Dean Graziosi

There are many theories about how to succeed in real estate investment.  There are high-risk strategies, low risk strategies, new-age theories and proven strategies.  As we have advocated in numerous articles, every investor needs to define their own strategy.

We recommend one of three well-tested strategies.  If the property or properties you are considering do not fit into one of these categories, you may want to reconsider your purchase.  Again, the key to successful real estate investment is to have a plan and pursue it unemotionally and consistently.

The three most consistent strategies are:

·                     Buy-the-bargain

·                     Increase-the-value

·                     Double-digit capitalization rate

If you are purchasing in order to profit, figure out which of these options fits your personality, abilities and budget and stick with your business plan.  One purchasing concept applies to all these strategies and that is that you must always buy right. 

Buying right is the name of the game with the buy-the-bargain plan.  In today’s real estate market, this strategy has some risk because turning the property over quickly or flipping it is no easy task.  While we can find plenty of opportunities to purchase at 20% or more below fair market value, we may end up holding the property because of oversupply.  To use the buy-the-bargain strategy today, the investor needs to be confident that a tenant can be found until such time as the shadow inventory clears.  Today, buy-the-bargain investors only consider purchasing at 30-40% below market value.

Increase-the-value is a solid investment strategy, especially appetizing to the handyman or investors who can make improvements.  The idea is to buy well below value and tailor cost-effective improvements that will raise the value.  In today’s labor market, there is a plentiful supply of affordable handymen.

The double-digit-capitalization rate is all about the numbers.  The formula for success is easy.  The capitalization rate is determined by taking the net operating income, or rent minus operating expenses exclusive of debt service, and dividing that net income by the purchase price.  Experiment with this formula and you will see that achieving a double-digit cap rate is not as easy as you think.  That is exactly what makes it a great strategy.    

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Once the borrower has received the Notice of Default and the notice has been posted publicly and usually printed in the local newspaper, the formal foreclosure process is in motion.  The borrower’s failure to comply with repayment terms has activated the mortgage’s acceleration clause and the lender requires full payment of the loan.

If the Notice of Default does not result in full repayment, the lender next issues a public Notice of Sale.  A copy, stating the time, date and address of the public auction where the property will be sold is sent to the homeowner.  The notice is also posted on the property.

The sale is called a Sheriff’s Sale.  It is the second major stage of the foreclosure process and follows the preforeclosure stage, which commenced when the first payment was missed.  The typical Sheriff’s Sale involves the following steps:

·                     The auctioneer reads a description of the property and any legal notices related to the address.

·                     The bidding begins.  Usually the bidders have prequalified to participate by depositing a check in advance.  The bidding process continues until the auctioneer accepts the highest bid.

·                     The paperwork is drawn for execution by the successful bidder.  The successful bidder is usually given a grace period to arrange financing for the property.  Once the financing is in place and paid, the title is given to the new owner.

At this time, the original owner may still reside in the home.  The Sheriff’s Sale is not an eviction proceeding.  The successful bidder may initiate eviction proceedings at any time after receipt of the title.  The evicted homeowner may have to vacate within 72 hours.

In the event the property is not sold at the auction, the property becomes Real Estate Owned (REO) and ownership goes to the lender.  This usually occurs when prospective bidders feel the property is not worth what is owed.  If the borrower and lender agree to sell the property to the lender prior to the auction stage, this step can sometimes be avoided.  In either case, when a successful bidder is found or when the home enters the REO stage, the foreclosure process is essentially complete.

The entire foreclosure process usually take anywhere from six to eight months but can occur more rapidly.  Homeowners who anticipate difficulty making timely payments must act rapidly.  There are a number of possible remedies but inaction is not one of them.

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Lawrence Yun is the Chief Economist for the National Association of Realtors, the nation’s largest trade organization with 1.2 million members.  In early September, Mr. Yun offered members his views on the recession, the recovery and the status of the national real estate market.

From an economist’s perspective, the recession is over.  Economists who see recent production trends feel the fundamentals of a recovery are in place.  The troubling unemployment figures are considered a lagging indicator.  Unemployment is not expected to begin recovering until late 2010.  Yun asserts that the country will not fully recoup the 7 million lost jobs for three years.  This cannot spell good news for the struggling housing market.

The 2009 first-time homebuyer tax credit has been a successful initiative of the Obama Administration.  Unlike its predecessor, the 2009 version does not require repayment.  The NAR credits the bill with creating 1.2 million transactions, which in turn created 1.2 million sellers, most of whom became purchasers.  The 2009 first-time homebuyer tax credit is set to expire on November 30^th 2009.  Yun and the NAR are pushing hard for an extension of the bill.  In fact, the group has proposed some fairly sweeping changes, which would add all homebuyers to the tax credit eligibility list and increase the amount of the credit from $8,000 to $15,000.

While Yun feels the recovery is underway, he takes a guarded view of the sustainability of the trend.  The uncertainty lies in the commercial and industrial real estate markets.  Neither of these sectors received stimulus assistance.  However, Yun takes heart in the fact that the Federal Reserve is taking the commercial real estate market under consideration.

Yun was generally optimistic about the status of the healing residential market.  Existing home sales in July rose 7.2% over June sales to a seasonally adjusted rate of 5.24 million units.  This marks the largest month over month gain in 10 years.  Sales of existing homes rose 5.0% above sales in July 2008.  The July Affordability Index dropped slightly but still remains favorable.

To sustain the positive trend in the housing market, Yun outlined a few critical essentials.  Primary to the recovery is the extension of the existing tax credit bill or adoption of the newly proposed version.  Currently both bills are under review in Congress, but neither Treasury Secretary Geithner nor President Obama has whole-heartedly endorsed the legislation.

Yun is pushing for an expansion of the stimulus citing that an increased government investment to $15 billion is certainly justified for the largest segment of taxpayers, the American homeowner.  Echoing a consistent theme long referenced by Warren Buffett, Yun cites the need to clear the marketplace of the existing backlog of inventory as critical to the success and sustainability of the recovery.  Yun further points out that the treacherous combination of high unemployment and the rising number of homeowners whose properties are underwater will continue to plague the foreclosure market through 2010.  

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