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I recently received an unexpected check from Canton Title Company. I had done a settlement with them back in 2004. Their records showed that I was due an amount back for recording fees.
They were reviewing old files and sent me a letter saying:
“Upon this review, Canton Title Company has come across your file and is please to advise that the review of your file reflects that you are due the amount reflected on the attached check”
The check enclosed was for $145.19. I watch title companies when I am due additional funds from settlement for things like water bill escrows. In this case I had no idea any money was due and considered the settlement closed.
Considering that the settlement was three plus years ago, any money due was long since forgotten. It is to Canton Title’s credit that they took the time to send me a check.
Kudos to Canton Title. Thanks guys, that will buy me a nice sushi dinner.
I found a very good article about what affects property values. Joe Manausa of the Tallahassee Real Estate Blog wrote a great post called How Home Values Are Determined. While this is aimed at sellers it has value for investors too.
In today’s market you are likely to run into sellers that are just unrealistic about what their property is worth. It may help to refer them to this article. One thing I particularly liked was his list of things that Do Not affect value.
What does not affect value?
What you paid for the house
Your remodeling costs
The amount of cash you need to buy your new house
What you want for your house
What I say your house is worth
What other real estate agents say your house is worth
What an appraiser says your house is worth
What the tax assessor said your house was worth
The last four on this list may all have very strong opinions what the property is worth, but they do not actually affect what it is worth.
It’s a good list and a good article. You should check it out.
Well more information is in and the new waiver of seasoning regulations (see previous post)only applies to homes that were foreclosed by the lender. Here is the ruling from HUD.
The key language is:
This waiver is limited to a sale within the 90-day period if the property is acquired through foreclosure, and is effective for a period of one year.
So it would appear that this will not help investors who wish to resell quickly. This is only designed to help lenders who have foreclosed.
The irony is that most banks seem to take quite a bit of time to move properties through their system anyway. The 90 day waiver may not really speed things up.
Inman news is reporting that FHA has temporarily removed the 90 day seasoning requirement for properties that they finance. I agree with the article, this won’t really help the backlog of foreclosed homes. Of course I didn’t think the original rule did much to address the real issue with “Flipping”. Seasoning requirements are a real impediment to legitimate wholesale or rehab deals.
What is Seasoning
Many lenders require that a property be owned for a certain period before they will finance it. This is to avoid the fraud and “Illegal Flipping” schemes where homes are quickly resold for substantially more than they are worth. FHA had a 90 day requirement. They also had tougher standards for 91 to 180 days.
So How Does that Affect Investors
Seasoning restrictions are a real problem for investors. Obviously every home we buy and resell is for substantially more than we pay. The problem is we can have trouble selling a property because our buyers will have trouble getting financing. Not all lenders are FHA, and not all lenders have seasoning requirements, but if you are not aware of this issue you can see you sale die at the last minute.
If you are an investor and selling a property you have held for less than a year you should get involved with your buyer and their lender and make sure that seasoning will not be an issue.
Update:
Since first posting this I have learned that the FHA 90 day rule rollback only applies to lenders who have foreclosed. It does not apply to Properties that investors buy. See FHA Update
The Baltimore Sun is reporting that Steven Berman has pleaded guilty on charges he conspired to fix bids at a number of Tax lien auctions in Maryland over a several year period. Mr Berman is the husband of Heidi Kenny, the attorney that I had reported won so many bids at the recent Baltimore City tax lien auction. See What is a Tax Sale? He will pay a $750,000 fine as well as face prison time. Given that his wife spent $16 million last month at the Baltimore City auction, I think he can afford the fine.
Last year the Sun had reported that the FBI raided offices of several tax sale bidders including Heidi Kenny. This article says that the FBI had witnessed attorney Harvey Nusbaum and Steven Berman signalling each other when to bid or not at the live Baltimore County auction last year. At the Anne Arundel County auction last year I saw three bidders who were winning virtually all the bids rotate bids among themselves. I also saw them signal each other when one was bidding and it was not his turn. I was surprised at how blatant it was and that auctioneer did nothing about it.
Apparently the investigation is ongoing and Mr Berman has agreed to cooperate. I am not worried, as far as I know I am not a target of the investigation.
You’ve heard that saying before. Sadly many small business people don’t know much about the laws they are expected to obey.
If you want to learn more about the laws that apply to Real Estate Investing, I will be teaching a class at the Mid Atlantic Real Estate Investors Association. Local Regulations and Ethics, it will be held Tuesday May 3, 2008 From 6:30 – 9:30 pm in Owings Mills, MD.
Go here MAREIA website for details and location. Ignore the prices listed, for May through July their classes are $69 for non members and $49 for members.
If you read my previous posts My Day in Court and What is a Receiver? You know the city is trying to take one of my properties and auction it off. The last time I was in court, the case was delayed for a month and a half to give me time to take action.
Well a month and a half has passed and I was back in court this week. Boy time goes fast when you have a deadline. I wasn’t as confident as the last time. While I was just as prepared, I didn’t really have much to tell the attorney other than I am trying to sell the property. I told him properties are selling slowly right now and gave him some statistics from the Multiple Listing Service. “The property is listed with an agent, I am marketing it dillegently but it would be unreasonable to expect that it would have sold by now.”
At first he acted like that wasn’t a good enough answer but he said I have been cooperating so he would cut me a break. We set a new court date for 3 months away. He said he expected the property to be sold by then. Of course I expected it to be sold by now. I price my wholesale properties to be a genuinely good deal for the investor buyer.
All of this negotiating is with the city attorney and happens before the judge even gets to the courtroom. He was nice enough to get the court clerk to issue me a summons right away for the next date so I was out of there before the judge even arrived. I’d rather not have to go to court in the first place, but all in all, not a bad day.
Happy investing and stay out of trouble,
Ned
PS: If you like this leave a comment. It lets me know what people find interesting.
After writing the previous post, Tax Sale Results part 1 I realized that some readers may not know what a tax sale is, so I will give a brief description and then the results.
The bulk of the income for most municipalities is property taxes. To encourage people to pay their taxes on time cities and counties generally charge high interest and penalties. They will also put a lien against the property so that it cannot sell without the taxes being paid off. Ultimately if the taxes are not paid then the county can take the property for non payment of the taxes.
But counties need money to pay the teachers, policemen, and garbage collectors etc. Payroll comes every two weeks. They can’t wait for someone to take their good ol’ time to pay their taxes, they need the money now. So the tax sale was developed.
Municipalities auction off tax lien certificates to investors, or in some cases tax deeds. The holder of these certificates has a lien against the property and essentially takes the place of the government tax collector. They get to collect interest on the amount due and have the right to foreclose on the property if the lien is not paid off. In the case of tax deeds, the investor gets a deed to the property and no foreclosure is needed, but usually the previous property owner has a redemption period.
Investors generally buy tax certificates for two reasons; to collect interest, or to get discounted properties by foreclosing on the lien. Yes you can make good money in tax sale but it is not as easy as “Pennies on the Dollar” that the infomercial guys would have you believe. It is an auction after all and it can be quite competitive as you will see below.
How Does it Work?
The specific regulations and interest rates will vary by state and sometimes jurisdiction. Here in Maryland we are a tax lien state and the nominal interest is 6-18% depending on the county. I say nominal interest rate because it is an auction and the effective rate depends on the bid and a complex formula called the “High Bid Premium”. This premium must be deposited with the county and does not earn interest.
The bidding determines three things:
1) The price you will pay if you foreclose on the property, this is your bid amount.
2) How much you have to pay the day of the auction, you must pay both the lien amount and the high bid premium.
3) Your effective interest rate. Because the high bid premium does not earn interest the more you pay the lower your effective interest rate.
Baltimore City 2008 Tax Sale Results, part 2
Well the City did pretty well last Monday, 9026 liens were sold at the Auction May 12th. The total lien value was $23 million and the high bid premium was $42 million for a total to the city of $65 million.
Almost 1200 properties received no bids and the liens revert to the City of Baltimore. You can go down to the city now and get one of these liens for face value. Most of these leftovers are junk liens. One of the worst case examples is 2620 Frederick Ave. with an assessed value of $11,600 with a lien of $606,616.
Yes you read that right – one half million dollars in taxes owed on a property worth $11,000! On average the liens on these leftover properties are 96% of the assessed value!
The top bidder in dollars was #189 ETS Maryland. They spent $17 million to win 2111 liens. Based on their bids, they will earn an effective interest rate of 6.91%
The next highest bidder was #30, 2008 City Holdings LLC, represented by Heidi Kenny an attorney who does tax foreclosure work. She spent $16 million last Monday. Her effective interest rate was 4.65%.
One bidder bid their interest rate down to .48% although that was an extreme 18 bidders did down to less than 5%. However 15 bidders bids will allow for the full 18% interest. The average interest rate received is 6.26%
You’ve heard of the 80/20 rule right? Well the bidding was even more lopsided than that. The top 10% won 95% of the liens. There was a total of 177 bidders. Ninety Nine bidders won at least one lien.
So How Did Ned Do?
I was in the top 20 bidders. I am certainly not one of the big guys but I have grown out of the one-sie, two-sie stage. My goal is to acquire properties. So I won’t really know for another year or two how I really did. However I got the most liens ever and I paid much less in high bid premiums than last year. My effective interest rate is about 13%, so that’s pretty good.
How About Some Good News for the Small Guys.
Well 9 bidders were able to win 1 lien for a total cost of under $1000. They all will earn the full 18% if the lien redeems. Thirty eight bidders were able to bid low enough to get a 15% effective rate or higher. Many bidders bid on 5 or fewer liens and still won at least on lien. Over 1/2 of the bidders bid on less that 12 liens and many won something. So you can play at this game on a small scale with a modest amount of money. But you better learn the rules and know how to play the game. You are playing against the big boys.
Happy investing,
Ned
PS: if you like my posts leave a comment below or click share this. Thanks.
In my last post I mentioned how there were two empty lots scheduled to go to tax sale. They were assessed at upwards of $100k although the neighborhood was worth double that. I wondered if anyone would bid without inspecting the properties to see that they were actually empty lots.
Yes, American Lien Fund is now the proud owner of a tax lien on 4206 Belmar. It is a vacant lot with newly seeded grass and fill dirt. It’s a clear indication that a house was recently demolished there. Their bid . . . $44, 394.36.
American was also a bidder on the other vacant lot nearby, 4313 Valley View Ave. This property had a $23,000 tax lien with a $105K assessment. Fortunately for American Lien Fund, a sucker is born every minute. Their $43K bid was handily beat by bidder #96. His bid? . . . $75,000!
These houses were both about 1700 sq ft. If you figure about $100 per sq ft to rebuild, then by the time you figure in your soft costs, your total cost would be about $200k, not including the lot. That’s about what homes in this neighborhood are worth. If you paid zero for the lot you would have about a break even deal. Both of these bidders are upside down.
Tax lien certificates are not near as profitable or as easy as the late night TV gurus would imply. All real estate investing has risk. Tax liens are no different. When I am done digesting the results I will do one more post about the sale in a day or two.
It’s been a little while since I last posted because this is a busy time of year for me. One of the things I do is buy tax liens at the Baltimore tax sale. This is not really a direct investment in real estate but it is a way to get passive interest. In very rare cases you can foreclose and actually get a property but it is much more rare that the late night TV gurus would have you believe.
One important thing you should do if you bid at tax auctions is inspect the properties. Especially in Baltimore it is important to make sure there is actually a building there. A case in point, this last weekend my partner and I were out looking at properties. We saw a property in a very nice single family home neighborhood. It was assessed at $100K but the neighborhood is worth double that. It would be a very desirable neighborhood to own or do a rehab in. There is just one problem. It was an empty lot. Clearly the building had just been demolished because we could see fresh grass seed growing.
There was a $900 lien on the property. Without looking at the property it would be easy to bid $50-100K or more. Of course an MT lot is not worth anywhere near that much, so you would be throwing away your money.
It will be interesting to see if someone bids for this. I’m going to watch this property and I will report back after the sale next week what someone bid.
As real estate investors we often hear about how we need a “team”. You know, the contractors, lawyers, accountants, real estate agents etc. that we need to do this business.
How do you find good team members? The best way is referrals from other successful real estate investors. This is the age old problem of which comes first the chicken or the egg. The bigger your network the easier it is to find these people. The problem is when you are new, you don’t have a big network and you don’t know who to trust.
One important member of your team is a good CPA. It is key to get an accountant that understands real estate investing. This is one team member that I am very happy to recommend. My CPA is Jeffrey Stoller from Goodwich, Stoller and Associates. He has done a great job for me. He knows real estate and has many real estate clients. He understands, real estate investing, the strategies we use, and how to structure our businesses to minimize taxes.
If that was all he did, he would be a good accountant. But the reason I am writing this is the outstanding service I have gotten from him and his staff. In person he is always patient with my questions (and I ask a lot of questions!) and he responds quickly to my e-mails.
Recently I applied for an equity line on one of my properties. The bank wanted tax returns. I called Jeff’s office to get copies. The receptioninst Alice Reinhold got them out to me in 2 minutes via e-mail. As the bank kept asking for more info, this process was repeated three times over a period of days. The last time was on April 15th. With a smile in her voice, on the busiest day of the year, Alice got that e-mail out while I was still on the phone.
In Today’s world where poor service is the norm, I just had to give credit where it was due.
Today I was in court for a receiver action; or as the city calls it a “Show Cause Hearing”. I have to show cause why a receiver (see What is a Receiver?) should NOT be appointed to auction off my property.
I had a tax lien on 526 N Arlington Ave 21223. The city took the owner to court. Well the last court date was postponed because they did not get proper service on the owner. That was a good thing. In the mean time I received a court decree for my tax lien. So today I was in court as the new owner.
So I spent most of the day yesterday well into the evening preparing for court. I had pictures with captions of properties I have renovated. I also had printed out pictures and permit lists of houses I have sold to other investors. I had 27 pages of well organized materials to show the judge.
I never showed it to the judge. When the City attorney saw what I had, he realized I was a responsible owner. We mutually agreed to delay the case for an month and a half to give me time to take some action.
The lesson here is; being prepared is invaluable. Based on what I saw in the other cases, I was the most prepared owner. Probably the ONLY one with pictures or other documentation. Most including me were not represented by lawyers. A few attorneys showed up without their client. The judge did not like that. If you get called into court I suggest you come prepared with more than just a slick excuse. The judge has heard them all.
Now that I know I get to keep it, I want to sell it. Does anyone want to buy a great rental? Leave a comment or click the button on the upper right to sign up for my buyers list.
In the fight against blight, former Baltimore Mayor Martin O’Malley instituted project 5000, where the goal was to acquire 5000 houses and sell them to investors and home owners. Most of these properties were acquired through tax foreclosures. These houses were sometimes sold as packages to developers or as SCOPE properties (Selling City Owned Properties Efficiently).
Well the Scope turned out to be anything but efficient. It is a failed program with few of the houses sold actually getting renovated at all much less on the schedule set by the city. Most real estate investors don’t like SCOPE because it is too cumbersome and too many hoops to jump through.
So it’s a new Mayor and a new plan. Rather than take over the properties themselves, they are taking the owners to court to appoint a receiver to auction off the property and put it in the hands of a qualified bidder who can rehabilitate the property and bring it back up to code. The authority to do this is in the Fire Codes. A vacant building is considered a nuisance and hazard to the health and safety of neighbors and the community.
As a personal note I am not too excited about this as it smacks of Eminent Domain. It also interferes with part of my business model. They are going after the same properties I have tax liens on.
Tomorrow I go to court for one of these proceedings. Over the phone the City Solicitor didn’t sound like he was going to cut me any slack in court even though I have only owned the property for a less than a week.
Also the city does not like the idea of people “flipping houses” They don’t see the value in a wholesaler. I am primarily a wholesaler. I see myself as an important part of the process of getting vacant property back into productive use. Some in the city see people like me as “greedy investors” taking advantage of the system.
Stagflation is a term from the 70s. It is when we have inflation (higher prices) but do not have economic growth (higher wages). This is one of the worst possible economic scenarios. We could be headed that way now.
Without the higher wages of economic growth we can’t pay the higher prices of inflation. If nobody buys anything then we have even less economic growth. It is not a good cycle to be in. This article posted on AOL Bernanke Warns of Possible Recession talks about these opposing forces.
Bernanke said “a recession is possible” yet two other members of the Fed are still concerned about inflation. These competing forces could lead to stagflation. So what dos this mean to real estate? I figure tough times mean better real estate deals. Good economic times are good for sellers. Bad economic times are good for buyers.
If you want a more humorous look at Bernanke check out this video. It’s been around a while but if you haven’t seen it it is a hoot. It was created by the Columbia Business School
Can you do this business without money? Many late night TV gurus and seminar instructors seem to pitch this angle of real estate. In fact there are many people who have been deeply in debt or even homeless that have had success in real estate investing. But is this realistic? These people are the rare exception. My problem with this type of talk is it sets up unrealistic expectations. I think it is simply a way to get unqualified people to buy expensive programs and classes.
A better way to think about it.
Yes you can do this without money, but you can’t do this without resources. I does take money to do this business, but it doesn’t have to be YOUR money. We often talk about OPM – Other Peoples Money. This is an example of what I mean by resources, OPM is a resource. Some other examples of resources you may have are; time, partners, knowledge, a strong work ethic, credit lines, a good credit score, mentors, employees (kids?), private lenders, team members, or business equipment like a computer and Internet connection.
What Resources do You Have?
Think about the resources you have. Do you have no money but you have time and a willingness to learn? You could leverage that by being an apprentice to an experienced mentor. I work with interns and I am sure many full time investors would love to have a helper willing to learn the business or bird dogs to feed them leads or great deals. If you have no time you can put your kids to work addressing and stuffing mailer to motivated buyers.
The Two Key Resources.
Do you have more time than money or more money than time? These are the two most vital resources you have in any business. Think about these two key resources in particular. Ask yourself which you have more of; time or money. Some investing strategies take more time, some take a lot of cash. Knowing the resources you have, will help you decide the best real estate strategies for you.
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