Private Reverse Mortgages

The Virtues of Private Reverse Mortgages

Banks have been touting the advantages of so-called "reverse" mortgages for many years as a way for cash-strapped seniors to tap into the equity in their homes to meet their expenses, whether simply for day-to-day living or to pay for the increased costs of home care.

The basic concept of a reverse mortgage is that the bank will make payments to the homeowner, rather than the other way around. The payments can be a single lump-sum, a line of credit, or a stream of monthly payments. The bank does not have to be paid back until the homeowner moves out or passes away.

See the entire article .here.

Happy Investing!

Financial Leverage

Financial leverage is an essential investment tool for the savvy real estate investor. George Antone, author of The Wealthy Code and The Bankers Code, writes about financial leverage, which is, making money off of money. He will be speaking more about this at his presentation to the Real Estate Association of Puget Sound’s April meeting.

The way that most people are familiar with making money off of money is by earning interest on their savings in a bank account. Typical interest earnings on a bank account may be in the range of 0.01-1%, and on a bank certificate of deposit may be  1-2.5%. This is considered to be a fairly “safe” investment, in that it has low risk, and correspondingly low interest earnings.

Higher risk investments generally carry a higher level of interest. Private lenders may earn anywhere from 3-12% on private funds loaned to real estate investors, while hard money lenders may earn anywhere from 10-18%, along with “points.” Points are calculated as 1% of the loan amount and are typically paid by the borrower up front. Most hard money loans will have anywhere from two to five points on the loan. So a hard money loan of $100,000 would be paid to the borrower as $95,000 after paying five points. The interest is typically calculated on the full amount of the loan until repaid.

Sometimes a private money lender will borrow money to make money. For example, someone with good credit and income could take out a home equity line of credit on their house, for say, 4%. He might then lend that money as a private lender to a real estate investor for 10%, making a 6% spread on his money. Otherwise, equity in one’s home just sits there, earning 0% interest.

In sandwich lease options, a real estate investor may negotiate terms with a Seller on an owner-financed mortgage at 4% annual interest; then turn around and charge the end-buyer an interest rate of 6% simple interest, making a 2% spread on the investment.

I financed much of my commercial real estate development using credit cards with 2-4% interest for 12-18 months. I charged my development company 10% for the use of those funds, which will be paid back when the property is sold or syndicated within that time frame. I will be reimbursed with interest as an expense to the company before net profits are split with my partner. Hence, I will earn both interest and profits on my investment.

Not everyone is comfortable with the idea of interest. The east African Oromo cultural group wanted to buy my commercial property on a Seller note, but were culturally precluded from paying any interest. Needless to say, this made any potential sale to them less attractive to me.

But for those willing to learn more about financial leverage, the use of interest and debt to make money is a great option for the real estate investor to employ in his bag of creative investment strategies.

Happy Investing!

Lease Option on Rocky Point Waterfront Home

Here is a case study of how I might work with a lease-option buyer on the purchase of the property highlighted in the last few blogs. In my next blog, I will discuss how an investor would profit by underwriting the mortgage for the lease-option buyer.

On a lease option, I typically pay the selling agent 1% of their commission up front, and the remainder when the option is exercised. So the down payment has to cover commission costs, option fee, and other related costs. I typically like to see 3 1/2 - 5% down as a non-refundable option fee. I used to bump up the purchase price by about 10% per year for seller financing and future value on an option, but in this market I'd be okay with $357,500 as a purchase price in three years for the house parcel.

Monthly payments should be equivalent to what monthly payments would be on the take-out loan, including taxes and insurance. Lenders like to see this too, as it demonstrates ability to repay.

If the buyer went FHA with a loan amount of $345,000, the FHA funding fee would be $6,000 so the loan would be for $351,000 then the payment with a 5.50% rate would be $1993 plus $161 for Mortgage Insurance (MI), and $308 for taxes and $50 for a total of $2512 a month.

Assuming the buyer put $12,500 down as an option fee (applied toward the purchase price), then monthly payments on the loan amount above would be roughly $2500 with taxes and insurance. I would be willing to apply $500 of the monthly rent as rent credit towards the purchase price, assuming payments were made on time.

At the end of the three year term, the house would be purchased for $357,500 less the option fee of $12,500 and rent credits of $18,000. The loan amount would actually be for $337,000--and payments would be even less per month. This is a good option for a buyer who cannot qualify for a loan today, but may in 2-3 years.

Purchase Price is Firm

When the Purchase Price Won’t Budge
Don’t abandon ship. Purchase price is just one variable in the entire equation. If the purchase price is non-negotiable, consider what other things might be up for discussion.
--Seller financing or adjusting the interest rate on seller financing
--Quarterly rather than monthly payments
--Amortizing over an extended period, perhaps even fifty years
--Exchange a down payment in return for improvements
--Loan assumption
--Extend the closing date
--Allow improvements before the closing date
--Reduce or eliminate the down payment
--Seller to pay closing or improvement costs
Many items on this list could translate to substantial savings and make the issue of purchase price less daunting. It is critical not to jettison a potential clear sail (sale?) just because one item doesn’t quite float as you had hoped.