want to do; short-sales, rehabs, or lease options, they will save you tens of thousands of dollars in mistakes, legal fees, etc.

In a recent post I discussed why Soft markets are GOOD rental markets to invest in. Now is the best time to buy Real Estate.
Here are the 3 best ways to Buy Real Estate in a Down Market:
#1 Lease Options
Lease options are Great for down markets. The opportunities are plentiful because there are lots of sellers out there having trouble selling their homes. This means they are looking for alternatives, and what you can offer them with a lease option is a whole lot better than just renting out their home or having to do a massive price cut.
The other great thing about lease options in down markets is that you have extremely low risk. No matter what happens in the market you’ll come out okay, because you aren’t obligated to buy. But even if the market were to go down more you can always try to renegotiate with the seller and get a better deal so you can still close. To learn more about lease option investing visit my website at http://www.wendypatton.com

#2 Wholesaling A.K.A Cooperative Lease Options
Cooperative Lease Options is a safe form of investing in down real estate markets, provided you have end buyers lined up before you close. There will be plenty of opportunities for wholesale deals, but the challenge may lie in finding your buyers.
If you are doing Cooperative Lease Options it’s a good idea to have a strong buyer list lined up. You don’t want to close on the property without an end buyer because you are in a down market. If the market continued going down you would be stuck holding the property as the value declined.
What I really like about wholesaling is that you can keep your risk level low by not having to own the property. You just flip it to your end buyer. Minimizing risk in down markets is very important. To Learn More about Cooperative Lease Options Click Here.

#3 Cash Flow Rentals
Some down markets are positively flush with great cash flow opportunities. Down markets mean that the renter pool has grown as well. If you make sure the numbers work and that the rental market is strong you can do very well with cash flowing rental properties. Passive income every month is a great way to build your wealth.
While there is some risk associated with a rental property in a down market, because you do actually own the property you can easily mitigate that risk by making sure the numbers work before you buy. If a property cash flows you can hold it forever without having to worry about what the market does. To learn about some great cash flow opportunities, the same area that I’m buying in right now, Click Here

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The biggest controversy for a subject to is the violation of the ‘due on sale’.   The due on sale clause is a provision in the mortgage documents that says if the home is sold or transferred, the mortgage will be paid in full or the lender could call the loan due in full.   This means that when the sellers deed the home to you, the lender could say, “Seller, we want you to pay off that mortgage in full – NOW!”   If you or the seller don’t pay it off, the bank could foreclosure on the property.    Most lenders will never know the seller transferred their title to you if the payments are paid on time.   Most lenders are really concerned with getting their payments on the loan, in full and on time.  Some lenders, for whatever reason, can and do choose to foreclose on a property transferred subject to, instead of continuing to receive payments from an investor.  Such events are rare, but do occur.  You should disclose this risk to a seller, or better yet, be prepared to refinance the existing mortgage in the unlikely event a lender calls the seller’s loan due.  There is some speculation in the industry that many due on sale clauses have not been called because interest rates are currently low, but if they go up, then lenders will have a reason to call loans due.  They will want to get the higher rates.  Right now the lenders have little incentive to call loans due, but that may change in the future.

In my personal opinion, the best and most ethical way to handle a subject to deal is to be totally honest.  Let the lender know you did it.  Send the lender a certified letter informing them of the ownership change.   Keep proof of the letter and return receipt in your files.  If they don’t respond (most won’t), then the law may hold that they have accepted the change by ignoring your letter.   If they actually try to foreclose, then you may need to pay off the existing mortgage and refinance the property into your own name.  If the property doesn’t have enough equity to justify refinancing into your own name, then it probably was not a worthwhile deal to begin with.

To learn about other risks when dealing with Subjects Tos and how to avoid them you can read my Investing in Real Estate with Lease Options and Subject-to Deals book.

A Subject To is getting the deed to a property without getting a new mortgage.  Instead, the seller signs over the deed to his home ‘subject to’ the existing mortgage. The buyer makes the mortgage payments on the seller’s existing loan, but does not take out a new mortgage to acquire the home.

Knowing when to use one is very important.  Many times, investors try to fit one technique into every situation.  That can be a very dangerous approach.   You must know which technique – Lease Option or Subject To – to use with each seller, to protect not only yourself, but your tenant/buyer as well.  Knowing which technique to use for your seller and their situation can save you tens of thousands of dollars in profit. There are many advantages of Subject Tos (some are the same as an option)

1.    Minimum or zero down.  Usually you only need to pay the seller a small amount to sign the deed over to you.  If they owe more than you are willing to pay, then there are times that they will pay you to take the deed from them.

2.    No financing required. When you do a subject to you don’t need to get a mortgage because you are taking over the seller’s mortgage payments.  Technically, you are not assuming the seller’s mortgage.  You are just making the payments on their existing mortgage.

3.    Ownership. The day the seller deeds the property to you it is yours.   You are the true owner of the home.

1. No income or credit checks.  Not once has a seller ever asked to look at my income or check my credit.  They are more worried about their situation and how to get help from you.
2. The Seller will love you!   You will be making a positive difference in someone’s life.

Look out for my next blog.  We will be discussing Subject Tos-The Risks and How to Avoid Them.  To learn more about Subject Tos and the advantages you can read my Investing in Real Estate with Lease Options and Subject-to Deals book.

November 19-22 I will be holding the “Soft Market Investing” Boot Camp. This is four days of intense Real Estate Investing training during which you’ll learn:

• What strategies work best right now in today’s market
• How to maximize your profit potential when using these investing strategies.
• Strategies you’ll be able to implement the very next day!

The training offered at this event will be, without question, some of the best you have ever been a part of at any real estate event. You’ll walk away with the ideas and concepts that can put tens of thousands of dollars in your pocket! This Boot Camp will also be saturated with strategies and concepts that work in today’s market. As most of you know, I specialize in Lease Options and Subject To’s. Both of these strategies will be covered in detail during the Boot Camp!

And, given the current real estate market’s condition, this couldn’t be a more perfect time to attend the “Soft Market Investing” Boot Camp.

The first Boot Camp was held June 26-29 and was sold out! Hurry up and Register….Seats are filling up fast!!

Click Here to Register