11 Creative Ways to Write About Belize Real Estate

Real estate investment decisions are made on the investor criteria. Unless the rental property serves some other purpose, perhaps to close a 1031 tax exchange in a hurry, capitalization rate, internal rate of return, cash on cash return, or some other factor or combination of all factors, tell the real estate investor whether to make the investment or walk away. Real estate investing, after all, is all about the numbers. ™

There is, however, the matter of any "upside rent potential" associated with the income-producing property that prudent real estate investors should consider before making investment decisions. This is not always the case, though. Remarkably, there are times real estate investors pass on good investment property opportunities because they fail to consider the potential of a property's upside in rental income adequately.

An income property with "upside rent potential" simply implies that its rents are lower then what the market will bear and the "potential" to collect higher rents and generate more income are a real possibility. To the real estate investor analyzing the income property it means, "hold on, and don't make any decision to pass on the property until you've reevaluated the cash flow based on several other rent scenarios".

Believe it or not, sellers (or their agents) sometimes, whether by neglect or faulty research, do fail to consider the property's true income potential when setting a price. If so, then any APOD, Proforma, Marketing Package, or other income and expense statement presented you, at the very least, distorts the income and every key rate of return guiding your investment decision. If unchallenged, and you rely on those numbers, and deem them unfavorable, you could pass up a good investment opportunity. It happens.

Always conduct your own rent survey. Know what comparable rental properties in the area are getting for rents and then make your own evaluation of what the market will bear. You might uncover something the seller overlooked, or perhaps discover that the seller set the price for the property with no consideration for upside rent potential at all.

Then run your own numbers. Using the rents you regard more in line with the market, recalculate the investment property's cash flow, cap rate, cash on cash, internal rate of return and other financial measures. Who knows, you could discover a nugget of a deal you might otherwise have missed. It happens.

In the past few years in the real estate market, the Buyers have finally gotten the upper hand.

And the one thing buyers are demanding is money! Money in repairs, money in upgrades, money in closing costs, and sometimes, money in their pocket.

The most surprising thing in my mortgage business, to me, has always been how little money people have saved.

Most loan programs simply require lenders to verify the borrower has two month's worth of house

payments in cash reserves when they close escrow. The majority of people I deal with have

trouble meeting that condition.

Forget down payments. They don't have it and that's why 100% financing is so popular. But how

about the 2%-3% in closing costs required to purchase a home? They don't have that either.

Enter seller contributions.

A seller contribution is when the seller of a home puts up some or all of the money needed toward

the buyer's closing costs. Seller Belize Real Estate contributions can be negotiated at the time of a home purchase

by having the seller pay closing costs rather than a reduction of the home sales price.

Sometimes you can do a combination of both.

A lot of people are creditworthy of having a mortgage but they just don't have a lot of money in

the bank. In these cases, seller contributions can mean the difference between a sale and no

sale.

A Seller contribution is very easy to do. You simply disclose it to the lender. In most cases,

these contributions range from 3%-6% of the purchase price. Some 100% financing programs

now allow seller contributions up to 6%. It used to be capped at 3%.

Ever wonder how the homebuilder offers to make the buyer's payment for a year? They use the

seller contribution to make these payments out of escrow. If you buy a $300,000 home and the

builder is allowed a 3% contribution or $9,000 and your payment is $1,500 per month, there are

your six months in payments.

Sometimes seller-contributed closing costs can help the borrower get a better interest rate by

buying it down, making the home easier to qualify for.

Ever wonder how a homebuilder can offer 4.750% interest rates when the market is at 6.000%?

They use seller contributions to buy down rate. Figure that every .250% of rate buy-down costs

1% in points or a loan discount fee. If the rate today is 6.000% and you want to buy it down to

4.750% that would cost 5 points in discount fees. You still have 1% left over for closing costs.

Are you offering these marketing possibilities to your clients? You need to get with your preferred

lender to find out how you, too, can compete with the builders. Don't just use seller contributions

to cover closing costs. You too can offer a home with a rate in the high 4.000's%.

Here is the catch: The amount of seller contribution cannot exceed the actual amount of closing

costs and it CAN NEVER be given back as a cash incentive to the buyer.

This is where the dark side of my newsletter begins....

In the summer, I did a loan for Jerry and Lorraine buying their dream home of $850,000. The

home had been on the market for around three months. They needed 100% financing and

during the loan application, Jerry said to me, "Not only is this house a great deal but the seller is

giving me $50,000 cash back at the close."

Jerry was planning on using this money for window coverings, new flooring and a plasma TV for

the family room.

I cringed. It was painful to inform him that this was illegal. His agent hadn't told him this. He still

went forward with the transaction at a reduced sales price of $800,000. A few months later we

were able to still get him new flooring and window coverings through a home equity line of credit.

The new plasma TV couldn't wait. It had to go on his credit card.

Cash-back is an American tradition. Cash rebates are offered on all sorts of products. Some

credit card companies will give you cash-back on the purchases you make. In Las Vegas, we

are used to giving out cash for better services at hotels, restaurants, clubs, and to avoid long

lines.

However, cash back in a real estate transaction is illegal from a lending perspective.

Seller contributed closing costs, which are legal, are not paid in cash but as a credit from the

seller to the buyer. They are fully disclosed and paid directly to the third parties through escrow.

This is different. I am talking about getting a nice big fat wad of cash or a big check at the close.

Here is how it works. Johnny Vegas goes out looking for a house. He finds one he likes listed at

$350,000. He offers the seller $375,000 but he wants $25,000 to be kicked back to him at the

close of escrow. Every one makes out on this deal! The buyer gets a big payday or new TVs or

furniture or flooring. The seller gets his asking price. The real estate agent gets a bigger

commission. The loan officer gets a larger loan and an increased commission. The lender gets a

more sizable loan with more interest over 30 years. And the neighborhood keeps its value in a

declining market.

So what's wrong with that? It's a buyer's market. Home builders are offering incentives as high

as $75,000. So why can't you?

For one, the home builder does not offer incentives in cash. They offer incentives built into

upgrading the property like flooring, pools, landscaping and sometimes, house payments for a

year paid though escrow, or closing costs. Never cash back.

The problem with cash-back is that this transaction has defrauded the lender. The lender is

tricked into making a loan that now carries incredible risk. The buyer has none of his own money

in the property but has already made $25,000. The loan amount is higher, so if things get a little

tight for the buyer, and that's a greater possibility, the buyer will simply walk away from the

home.

If he walks away from the home, he does so with an artificially inflated value, which, in turn, raises

property taxes for everyone and leaves the lender with a home they will lose a substantial amount

of money on in the resale market.

Major sub-prime banks with billions of dollars in loans are closing their doors. Many of these

companies ran out of cash needed to repurchase loans that they had sold in the secondary

market because the original borrowers had defaulted. Schemes like cash-back at close are, in

large part, to blame.

For this to work an appraiser has to come in above the original asking price. This is a home that

is now very likely upside down at close. The loan amount is higher than the actual value.

And what stops someone from going out and buying 10 houses concurrently in this scheme,

adding $50,000 to each home, making $500,000 and then simply walking away leaving the banks

with foreclosed properties that are upside down? It's a great business plan for someone who

doesn't care about having their credit ruined, running from litigation and possible criminal

prosecution, or the big-picture, economic implication of large sub-prime lenders going out of

business.

There are people out there right now doing this. That's why banks are so strict about this.

The rule of thumb is that if a lender is not completely informed of ALL of the terms of the

transaction in writing, then the transaction is illegal.

I have been personally burned by three transactions like this in the past year. It has been very

costly for me financially. As a mortgage banker, I can be held personally responsible for the

loans we make. In all these instances, I have come to learn, the buyer never even saw the

house. That is a giant warning sign for you. You can be held liable as well. More signs are

below.

A lot of you reading this newsletter right now are shocked. Some of you probably think this idea

is legal and simply a way to compete in a buyer's market. Some will even write me to tell me that

they had an attorney review these transactions and that this is perfectly legal.

I recently had to argue this with a respected, experienced real estate agent of 20 years. He was

the listing agent on a $500,000 home. In the purchase agreement, it clearly stated the seller

would give the buyer $75,000 at close. I called to tell him we could not do the loan this way. He

argued that, he had spoken with a real estate attorney, and so long as this was disclosed in the

sales contract, and the settlement statement at close, everything was legal and above-board.

He was 100% right. If you properly disclose the cash-back in the purchase agreement and the

final HUD-1, you are not doing anything wrong. However try and find a lender who will do the

loan. None will. This agent could not understand why we would not do the loan if he was doing

everything legally.

If a lender finds out about this in the middle of the loan process, you can expect the transaction to

be cancelled or to be asked to try and accomplish the end result a different way. Maybe a

reduction in sales price or additional closing costs.

If it's not caught and the loan goes through, it might be caught in a post-closing audit. If this

happens, the lender can call the Note due. This means you likely have 30 days to pay it off in

full. You can find an "acceleration clause" in all mortgage loans. This allows the lender to

demand immediate repayment if the borrower lied at all in his mortgage application.

Even though no lender will touch loans with cash back, the problem really isn't in the transactions

where the kick back is written into the purchase agreement. Those can usually be explained to

the buyer and seller and a restructuring of the transaction can be reached. The problem is in the

ones where it's not disclosed. This is where fraud occurs. If you fail to disclose this kick back,

and you have knowledge of it, you are an accomplice to loan fraud. If this is discovered in an

audit of the file and you were involved, you can be held criminally, lose your license, fined and

even face jail time.

When loans go into foreclosure, banks audit the file very aggressively to look for the mistakes

they made so as to try to never repeat them again.

There are banks out there that become no different than aggressive police detectives when a

loan does into foreclosure. They may interview the buyer, the seller, and often the agents to find

someone who will "crack," admit loan fraud, and then press charges against the parties they

believe guilty. They will threaten these parties with criminal charges and lawsuits to get to the

truth. This can occur years after the transaction has taken place.

My understanding is that this has become so prevalent in many cities that brokers have had

meetings with their agents to go over this topic in detail.

OK, so what are the signs that this may be going on?

o Your instincts tell you something is "not right" about the deal.

o The listing agent is asked to raise the sales price or the buyer makes an offer well above

list price and asks for cash back.

o Even though the property has been on the market a while, it sells for higher than every

other like model in the neighborhood.

o The buyer, agent, or their "friend" vehemently insists on using their title company or

appraiser.

o The commission to the agent is much higher than normal.

o The appraisal is obviously inflated.

o Neither the buyer nor the buyer's agent has ever seen the property.

o The buyer or buyer's agent claims that the extra money will be used for home repairs or

renovations or paid to a contracting company to handle the repairs or renovations.

How serious is this? Bank fraud carries a maximum prison sentence of 30 years and a $1 million

fine. Conspiracy to commit bank fraud has a maximum sentence of five years and a $250,000

fine. Its tough to lose a deal but its tougher to lose your license or your freedom. Know when to

walk away.

The bottom line is lenders encourage seller-contributed closing costs because it usually creates

buyers and opportunity. Cash back at close is discouraged because it can create a greater

potential for loss, litigation, and criminal activity.