The Perfect Flip

The rules of buying a home do not change when doing a flip.  The important issues still remain; what is the marketability of the subject property (location, market appeal).  The mistake that I see most often made by the non-savvy buyer is that they try to buy the cheapest house they can find - forgetting that they will have to find interested buyers for it. 

The flipper should always work backwards into the flip - how much can you REASONABLY expect to sell your flip for on the open market, minus the expenses of marketing and renovations.  So, for example; if you determine (after consulting with your trusted real estate advisor)  that you can sell the subject home for $100,000, and that you expect to have 7%  in marketing and closing cost, and have budgeted $30,000 in renovation cost, then paying $60,000 for this property would give you a profit of only $3,000.  Don't forget your purchase expenses, holding cost, and your tax consequence for next year. 

Due diligence is a term that applies to all of the background investigations you do with the property prior to becoming obligated to buy it.  We'll leave the title investigation up to the title company, and we'll pass on the liability to them as well.  Performing a thorough inspection of the property is just good business.  Walk the property with your contractors.  Most importantly, consult with your Realtor to determine where you should place your renovation dollars.  He will help you with making the property more marketable to the largest number of buyers.  He'll also help you save money.  Some renovations will not increase the value of the property, but will make the difference between a marketable and unmarketable home.

Wouldn't it be great if you didn't have to pay any capital gains tax on your profits.  Well, you don't.  The best flip of all is the one that you hold onto for 2 years.  Move into it and make it your primary residence.  At the end of the 2 years, sell it and pay no capital gain tax.

The Foreclosure Freeze

You most certainly have been hearing about the massive "robo-signing" foreclosure scandal that is rapidly encompassing the biggest banks in the country.  Here are 4 things home buyers need to know about this breaking real estate news, and how it impacts them.  Here locally, we are seeing some of these large national banks pulling or suspending their foreclosure sale (literally pulling these homes off the market).  We (in our local area) have not been as hard hit as other areas of the state, but THIS WILL AFFECT US TOO.

1.  What is robo-signing is, and what all the fuss is about?  The phrase robo-signing refers to what we’re now realizing has been a very common practice in the banks’ foreclosure document processing divisions, where one person was essentially given the job of signing as many 10,000 foreclosure documents per month, by hand.  These individuals were supposed to be reviewing the files, making sure grounds for foreclosure actually existed, signing the docs in front of notaries. But because of the volume of documents, what they actually did was just sign thousands of documents at a time, without even reading them, and ship them off somewhere else to be notarized.

If you do the math on an 8 hour workday, you'll see that that only gives the staffer 1.5 minute to review each file and documents to make sure the foreclosure is warranted.  That's not humanly possible, which is how these staffers got the nickname “robo-signers”
   
Government regulators are very concerned that the banks may have been taking people's homes without following the proper legal procedures.  As a result, 40 states' attorneys general (including Wisconsin) are teaming up to launch a multi-state investigation, and the federal Comptroller of the Currency and federal attorney general may also get involved in investigating this issue.
2.  Will the freeze will make the banks cancel buyer contracts on REO properties? Currently, the freeze impacts bank-owned properties that are owned and/or serviced by Ally Financial/GMAC Mortgage, JP Morgan Chase, and some properties that were owned by Bank of America. Generally, contracts to buy these homes are being put on hold and extended for 30 days.  As well, the banks are often reaching out directly to buyers and offering them the option to cancel their contracts and recoup their deposit money.

3.  Is it safe to buy a foreclosed home? There's lots of talk right now about the "clouds" that this scandal will create on the titles to homes that were foreclosed by the banks' foreclosure mills. And that makes sense: if the home wasn't properly foreclosed on in the first place, then the legitimacy of the bank's resale can be called into question.  Normally, I'd say: Don't worry about it - that's why we have title insurance!  But last week, 3 of America's largest title company insurers declared that they will not offer title insurance on a number of the homes that may have been involved in this scandal.

In the vast majority of cases – when the foreclosure was justified and a bona fide purchaser, someone who was not involved in the bank’s wrongdoing, has purchased the home, courts will not reverse these foreclosures or their sale to buyers.  But if you’re in the market for a foreclosure, get clear on which bank owns the place as soon as you can, and run the property past your title insurer before you get too far into the transaction to make sure they can write a policy of title insurance on the property before you spend too much money on inspections and appraisals.

4.  How the foreclosure freeze will impact American home values.  In the short term, these freezes might cause prices to stabilize, as we expect to see the supply of foreclosures for sale start to shrink.  However, if these freezes stretch out for a long period of time, they could simply be delaying many inevitable foreclosures, which could delay the recovery of the housing market and home prices, over time.  I wouldn't expect to see the freezes cause prices to drop much beyond where they are now, but if they stretch out, they could keep appreciation flat for a longer period of time.