I mainly focused my search on bank-owned (REO) properties.  The pre-foreclosure opportunities are limited in this area due to the newer homes and lack of equity so it’s best to let the bank foreclose and they’ll take the loss.  Unfortunately, good deals are moving quickly so I’ve been beat to the punch on a several deals.

I signed up for an awesome service, Investway that notifies me of any changes to properties in zip code 76248 less than $130k.  I noticed this property when it listed originally at $129,900 then drop to $109,900 after 30 days.  I drove by and checked it out but didn’t pull the trigger.  A few days later was under contract and I wrote it off.  A month later, on Friday morning I received an email that the property was changed back to active and dropped to $99,900.  I called the listing agent at 8am and found out that the last contract at 105k fell through because it was taking too long for the bank to close.   I submitted an offer for $90k and had it under contract at $96k by 10am.  I’ll give credit to the agent for getting a get a bank-owned property under contract in just a couple hours.  It was fortunate as this deal generated dozens of calls over the weekend.

Unfortunately, I won’t close on the sale until after the June 2 deadline to protest county appraisal values so I’ll be paying more on property taxes than I should be for the first year.  Once I get that resolved I’ll cashflow at $300+ month.

I still believe it is a great time to invest but I don’t think we’ve hit bottom.  I’ll keep my eyes open for truely motivated sellers and let you know what I find…

All that changed Saturday night when I was searching through MLS.  I’ve run the same searches looking for newer homes in Keller under 130k nearly every day for two weeks. This time a new listing appeared in my results.  The property at 9717 Hathman was reduced from $164,900 to $97,900 - a full $67,000. 

At first I thought it was a mistake.  Sometimes agents accidentially mis-type the price.  Checking it on TAD shows the county appraisal at $193k in 2007 and it was deeded to the bank in November 2006.  I left a message with the agent and also sent an email.  The next morning I drove by the property and looked inside  There were a few houses with foundation problems but this house looked good.  I called the agent again and sent another email.  The agent returned my call Sunday night to let me know the price was correct and they have received several offers but they planned to submit them all Monday morning.

The next morning I did something I’ve never done before.  I made an offer for MORE than the asking price.  The price was right for cashflow and there were multiple offers so I needed an advantage.   Hopefully the additional $2100 on my $100k offer will push me over the top. 

No biggie if I don’t get this one.  I know now that some banks are motivated to move their properties quickly - It’s all about timing.  What if I would have offered $95k the day before they dropped the price? 

3/17 Update:  My offer wasn’t accepted.  After further review, the agent had their “lines crossed” and was supposed to drop the price to $140k, not $95k.  They received 30 offers and all were rejected.  The agent was fired.

When I returned to the house I looked it up in MLS - nothing.  This is actually a good sign since they clearly aren’t marketing it well.  I found it on the Beazer site and sure enough, they’ve already dropped it $20k off the original $144k asking price.  Don’t get me wrong, that 144k original price is nuts and doesn’t reflect the current retail value.  However, most homebuyers don’t negotiate the price with new home builders so you can assume a good portion of homeowners in this neighborhood purchased around this price originally.

I called the number listed on the site (different than that listed on the sign) and again left a message.  I never heard back so I left another message the next day.  IMO, the lack of response is a good sign as well.  If it’s this difficult to buy a house from these guys then most buyers will just move on.

I called again the third day and finally reached Casey Oniel.  He gave me his fax number and email address and said they were definitely interested in selling this property since it was their last house in the area.  I wrote up an offer for $90k and faxed it to Casey along with my prequalificiation letter.  We’ll see…

Update:  I never heard back on this offer.  They won’t return my calls so I guess they are not too motivated to move this property.

I created a complex spreadhsheet to evaluate the income and expenses (mortgage, taxes, insurance, HOA, PMI, etc..) for properties from 100k-150k and determined I’d need roughly 30%-40% equity (from retail) in order to cashflow these properties at $200/mo.   I’m optimistic I’ll find properties at 20%-30% discounts from retail (or original purchase price) in this depressed market then put down 10%-20% to reach my goal. 

I plan to use a conventional 30 year mortgage.  While I may sell the properties at full retail when the market turns positive in 3-5 years, I want the option to hold on and pay them off.  Also, I am not assuming any appreciation on these properties since there is still a ton of room to build so I need to make my money on the discounted purchase price.

I plan to focus on properties that have been on the market for quite some time and have already dropped the price by 10-15% then make a low-ball offer at another 10-15% discount.  I suspect I’ll make 10 offers for every one I close.  Fortuantely, I am a highly qualified buyer, can close quickly, require no contengencies, no buyers agent and I am willing to take properties as-is for a discount.

Why is it time to buy?   In my opinion, the DFW economy is strong.  We have good job growth, postive population migration, influx of barnett shale money and a low cost of living.  We may still have some bumps ahead but we’ll be impacted much less than other areas of the country.

Why now?  Foreclosures are high, builders are in trouble, homeowners are looking to unload quickly so there are plenty of good deals. Mortgage rates are low for those with good credit and cash.  Most importantly, rents are rising!  Thousands of foreclosures every month are creating new renters.  Plus, lenders tightening so buyers actually need to show they can make the payments before they get a mortgage - imagine that! 

 My goal is to purchase 3-5 single family homes in 2008 at a 25%-30% discounts, put 10%-20% down and rent them with at least $200/mo cashflow.  I can sell when the market turns around in a few years or hold on for longer term cashflow.  It’s not rocket science!

Stay Posted.  I’ll be blogging my progress over the coming months.

The populatiry of subprime lending over the last few years didn’t help the rental market as would-be renters with low credit scores and no money down were able to purchase homes.  Of course many of those purchases will be forclosures in the coming years, but that is a different story.

According to this recent article in the Fort Worth Star Telegram, the subprime lending market has dried up.  This will be a boom for rental investors as these would-be subprime purchasers are now renters again.

In blink of an eye, credit no longer so easy
By ANDREA JARES
Star-Telegram staff writer

S-T/IAN McVEA
Paul Peebles of Old Capital Lending in Southlake has had to turn away many prospective buyers. Paul Peebles, senior loan officer at Old Capital Lending in Southlake, used to offer a variety of mortgage loans.

There were loans for people with shaky credit or too much debt. Loans for self-employed people who didn’t have a regular paycheck. And loans for people with little available for a down payment.

But in recent months — especially the last two weeks — he has had to turn away many prospective borrowers, unless they wanted a traditional fixed-rate note and had a chunk of money for a down payment.

Home buyers looking for more exotic loans will have to keep on shopping. But Peebles figures that they aren’t having much luck elsewhere.

“I sell what everybody else sells,” Peebles said. “We all get our money from the same sources.”

Mortgage funding has been tightening up, hobbling what had been unbridled growth in the housing market in recent years. And since the end of July, the flow of capital between borrowers on Main Street and big-time lenders on Wall Street has gotten downright congested.

This month, the housing crunch became an issue on Wall Street, as rising foreclosures and defaults on subprime mortgages sank the value of hedge-fund investments and launched a stock sell-off. Investors have grown leery of securities backed by subprime mortgages, drying up a ready source of cash for lenders.

“They just don’t have a taste for the subprime and Alt-A loans,” Peebles said, referring to mortgage loans for borrowers with low credit scores.

The resulting credit squeeze has driven many mortgage companies out of business.

A Web site called www.ml-implode.com manages the “Mortgage Lender Implode-O-Meter,” which counted 116 failed mortgage companies as of Friday, adding two since Wednesday. Fourteen more were on the ailing list, although the site notes that “most of the industry now falls under this description.”

The recent havoc in the mortgage markets is particularly shocking to people in the industry because of the size of the companies that have fallen, as well as the sheer speed with which it has happened.

American Home Mortgage Investment Corp., one of the largest secondary mortgage lenders in the country, announced Aug. 2 that it had stopped taking mortgage applications and would lay off about 7,000 employees the next day. Four days later it filed for Chapter 11 bankruptcy protection.

“It happened in literally a week and a half’s time,” said Chad Bates, president of Legacy Financial Group in Arlington, adding that the company had an excellent reputation. “They are an example of a company that wasn’t doing subprime-type loans, but they were doing a lot of adjustable-rate mortgages, and the value of that portfolio went down, creating the margin calls that they could not meet.”

The trouble among secondary lenders is making it hard for mortgage brokers to strike deals with subprime borrowers they would have happily loaned money to only a few months ago.

“We have products pulled off the market on a daily basis,” Bates said. “I’ve been in banking since 1979, and I’ve never seen anything like it.”

That sentiment is shared by Barry Habib, chief executive of the Mortgage Market Guide, an information service based in New Jersey.

“We’re going through history right now,” he said. “Never in history have we seen a liquidity crunch happen like this.”

He notes that over the next 30 days, a lot of adjustments will occur as loan commitments already sold work through the system.

“It’s going to get worse before it gets better,” Habib said.

Many nontraditional mortgage loans are no longer available, including loans for more than the home’s value and loans with little or no proof of finances, known as “no-doc” or “low-doc.” Many lenders now require down payments of 5 percent to 10 percent and higher credit scores — shutting out many people who would have qualified before, said Darryl Moree, broker at Family1stHome.com in Arlington.

“The market has totally changed,” he said. Before the recent tightening, he said, he could sell three or four people a mortgage for every 10 who contacted his office. Today it’s more like three mortgages for every 20 contacts.

Borrowers now need to have credit scores of about 640 or higher and bring more cash to the closing table.

“I don’t want people to think that they can’t find any loans anymore,” Bates said. “There are a lot of products if they clean up their credit or have significant money to put down as a down payment.

“We still even have core Fannie Mae products that offer up to 100 percent financing for purchases.”

The squeeze in loan availability could spell trouble for homeowners who have adjustable-rate mortgages that they had hoped to refinance. If those homeowners don’t get a new loan before the rate adjusts upward, their home suddenly gets more expensive — sometimes so expensive that they can no longer afford the payments. Foreclosures could spike.

“I fully expect them to be reacting in December as we move into the holidays,” Moree said.

The mortgage meltdown also affects homeowners and builders who are trying to sell houses. Tighter restrictions on mortgage loans leaves fewer people available to buy homes.

Real estate market watchers say existing-home sales are already being affected by the lending squeeze. Home sales over the past six months have been down from last year in the 29-county North Texas area tracked by the North Texas Real Estate Information System.

Executives with Fort Worth-based D.R. Horton said in their quarterly earnings call in July that tightening mortgage standards were making financing more difficult.

“In some instances across the country, we’re trying to qualify the same buyer two and three times, based upon the changing conditions in the marketplace,” Chief Executive Donald Tomnitz said.

As the housing market goes, so goes a good chunk of the local economy, notes Moree. If people are not buying houses, they’re not shopping at the hardware store, signing up for pest control and other rites of homeownership.

ajares@star-telegram.com
Andrea Jares, 817-548-5522

Maybe it’s time for you to think about jumping back into the rental market!

Home builders have building like crazy the fast few years and it is beginning to catch up to them.  When builders are in trouble they need to unload houses (and land) in a hurry.  Sounds like a perfect time to purchase new rentals at deep discounts.

This recent article in the Star Telegram highlights the problems from DR Horton. 

“D.R. Horton case shows even best can make mistakes
By Mitchell Schnurman
Star-Telegram Staff Writer

STAR-TELEGRAM/RON JENKINS
The nation’s largest home builder, D.R. Horton, builds homes in 27 states and 83 metropolitan areas in the United States, including this development in east Fort Worth. D.R. Horton used to say that only another Great Depression could stall its growth.

Any downturn in the housing market would be a buying opportunity, the Fort Worth home builder said — a chance to gobble up smaller players and get land on the cheap. It would then use its size, low costs and economies of scale to rack up more double-digit growth in sales and earnings.

Things haven’t worked out that way. It’s clear now that Horton bulked up at the wrong time, doubling its land position as the housing market was hitting its peak and not long before demand plummeted.

Sales have been in a free fall and, for the first time, the red ink is flowing.

Horton’s travails are a reminder that no company is invincible, even one that’s always been a profitable growth machine.

Most large home builders are facing similar issues, having expanded too much, and the problem has spilled onto Wall Street. Fears about subprime mortgages rattled investors around the globe last week, and central bankers in Europe, Asia, the United States and elsewhere pumped in billions to try to steady the markets.

Maybe they’ll have more luck than Horton, the nation’s largest home builder. It has tried myriad ways to stave off the housing downturn, without success.

The company has eliminated 3,300 jobs, punted 60 percent of its option deals on land lots, slashed home prices, boosted buyer incentives, and bullied suppliers and subcontractors. In April, it ordered division presidents to do whatever was necessary to hit sales targets.

Instead of rebounding, Horton home sales fell 40 percent in the quarter ended in June. Nearly 4 of 10 buyers also walked away from their contracts.

“D.R. Horton doesn’t see strength in any of its markets right now,” Chief Executive Don Tomnitz told analysts recently. “You hate to say it, [but the decline] is actually a little bit worse than [it] appears.”

Horton had never reported a loss since building its first house here in 1978. That streak ended abruptly last month, when Horton took a $1.3 billion write-down to reflect declining conditions nationwide and posted a net loss of almost $824 million for the quarter.

The company’s total market value, which topped $11 billion two years ago, is half that today.

Horton executives never believed that they would see such results. In 2005, when analysts were starting to worry that the housing industry was overheating, Tomnitz was asked what might upset the boom for Horton.

The analyst went to lengths to say he wasn’t suggesting a possible loss for the company, just asking what kind of environment might lead to flat earnings.

“I would say only one economic scenario,” Tomnitz said, “and that’s a depression like we experienced in the ’30s.”

Horton had weathered other downturns, he said, referring to the early 1980s and early ’90s. Barring the severe job losses and disruptions that accompany a depression, he said, Horton would post double-digit growth, in large part by taking market share from smaller builders.

He compared Horton’s approach to how Wal-Mart had overtaken his aunt’s small drugstore in Mexico, Mo.

Turns out that flexing such muscle can cut two ways. Horton hasn’t been able to hit the brakes fast enough on its expansion, force deep enough concessions from suppliers or dump landholdings in the way it expected.

Some things that Horton long considered strengths have turned into weaknesses. Its giant size seems to have created bigger problems. For years, Horton bragged about all the land it controlled; now that’s an albatross.

And a crucial strategy — geographic diversity — hasn’t offered much protection, not when markets are declining across the board. Horton builds homes in 27 states and 83 metropolitan areas in the United States, and the company figured that if California went south, Florida or Texas would run counter.

But sales in every region have declined sharply. In the West, excluding California, Horton sales fell 39 percent. In California, the decline was 53 percent. The best performer, the Southeast, was down 25 percent.

Blame it on a glut of homes for sale, both new and existing, and the tightening of credit markets nationwide. The subprime scare has turned off the easy-money spigot. Some Horton customers had to go to two or three lenders to try to qualify for a mortgage, Tomnitz said.

The company has pressured subcontractors and suppliers for price cuts. That’s yielded savings of about 5 percent on new homes, but the builder has cut selling prices by twice as much to entice buyers.

Landowners also haven’t been as cooperative as the company hoped.

“It seems like we had a lot of hard-line sellers out there,” Tomnitz said.

Horton figured that land options would shield it from an industry decline, because the land could be abandoned if necessary. But the sheer numbers have made that difficult.

At the end of fiscal 2003, Horton had 179,370 lots, with about half under option contracts. Two years later, it had almost twice as many — 346,000 lots. It’s been unwinding the positions, but the process takes time and money. As of June 30, Horton had 252,000 lots, with only 33 percent under option; it owns the rest.

As much as the industry is being squeezed, it would get much worse if unemployment spikes or interest rates rise. The credit crunch has created a similar effect already, says Mark Dotzour, chief economist for the Texas A&M Real Estate Center. A whole class of home borrowers who could get easy money a few years ago can’t get any loans now.

“If you told shoppers at Wal-Mart that they couldn’t use Visa or MasterCard for six months, many wouldn’t be able to buy anything,” Dotzour said.

At least builders are cutting back in a big way. In June, building permits fell 34 percent in the Fort Worth-Arlington area, and total activity is near 2001 levels. On the Dallas side of the metro area, single-family permits are being pulled at a rate last seen almost a decade ago.

Horton and others, it turns out, couldn’t resist the excesses of a market bubble. Now we’ll see how they work them off.

schnurman@star-telegram.com
MITCHELL SCHNURMAN’S COLUMN APPEARS SUNDAYS AND WEDNESDAYS. 817-390-7821″

Keep checking our wholeslale marketplace as we have wholesalers finding these deals for investors today!  

1.  While the location was great, the timing was poor.  The property was just one house down from the construction of Grapevine Station.  When I first purchased the property the construction was fairly far from the property but it slowly crept up to the house as the rehab continued.  By the time I was ready to sell, a huge 3 story concrete structure was erected just a hundred yards from the property.  It didn’t help that two other houses went up for sale on the same block so it appeared that everyone was bailing on the area.  I believe this was a timing issue as the development will likely increase the value of the property when complete since it’ll be walking distance to Starbucks, restaurants and retail.

2.  I performed a fairly detailed self-inspection on the property when I purchased and felt comfortable with the issues.  However, when I sold the property the buyers inspector found dozens of other issues.  Of course much of it could be fixed but I simply didn’t have the time to deal with all the additional work once the rehab was completed.  So, I ended up discounting it significantly to cover the costs for the buyers to fix it all.

In the end, I purchased for $100k, put in about $40k and sold for $155k.  Not near the profit I had planned but I learned a great deal. Hopefully you learned something as well!