Thursday, May 08, 2008

Real Estate Investment Tips

I attended a seminar the LDS church held for the community on Investment tips. It was very educating and I thought I'd share some of the things I picked up. I'm in no way versed in investment strategies or real estate, so feel free to add your opinion/clarification in the comments.

Sub-prime mortgage problem
In 2002 interest rates reached rock bottom at 4.5%, everyone who could refinanced their house. Lenders didn't like the low interest rates and started offering incentives to buy bigger homes at the new rate, when interest rates increased owners couldn't afford the payments anymore and were foreclosed on (probably due to 0% down loans).

What is a foreclosure?
Happens when you can't afford to make payments on your house, and you can't sell it. For example, let's say your mortgage was 100K and you put nothing down. To sell the house, including closing costs (~$10K), you would have to pay 110K. So you'd have to bring an extra $10K to the table. So your credit gets whacked and you get foreclosed on.

It's bad to sell your home in an area where there are a lot of foreclosures. The reason bing that financial institutions can take a hit on them (sell them for a low price) because they have plenty of opportunities to make up for the loss by selling other properties for more, while you only have one shot.

When does it make sense to Flip?
Flipping only makes sense if you can by a house at an under-market value and sell it at at least market-value (no one really ever pays more), not possible in South-East Texas right now.

Best option: Hold and Buy
If you do want to invest in real estate the best option (here in the South) is to buy real estate and then put it on the market while leasing it out. All those who were foreclosed on are now looking for places to rent, generally in the $1200-$2000/mo. range.

Beware of Mortgage Scams
The gist of mortgage scams is that bad credit people look for good credit people to get loans for them, and then wreck the good people's credit. The bad people bribe appraisers to give high appraisal values to validate a loan well above the true value of the home, the good people get the loan, receive a little extra cash, and then the bad people leave with the excess money, leaving the good people with an outstanding loan, thusly ruining their credit.

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