I'm not sure if this is more of a venting blog or a heads up, but I wanted to tell this story....

I recently was trying to refinance my home.  Because I'm self employed, the lender asked for 3 years of tax returns as a self-employed person.  Well, I had to wait for my 2007 returns to be completed.  No problem.  Got that done in March.  Got the appraisal done in Dec and updated in March.  The value of my home actually went up in a so called "down market".  So, we get approval and go to settlement.  I have a second mortgage on my home with a, what I thought, was a very good bank.  When the lender for the re-fi submitted a re-subordination application (for the second mortgage to be the new second mortgage), my bank said "no" because they questioned the appraisal.  My bank is in San Antonio, TX and I am here in Lancaster, PA.  They have no idea what the market is here!  So, needless to say, I didn't refinance.

The odd thing is that by not allowing me to refinance, the bank actually exposed themselves even more.  My plan was to refinance, consolidate a little debt and then pay down my second.  But because they questioned the appraisal, I feared they would lower my credit line.  So, I quickly took everything out I could.  As a self-employed person, I could not afford to lose any cushion I had. 

So, now my expenses are higher, and I have more debt.  I have cash now, but that is my padding.  When I was talking to my friend who was the lender, he said it reminded him of the movie Trading Spaces, where Eddie Murphy goes from being a scam artist on the street to a scam artist on Wall Street (couldn't help myself with that one).  As the market is trading, they ask him if they should buy a certain stock....he says, "no....wait....they're panicking out there, you can smell it".  I think the same holds true for the lending institutions today.

I normally like to talk about the benefits of investing in real estate.  Positive cash flow, ROI, etc.  But there is one thing that I think I should add to the discussion...the idea of due-diligence.  The idea of due-diligence is to make sure you are getting something that will work for what you want to do. 

I recently ran into a situation where my client put an offer on a commercial property on a busy highway.  I put a 20 day due-diligence period into the contract.  In other words, we had 20 days to make sure the property is secure and safe by doing inspections.  But also, we had to make sure that the township (local authority) was ok with the property and with what he wanted to do with it.  Turns out that the property was only zoned for one apartment and one commercial space; but it had two apartments in it and too much parking area.  As a matter of fact, the only reason the township had not sent a violation notice to the owner is because they did not have an address for him.  If we had not put in that due-diligence period, my client would have bought a property that he would have had to change to make fit the zoning...which would have changed his cash-flow, roi, etc.  In other words, what he thought he was buying was not at all what the property really was.

To some, this may be a no-brainer.  But you would be surprised by how many seasoned investors and real estate agents that miss this all important step.  In my opinion, the acquisition process should be like this:

1.  Identify type of property you wish to invest in (multi-family, commercial, etc.)
2.  Narrow down your choices
3.  Perform a cash flow analysis on each property
4.  Choose a property based on cash flow and ROI
5.  Make offer
6.  Negotiate
7.  Perform due-diligence (check zoning, inspect property, review financial data, etc.)
8.  Prepare for ownership
9.  Closing
10.  Begin

Sounds simple, but step #7 is so important.  With the experience I had this week, I thought I'd share it with you.  If you have any comments, please feel free to post.

  
    

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The real estate market has been in the news a lot lately, and it hasn’t been positive.  However, what you see is not always what you get. 

In many ways, there is a bubble around Lancaster County.    We do not experience the big ups in the market, or the big downs.  The Lancaster market is pretty stable. 

What has happened is that we have gone from a seller’s market a couple of years ago to a buyer’s market now.  The market has “softened” but not dropped.  Buyers, however, are loving the current market.  Low interest rates (around 5.75%) and a softer overall market, make it easier for buyers to find the house they want at a price that they can afford.

You’ve probably also heard a lot about the “sub-prime” mortgage crisis.  The term “sub-prime” does not refer to the prime interest rate.  What it does refer to are buyers who had below optimal credit.  So sub-prime are higher risk loans.  A few years ago, buyers with below optimal credit scores were given “special” loans to get them into homes they really couldn’t afford.   Lower home values and higher payments for these buyers have created the “crisis”.  For most people with good credit, the impact is minimal.

The current market softness is a good thing for the market, as a whole.  It is a self-correcting market.  The market probably won’t go back to a seller’s market for a while, but it will strengthen and become healthy again. 

The real estate market is cyclical.  It follows the basic law of supply and demand.  Today’s market is good for buyers.  For those of us in Lancaster County, prices have not fallen a great deal and the buyers are out there.

 

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No, I haven’t gone crazy and this is not just a sales pitch.  With all the doom and gloom in the media, investing in real estate may seem like a bad idea.  But dig a little deeper and you’ll see that it is the perfect time to invest. 

If you’ve read some of my earlier newsletters, you’ll remember that investing in real estate does not mean buying and hoping the property goes up in value.  There are two ways to invest in real estate.  Flipping or “buy and hold”.

Flipping is buying, improving and then selling for a profit.  This is different than just hoping the value goes up; an investor is actively improving the value of the property.  The increase in foreclosures will make it easier to find these properties, however, the softer overall market will make them harder to sell.

However, today, the “buy and hold” strategy is the perfect strategy to build wealth.    There are several factors that make this true.

Cashflow should be your primary focus when analyzing an investment property.  That cashflow is determined by the income minus the expenses.  Today’s market will bring higher income and lower expenses. 

First, the income will be higher.  The so-called mortgage “crisis” has really only affected those people that over-extended themselves or should not have been buying  a home to begin with.  However, those people still need a place to live.  That means they will have to rent.  The law of supply and demand says that if there is more demand, prices will go up.  With more people looking to rent, rents will go up.  Which means more income for an investor. 

Good credit scores and some money down will still allow buyers to purchase a property.  Mortgage rates are still low (around 6%).  Money is cheap.  An investor can leverage more with less.  This equates to lower mortgage expenses for an investment property. 

Also, with an overall softer market, prices are dropping.  Don’t expect huge drops, but drops of 10-15% are becoming the norm.  Today, an investor is able to buy more of a property with the same money than they could have 3 years ago.  This, again, is lowering the expense.

With higher incomes and lower expenses, it is now easier to get a positive cashflow than it has been in the past few years.  This “perfect storm” of income and expenses is a good storm, for the investor.

The media likes to tell doom and gloom stories.  Stories that make you worry.  But in this case, the doom and gloom that the media has created, has been a gift to the savvy investor.  The savvy investor will realize that now is the time to strike and use that “perfect storm” to their advantage.  Now is the time to be a savvy investor.  If would like to see how this affects you, please call us.  We would be more than happy to just sit down and chat.

 

 

 

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Hello,

Thanks for visiting my blog.  To be honest, this is my first attempt at a blog.  I've been reading a lot about them and how to make them successful.  Hopefully, I've learned something.  I'm sure I'll learn something just from doing it.  I think that's the whole purpose of life, is to learn.

The name of the blog is kind of a joke.  My wife and I opened a garden center a couple of years ago that failed.  When we were in the process of deciding whether or not to open it, I kept saying to her "...the numbers look good".  Recently, a friend of mine and I bought a Bed and Breakfast ( www.acrossthewaybb.com ).  In the course of a discussion with him, his wife, my wife and myself, my friend said "...the numbers look good".  We got a big laugh out of that.  So, I thought I would call this blog "The Numbers Look Good".

The purpose of this blog is talk about investing.  Whether it's real estate investing, business investing, or any other type of investing topics, I'll try to discuss it here.  For instance, I recently got done listening to "Why We Want You To Be Rich"  By Donald Trump and Robert Kiyosaki.  My next entry, I'll try to give a review of the book on tape. 

Thanks again for visiting.  Don't forget to support "The Numbers Look Good" by clicking on some of the ads.

Thanks!