Ask Realty Times

Written by Posted On Thursday, 27 December 2007 16:00

Question: I am new to the real estate business, like three months. I just got my license. I was watching one of those get rich quick schemes, and one caught my attention. I have done some research but I'm still hesitant to try this since I've tried enough get rich schemes in my life.

The idea is to become involved in cashflow notes -- you find people with cash notes (owners who sold their homes and self financed and therefore are collecting a monthly payment), convince the loan owners to let me auction off their notes and have an investor pick up the note, providing me with a commission and then off to the next victim.

Does this makes sense? Does this actually work?

Answer: What you call a "cashflow note," everyone else generally calls a second trust. In other words, it's financing in addition to a first loan, usually taken back by a seller.

Given that we have a huge number of individuals who have financed with little or nothing down, why would a seller take back a second trust? Sure, it happens, but it also happens when people get hit by lightning.

Why would a property owner hire you to sell their note? Do you have any experience? Any buyers? Do you know how to price notes? Do you need a license in your jurisdiction to be in the business of selling notes?

Perhaps it's just a slip of the keyboard, but it seems difficult to imagine that any note buyer would want to do business with someone who regards them as a "victim."

Question: We've signed an agreement of sale with a new home builder, put $40,000 down and are soon going to have the new house ready.

The problem? We have not sold our existing home. We can't afford both mortgages and do not qualify for both anyway. How to get our deposit back or what we can do? Our new home builder is aware of our situation and said they will be sending an appraiser over to our house to see if they can do anything for us. What do you think they might do? They are being very vague and we are very stressed.

Answer: The goal of a home builder is to sell new homes. Unless there's a contractual obligation to the contrary, it is not the builder's job to sell your existing home, buy it or fix it up.

Most likely you have bought a new home using a sale agreement written by attorneys who work for, ta da, the builder. You can bet that every term and clause favors the homebuilder, thus the odds of getting back your deposit are just about zero.

What can you do? Selling the first property is the plain solution, but if that's not possible then would it make sense to rent it? Would it make okay to stay in the existing home and then rent the new one? The problem with this approach is that you likely applied for and obtained financing as an owner-occupant and not an investor.

Having an attorney review the new home sale agreement to see if there are any grounds for the return of your deposit. For instance, what if you no longer qualify for financing? How about a partial settlement where you give up some -- but not all -- of the deposit?

Question: Do you know of anyone currently buying property in Costa Rica with a self-directed IRA with checkbook control, utilizing their LLC to do so?

Answer: No.

I'm not sure what your goal is in this matter, but one of your first steps should be to engage an attorney in Costa Rica to determine if it is possible to hold title in the manner you suggest. Then you would need to speak with an attorney and tax professional in the U.S. to assure that what you propose is up to code here, since this is where the money and corporate entity are based.

Question: What are the differences between a "foreclosure" and an "auction" in the real estate market? Who is doing the foreclosure? The owner or the mortgage company? When the house is being sold at auction does that mean it is already owned by the bank?

Answer: A "foreclosure" is a forced sale, an effort by a lender to get back its investment by requiring the sale of a property which serves as security for the loan. An "auction" is a way of selling, a marketing system which does not necessarily mean that a property is being foreclosed.

A home sold at auction is typically not owned by a lender -- it's usually property where the owner still has title. In the context of a foreclosure, a lender will bid for the property. The lender's bid is typically enough to assure that any other bidder must pay enough to pay off the lender. If there is no larger bid, then the lender gets title to the property.

Question: We bought a North Carolina home but have since moved back to Florida, where we rent. We're now trying to sell the North Carolina property.

Is it better to get the North Carolina property sold or to have a lease/purchase option for one year? What penalty will we pay by not living there two years? Do you have to physically live in your home for two years or just not sell it for two years? We would like to buy in Florida again but our lease is up next September and we don't want to rent another year.

Answer: In general terms you need to physically live in a property for two of the past five years to qualify for the residential real estate capital gains write off. However, do you have any meaningful profits to tax, or any profit at all, given the limited term of your ownership?

The IRS explains the occupancy test this way: "To exclude gain," says the IRS, "a taxpayer must both own and use the home as a principal residence for two of the five years before the sale. The ownership and use periods need not be concurrent. The two years may consist of 24 full months or 730 days. Short absences, such as for a summer vacation, count as periods of use, but longer breaks, such as a one-year sabbatical, do not. The taxpayer also must not have excluded gain on another home sold during the two years before the current sale."

On the matter of a one-year lease purchase, such agreements are complex and need to be prepared by an attorney. While renting an investment property recently, a number of prospects raised the idea of a lease-purchase agreement. In each case they had insufficient cash, credit or both to buy now.

Question: I've been discharged from a bankruptcy for about two months and want to see about purchasing the home in which I now live. When can I begin this process?

Answer: You can speak with lenders, but take a look at the mortgage marketplace: Most lenders today are running from subprime borrowers, subprime loans, toxic mortgages and anyone who had a late payment since the Packers last won the Super Bowl.

For instance, even the liberal FHA program is likely to be off limits in your situation. FHA guidelines provide the following standards:

"A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower from obtaining an FHA-insured mortgage," says HUD, "if at least two years have elapsed since the date of the discharge of the bankruptcy. Additionally, the borrower must have re-established good credit or chosen not to incur new credit obligations. The borrower also must have demonstrated a documented ability to responsibly manage his or her financial affairs. An elapsed period of less than two years, but not less than 12 months, may be acceptable if the borrower can show that the bankruptcy was caused by extenuating circumstances beyond his or her control and has since exhibited a documented ability to manage his or her financial affairs in a responsible manner. Additionally, the lender must document that the borrower's current situation indicates that the events that led to the bankruptcy are not likely to recur.

"A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA-insured mortgage provided the lender documents that one year of the payout period under the bankruptcy has elapsed and the borrower's payment performance has been satisfactory (i.e., all required payments made on time). In addition, the borrower must receive permission from the court to enter into the mortgage transaction."

HUD also says there can be exceptions to its general rules "when the property was included in a bankruptcy that was caused by circumstances beyond the borrower's control (such as the death of the principal wage earner; loss of employment due to factory closings, reductions-in-force, or serious long-term uninsured illness), the borrower may be eligible" for an FHA loan.

The bottom line: Speak with an FHA-approved lender and get your situation reviewed.

A Tip Of The Hat

This column received thousands of questions each year, an enormous volume of material that must reviewed and considered with care. Ed Armenta, Robert Jennings handle the questions we receive and do so with both skill and compassion. Our editor, Carla Davis, makes sure we use the questions that offer the widest benefit to readers, viewers and listeners. The result is that my job is made easier -- and the columns you read are better than anything I could do alone.

To all, best wishes for the coming year. May it be a time of low interest rates, fewer foreclosures and stable home values for everyone.


Have a real estate question? Send your inquiry to Ask Realty Times . Because of the volume of mail received, Mr. Miller cannot respond to questions individually or privately. Published letters may be edited for space and style. For comments regarding other Realty Times articles, please contact individual authors by pressing here . For past columns, please press Ask Realty Times .

This column is designed to provide accurate and authoritative information in regard to the subject matter covered. It is made available with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services. If legal services or other expert assistance is required, the services of a competent professional person should be sought.

Rate this item
(0 votes)

Realty Times

From buying and selling advice for consumers to money-making tips for Agents, our content, updated daily, has made Realty Times® a must-read, and see, for anyone involved in Real Estate.