The FHA announced on January 28, 2011, that it would extend its “Anti-Flipping Waiver” through December 31, 2011.

Under normal conditions, FHA regulations prohibit insuring mortgages on homes owned by the seller for less than 90 days. But in today’s foreclosure-ridden environment, with so many distressed properties on the market, the agency has found that many rehabs take less than 90 days, and the tightened credit market often leaves FHA-insured mortgage financing as the only means available for potential homebuyers to purchase these recently-renovated properties.

The extension of the waiver will also help move more foreclosed properties off the market and reduce the number of vacant homes in neighborhoods throughout the country.

In fact, the agency reports that, since the waiver first took effect in February of last year, they have insured over 21,000 mortgages, at a value of $3.6 billion, on properties resold within 90 days.

Read more from the article
FHA Extends ‘Anti-Flipping Waiver’ to Speed Sales of REO Homes 

- Carla Palmer

In my previous blog, I discussed the pros and cons of incorporating, including filing as an “S” Corporation. Now let’s look at LLCs, or Limited Liability Companies

A Limited Liability Company blends elements of partnership and corporate structures. Because LLCs provide the benefits of limited liability and create “pass through” taxation, without being subject to the many restrictions on “S” Corporations, forming an LLC is often seen as a better option.

Limited Liability Companies are are often mistakenly referred to as Limited Liability Corporations. These businesses are not incorporated. But they do have to file “Articles of Organization” with their applicable state agency.

Come tax time, an LLC can elect to be taxed as a sole proprietor, partnership, “S” corporation or “C” corporation (as long as they would otherwise qualify for such tax treatment), providing for a great deal of flexibility.

Owners of the LLC (called “members”) are protected from some or all liability for acts and debts of the LLC, depending on state shield laws.

The regulations regarding Limited Liability Companies continue to evolve. Some early statutes did not allow LLCs to have just one member; the structure was considered to be a form of partnership and needed at least two. All states now allow single-member LLCs, although differences can exist in the way they are treated versus LLCs with two or more members.

A more recent change is the introduction of Series LLCs, which allow companies to have various series or “cells”, and segregate the assets and liabilities of each series.

NOTE: Not all states view LLCs the same way when it comes to liability. Always research the laws for your particular state, and consult a tax attorney, before setting up any business structure.

The decision to incorporate or not is one that faces owners of businesses large and small. Let’s examine a few pros and cons.

Owner protection from legal liability. Incorporating can limit owner liability for the corporation’s activities and debts.

Cons

1. The process of incorporating can be costly in both time and money.
2. Corporations must follow established “formalities”, such as holding regular director meetings, recording all corporate activity, and maintaining the corporation’s ongoing financial independence.
3. Profits from traditional corporations can sometimes be “double taxed”. The corporation itself is taxed for any profits earned, and individual stockholders who earned profits (by way of dividends) are also taxed. This may not be an issue for smaller corporations, whose owners often draw salaries instead of dividends; salaries are tax-deductible for the corporation. One solution to the “double tax” situation is choosing the “S” corporation tax status.

“S” CorporationsIn general,”S” corporations do not pay federal income taxes. Instead, the corporation's income or losses are passed through to its shareholders, who must report the income or loss on their individual income tax returns. This concept is called single taxation.Thus, company losses can offset personal income made from other sources. In addition, “S” Corporation shareholders are not subject to self-employment taxes.But qualification as an “S” Corporation depends on meeting strict structure and reporting requirements. Also, “S” Corporations cannot deduct the cost of benefits for employees/shareholders who hold more than 2% ownership.
NOTE: Always research the laws for your state, and consult a tax attorney, before establishing any business structure.
In my next blog, I’ll discuss LLCs.

- Carla Palmer

Potential profit making REO purchases still exist, but be careful!!

Even with the recent halting of a limited number of foreclosure proceedings by some of the biggest mortgage lenders in the nation, over fears of possible defects in their file documentation and foreclosure procedures, foreclosure action is heating up.

Meeting rooms at convention centers are becoming the sites of distressed-property auctions, with buyers competing for properties sometimes only based on an exterior photo.

Many first-time investors are jumping in, hoping to ride a wave of increasing home values.

And there is some good news on that front. According to the Zillow Home Value Index (www.zillow.com), home values in California, overall, rose in August of 2010, by .2% for the month, .6% for the quarter, and by 2.8% compared to August of 2009.

Some areas of California are showing modest-to-good growth compared to August 2009. Los Angeles Metro is up 3.3%, San Francisco, 2.7%, Santa Barbara Metro, 1.4%, San Jose and Ventura metros, 2.5%, and San Diego Metro, by a robust 5.3%.

But there are some areas of real weakness, too. Bakersfield is down 2.5%, Fresno, down 5%, San Luis Obispo, 2.8%, Sacramento, 2.4%, and Visalia, down by 10.5% from August 2009.

Riverside is holding steady, with 0% growth for the month, .1% for the quarter, and .1% compared to August of last year.

With the foreclosure machine now gearing up for full operations, an ongoing glut of distressed properties will continue to have a dampening effect on sale prices for some time to come, especially in the areas that have been hardest hit.

So what does all this mean for rehab property investors? Keep your expectations for home value growth at a moderate, realistic level. Research the heck out of market trends in the geographical areas you are looking to invest in. Be particular about the neighborhoods and properties in the immediate area. Lastly, realistically estimate potential net return after rehab, holding and resale.

- Carla Palmer

Fannie Mae’s “First Look” program and HUD’s “Neighborhood Stabilization Program (NSP)” give state and local governments the right to buy foreclosed properties before they go on the market.

First Look restricts offers during the first 15 days to only those from owner-occupants, public entities or their designated partners. Offers from investors can be submitted, but won’t be considered until after the initial 15-day period.

Buyers who qualify under First Look or NSP may also be entitled to a discount of up to 10% off the appraised market value.

On top of that, many professional investors are now channeling their funds into California’s collapsed housing market, buying foreclosed homes at distressed prices and hoping to quickly refurbish and sell the homes for a profit.

In the past, the typical “flipper” was an amateur using lines of credit or savings for an investment property. But professionals, primarily private equity funds and groups of wealthy individuals, have increasingly entered the field, driven by a lack of investment opportunities elsewhere.

Public auctions of foreclosed properties are held daily on the steps of local courthouses, and are heavily attended by pros.

This influx is driving auction prices higher and making profit margins tighter. The bidding process can be fierce, and oftentimes bids are made on homes that have not even been inspected in order to gauge repair costs. Many of these homes are also still occupied by the original owners.

Despite these barriers, opportunities still do exist for the “little guy”. 

- Carla Palmer

For many of us, our credit scores are not at the, shall we say, “altitude” they once were. The economic meltdown of the last few years has taken its toll.

The Fair Isaac Corp, creator of the FICO score system, reports that more than 25% of all consumers with active credit files now fall below a 599 on the FICO scale, making them unacceptable to traditional lenders and less attractive to hard money lenders. However, equity is often deemed more important than credit scores when qualifying for a hard money loan.

If your credit score is limiting your opportunity to purchase or refinance property and you need to complete the transaction in less than 30 days, you might consider “rapid rescoring”. Most mortgage brokers can help you get started.

“Rapid rescorings” are performed by independent credit reporting companies, which use procedures approved by the major credit bureaus to make direct changes to your credit file.

Credit rescorers will link you, your creditors, and the national credit bureaus to correct errors and omissions that could be bringing down your score.

Rescorers can also analyze your credit file and, in some cases, make suggestions on spending that will quickly give your credit score a boost.

Most legitimate rescorings take about a week, and cost the borrower an average of $30 per account in your file. A complete rescoring runs $90 to $200 or more.

Most importantly, be realistic about what credit rescoring can do for your FICO score. Rescorings can make a significant difference, but the average increase is 25 to 32 points.

But that could be enough to allow you to qualify for a loan, if not from a traditional source, then from a hard money lender.

And ignore the “credit repair” schemes and scams that are out there, promising to improve your FICO score overnight. They can’t, and in some cases their methods may not even be legal.

- Carla Palmer

A limited number of hard money lenders arrange and appraise rehab financing based upon "Future Value" of a property. Which is also called "After Repair Value" appraising. 
To clarify: Assume an investor/borrower has an opportunity to purchase a house for $125,000 and believes the "After Repair Value" is $175,000. If a loan is based upon the purchase price and the maximum Loan to Value (LTV) is 60%, the gross loan amount would be $75,000 ($125,000 times 60%). The down payment would be $50,000 plus cost.
If a loan is based upon "Future Market Value" and maximum Loan to Value is 60%, the gross loan amount would be $105,000 ($175,000 times 60%). The down payment would be $20,000 plus cost, which is $30,000 less than the scenario above. This also increases the potential yield on invested dollars. 
Assuming the investor is able to negotiate a lower purchase price of $120,000, potentially his down payment would be decreased from $20,000 to $15,000 ($120,000 less $105,000). 

This is why purchase of rehab properties using "Future Value" appraisals is so popular!

Prior to 2007 hard money lenders were lending as much as 75% of "Future Value". Today, because of the recession their guidelines are between 50% and 65% of "After Repair Value". Most lenders require a down payment of 10% to 20%.

The above example assumes the lender likes the property, borrower has decent credit and ability to make monthly payments. Hard money guidelines are not standardized and the example loan above may be approved by some hard money lenders and turned down by others.

Hard money, financing vs. bank loans.

With limited availability of funding from banks and other institutions hard money for many borrowers is the only game in town. Hard money lenders are helping with the purchase of both residential and commercial properties. Popular among lenders are loans to finance the purchase of non-owner occupied houses for short term holding. Typical dollars loaned on these properties are $100,000 to $600,000. Buyers are purchasing the properties substantially below the current market value. After repair and fix up they are sold for potential short term profit. If annualized the return on invested dollars can be substantial.

Hard money, also called private money financing is also available for apartments and small commercial properties. Bank guidelines are more conservative for these loans. Documentation is very  extensive as banks pick and choose who to lend to. Fortunately, hard money lenders are in the market and are more liberal and aggressive than banks!

While hard money is available it is not as plentiful as it was prior to 2007. Many hard money lenders were burnt by the recession and have not returned to the market. Currently, there is a greater demand for loans than available money. As the real estate market improves private money lenders will return as they did after the seventies and nineties recessions.

It is more important than ever to present a complete and professional package to lenders when applying for financing. With the large volume of applications lenders have a tendency to put the poorly prepared packages at the bottom of the stack. Additionally, make honest full disclosure. Lenders will automatically turn down a loan if they feel the borrower is less than honest.