Buying Real Estate Creatively Can Be T.O.P.S.

May 15, 2015

Guest article by Augie Byllott:

I am often asked the best way to acquire investment properties. My answer is usually, “It depends…” Those of you who know me, know I have a sense of humor, but this answer is not intended to be either evasive or funny. My favorite acquisition technique is with owner financing, but that usually requires a free and clear property. How many of those free and clear properties come along with a motivated seller attached? Certainly there aren’t as many as I’d like.  Then there’s buying with cash…I’d rather save that resource for the killer deals that have to be closed quickly in exchange for a massive profit.

For houses with an existing mortgage, my favorite way is to purchase the property using the T.O.P.S. method (Taking Over Payments System) also known as “buying subject to” the existing mortgage.  The general problem with the term “subject to” is that most people just don’t understand it. T.O.P.S.is so simple a child can understand it!

It’s a great way to buy pretty houses without spending a pretty penny. Simply put, I step into the seller’s position and begin making their payments at an agreed upon date. The ownership of the property is transferred to me or my entity and the mortgage remains in the seller’s name until I, or more typically my tenant/buyer, pays it off when they obtain new financing and purchase the home.

Why is this a good deal for the seller, you ask? The first thing you have to remember is that successful investors only deal with motivated sellers! This is a good deal for the seller because I can close within a matter of days, as there’s no lengthy loan qualification and approval process.  Additionally, I can typically pay them a higher price because I don’t have any financing costs.

Why is this a good deal for the bank? In many cases, the seller is either in default or soon will be. Banks make money by taking in deposits at one rate and lending them out at a higher rate; simply, they earn a spread on their depositor’s money.

When a loan, which is an asset, becomes delinquent, the lender’s income stream is interrupted.  When their assets become non-performing, the lender is required by the Fed to increase their reserves.  These reserves reduce the amount of capital available for new loans. So, does the bank prefer payments or would they rather foreclose and take the house back? The easy answer: with foreclosure costs running at about $40,000 per house; banks want payments, not houses!

Finally, why is it good for the investor? First, we have no funding cost.  Second, since the loan is not in our name it doesn’t appear on our credit report. Third, our creditworthiness doesn’t come into play because we are not qualifying for a new loan.  But the best reason is that “subject to” transactions offer you the broadest array of exit strategies!

Additionally, even if you have a super credit score, most lenders will limit you to a maximum of 4 loans (if you can get them) and you’ll be required to make a substantial down payment (25 – 30%).  If the loans aren’t in your name and you don’t have to qualify for them, just how many of these will you be limited to? That’s right, no limit!  I met an investor from Ohio who has over 200 properties; not a single mortgage was in his own name. That’s quite a retirement portfolio he’s built.

My preference is to be a “transaction engineer” rather than restrict my business to any one strategy, technique or area of investing.  I love finding profitable opportunities in all types of transactions from pre-foreclosures to renovation projects or owner financing, to split funding.  But a core element of my acquisitions strategy is using “T.O.P.S.” transactions and it should be a critical part of yours.

By the way, did you know that you can do T.O.P.S. transactions for buying real estate with your self-directed IRA?

Augie Byllott helps people buy and sell homes and investment properties in all price ranges without using lots of cash or credit. He is a full time real estate investor, speaker and coach with Personal Action Coaching & Training. He is also a founding member of Common Wealth Trust Services, LLC a land trust service provider.

Secrets from Banks

May 7, 2015

Guest article by Karen Finley of NPL Executives:

Does anyone recall the big bank executives going before the U.S. Senate in 2008 to explain why they needed a bailout from the American taxpayers? The headlines read: “The big banks are too big to fail,” resulting in the U.S Treasury paying over 100 billion dollars to hundreds of banks with just a fraction of them having paid the loan in full.

Did anyone ever question why the US bailed out the banks and not other industries? What made them so susceptible to the moving economic factors of 2008? After all, would they have really failed without the bailout, or was it an opportunity to maximize a storm?

If we hearken to those days, banks claimed they needed help because homeowners were no longer paying their mortgages due to massive layoffs nationwide. Therefore, banks reported deep losses…or were they really losses?

PMI may give us a clue. Private mortgage insurance is forced in play when buyers can’t afford a 20% down payment. Should the buyer foreclose on the mortgage, the lender will activate the private mortgage insurance to pay the balance of the debt owed.

So where was the loss?

The banks received the private mortgage insurance AND the US Treasury bailout. So again, where is the loss? Upon reflection, they made a mint, and most people aren’t asking any questions, or at least not the right questions.

So here’s another question, “Are you asking the right questions?” It was real estate, not the stock market that positioned the banks to receive a massive wealth transfer in 2008. Has their game plan changed? How will your wealth transfer happen? Will you rely on stocks or take a page from the bank’s playbook?

NPL Executives is a brokerage of secured, first lien positioned mortgages available for purchase by investors who wish to establish the interest rates and repayment terms. Contact NPL via email at [email protected] or by phone at 682-202-4459.

17 Tips for Note Investing

April 1, 2015

Guest Article by Tracy Z. Rewey:

Want the security of real estate without the hassles of the 3 T’s (tenants, toilets, and trash)? Then it’s time to consider investing in real estate notes.

Be The Bank

When you own a promissory note, you are acting like the bank. You are the one receiving the payments. If something needs fixed the owner has to do it. And like the bank, you also have the right to take the property back in the event of non-payment. You can then sell the property for cash or take back another note.

A Note Investing Example

Seller financed mortgages and trust deeds are a staple of private note investors. The note is created when the owner of the property allows the purchaser to make payments over time rather than getting a traditional bank loan. While seller financing has always been around it has seen historical increases over the past 5 years.

The deals come in all shapes and sizes so we’ll look at one example of a well-seasoned transaction involving an owner-occupied 1971 mobile home with land in Texas.

The property sold with owner financing for $32,500 with 5% down. After collecting 95 monthly payments the note seller wanted to sell the remaining payments for cash today. The payer still owed a principal balance of $8,924.50 with 9% interest payable in 25 remaining installments of $392.88 per month.

With a slow payment history, delinquent taxes, and lapsed insurance, there were few interested investors. Satisfied with the equity position against the land value alone, my self-directed retirement account made a net offer of $2,531.

The seller, tired of the headaches and in need of cash, accepted the offer. The Note and Deed of Trust were endorsed and assigned to the Retirement Account Administrator for the benefit of (FBO) the individual retirement account.

By investing $2,531 for the right to receive the remaining payments the self-directed IRA was able to yield a return of over 180%.

The note eventually paid in full, however, if the buyer had stopped making payments the retirement account could have foreclosed and resold the property.

Tips for Investing In Real Estate Notes

After 25 years of buying and selling seller financed notes there have been both wins and losses. If you are just getting started these are my 17 tips for new note investors:

1. Learn From Others – There is no reason to reinvent the wheel. Learn and network with other investors to find the opportunity and minimize the risk.

2. Refer a Deal First – Before investing your own funds get some hands-on experience. Start by referring a deal to another note buyer and earn a referral fee. Once you understand the process then consider note investing for your own portfolio or with retirement funds.

3. Discover The Why – Get direct with the note holder to find out why the note is being sold. Does the seller need the money for another investment? Are their financial challenges? Is there a certain sum that will solve the seller’s needs or wants? Understanding the why will provide insights valuable to both deal structuring and due diligence.

4. Always Talk to The Payer – Go beyond the basic estoppel and actually talk to the person making the payments each month. You will be surprised the things you will learn. They might be in the process of refinancing (think early payoff), just lost their job (better rethink that ITV), or stopped making payments a year ago (funny the seller didn’t mention that). Better to know the good and the bad before writing that check.

5. Verify Everything – Some sellers lie. Sometimes it’s on purpose, sometimes it’s by omission, and other times they just don’t know the facts themselves. Make it a practice to verify everything.

6. Embrace The Boring – Due diligence can seem tedious and mundane. So can brushing and flossing every day. But we do it anyways. Why? Because it is essential to good health and preventing bad breath. Establish a checklist and follow routine due diligence procedures to ensure a healthy investment (and to avoid the deals that stink)!

7. Plan for The Worse – If the note stops paying you get to take the property back. Of course it takes time and money to initiate foreclosure and there is inevitably some fix-up or back taxes. There are no TARP funds for private investors. Be sure to keep the Investment-to-Value (ITV) at a level that allows you to get out whole at the end of the day.

8. Partials Are Your Friend – You don’t need to buy all the payments remaining on a note. Partial note purchases can be both the safest and most profitable transactions.

9. Master The Time Value of Money – Learn how to run a financial calculator. Understand the 5 keys to cash flow calculations and how to structure deals to increase yield and ROI.

10. Encourage Early Payoffs – When you buy notes at a discount an early payoff can mean increased yields. Take a solid 10% return and turn it into a 20% return by incentivizing the payer. We’ve used discounted payoffs, lower interest rates, and even a TV to encourage the payer to accelerate the amortization.

11. Originals Count – Get the original promissory note. Have the original note endorsed at closing and keep it in a safe place. If the seller is not the original note holder be sure there are endorsements that follow the chain of title. You will want this if you ever need to enforce your lien position or prove holder in due course status.

12. Seek Professional Help – Get title insurance and use the closing services of an attorney or qualified escrow agent. Seek advice from competent legal, tax, and financial advisors.

13. Use Solid Servicing Procedures – Track the payments each month including interest and principal applications. Act quickly to start collection efforts when payments are missed. Check to be sure real estate taxes and property insurance are paid when due. Use the services of a servicing professional whenever possible. It’s easy to get busy and let too much time pass before taking action.

14. Understand When Laws Apply – There are laws that may or may not apply to note transactions. It can depend on how the note was created, the state, and/or the number transacted each year. Do your homework on the Dodd Frank Act, Safe Act, RESPA, Fair Credit Act, SEC, and others to determine whether or not they apply and how to comply when necessary.

15. Spread The Risk – It is better to buy five notes for $50,000 each than one for $250,000. In addition to spreading the risk among several deals, smaller balance notes often provide greater opportunities for increased yields.

16. Know When To Fold – Once upon a time I bought a mortgage note without proof of property insurance on the collateral. It had been in place then lapsed the day of closing. Rather than pull funds or delay closing we finalized the deal. The house burned down over the weekend. While “Burn to Learn” makes for an entertaining story I should have played that hand differently.

17. Be Creative – To find value where others overlook you need to get a little creative. You can buy a 4% face rate note and still yield double digits. The seller that won’t take a discount might consider a split funding or 50/50 partial. Realize that most seller financed notes fall outside of some conventional lender’s strict guidelines. You will need to think outside the box to minimize risk, secure a good return, and still create a win-win situation with the seller.

Tracy Z. Rewey is the author of How to Calculate Cash Flows and co-owner of Diversified Investment Services, Inc. She has handled millions of dollars in owner-financed real estate notes and alternative cash flow purchases since 1988, becoming a well-known industry expert. Visit www.noteinvestor.com to receive a free eBook on the 5 Ways to Cash In on Notes.

Obama Backs Stricter Advisor Rules

March 3, 2015

Article by NuView president Glen Mather, in response to this Wall Street Journal article:

With a considerable push from the current administration, the Department of Labor (who has oversight over IRAs and 401(k) rules) is creating new rules for financial advisors that provide services for retirement plans and participants. As a separate initiative, the SEC is devising new fiduciary standards, which has introduced a great deal of uncertainty in the world of financial advisors.

The agencies seemed to have a particular concern about advisors who recommend rolling their client’s funds from a 401(k) plan to an IRA to make particular investments. Should these advisors be held to the higher standard of “fiduciary,” which under the current definition would mean getting to know the client and their personal financial situations at a far deeper level, as their recommendations must be in the best interest of the client?

Most legislative and administrative changes, drafted with the best possible intentions, lead to unintentional consequences. In this case, since most advisors who spend a significant amount of time with their clients charge a fee for their services, most would elect not to serve the client with smaller account balances, as they would either be unprofitable to the advisor, or expensive to the retirement account holder.

Perhaps a further result of tightening the advisor rules will be that the employee leaving their 401(k) plan will be forced to make decisions on their own – or in other words, self-direct their decisions.

In either case, making an informed decision is a key component.  What is a bit tragic is that there are so many 401(k) and IRA holders who simply choose not to inform themselves about choices they have. There will be no one, including your financial advisor, who has a greater stake in your retirement plan. With a self-directed IRA, you serve as your own fiduciary – and thus you never have to worry about not knowing your own financial situation. You educate yourself about the choices and make the best decision on your investments, and your IRA administrator will move the funds as directed.

For the 75 million IRA and 401k plan participants, perhaps these new initiatives will be positive ones. The fact is, the self-directed IRA holders have figured this out for themselves long ago.

What is your Retirement Number?

February 20, 2015

Guest Article by Paul McGarigal:

When asked, “What is your number?” many people have no idea what you are talking about. The number, of course, is the amount you will need to retire. Let’s take a look at how to figure out your retirement number.

If you now live on $7,500 a month gross combined income, that’s a $90,000 per year family income. Sounds like a lot to most people, yet this income amount puts you in the top 15 percent of all families in the United States. If each person in a retiring couple receives about $1,500 a month from Social Security, then that’s only $3,000 a month toward the $7,500. Where will the other $4,500 a month come from?

Here’s one scenario: If you manage to save $300,000 in your IRA/401K by the time you retire at a 5 percent annual return (of which there may not be too many offering that return) that would be $15,000 a year or $1,250 per month, which is not enough. But how about $1,200,000 at 5 percent? That’s $60,000 a year, or $5,000 a month, which when added to your $3,000 Social Security benefit will put you closer to what you need to live the same as you did when you worked.

So if $1,200,000 is your retirement number, how are you going to get that amount in the years you have left to work? Let’s say you are 40 years old and will work 25 more years. The math is easy. $1,200,000 divided by 25 is $48,000. This is the amount needed each year to add up to $1,200,000 over 25 years.

How are you going to get $48,000 a year, you ask? Real estate. You can purchase a home for 3.5 percent – 25 percent down, depending on its use. Then, with the help of a real estate professional, you can learn how to have tenants pay your mortgage for the next 15 – 25 years, while you receive tremendous income tax advantages. This may be the only way you will ever come close to saving or accumulating a $1,200,000 nest egg for retirement.

Just three houses at $250,000 each now will double in value over the next 25 years, assuming only a 2.9 percent average rate of appreciation. So, $250,000 multiplied by three is $750,000 and multiplied by two is $1,500,000. Selling them at age 65 would fund your nest egg and help you enjoy 20 to 40 years of retirement.

Of course, this is the short version of a much more complex formula that will be different for each couple. But hopefully you are at least thinking about your retirement number and now see how real estate and a knowledgeable real estate agent can help you get closer to reaching your goal.

Paul McGarigal has been in the top 1 percent of all Realtors in Central Florida every year for the past two decades. He is also very involved in his community and volunteers with youth sports and the YMCA, among many other non-profits. This article was also featured in the April 2013 edition of  Central Florida Lifestyle

It All Starts With Saving

February 3, 2015

Article by NuView president, Glen Mather:

We generally become the summation of our habits, the outgrowth of our discipline, and the energy of our ambitions.

Ever hear anyone say, when challenged about their attitudes and habits, “I’m sorry, but that’s just the way I am?” I’m certain that they don’t mean to convey that they are unwilling to evolve or change, even in a positive way, but those statements reinforce the sense that they feel content with their current situation no matter how negative it may be.

When is it too late? Only when you can no longer effect change. As long as a conscious effort can be exerted, you still have time.

Last month, I read a wonderful book called Cash Flow Diary by J Massey. When I met Massey, I saw him speak in front of hundreds of investors, and later I invited him to speak at our annual Planning for Prosperity conference in Orlando. I had a very unusual response to his book on real estate investing – I started flossing regularly.

I was struck by Massey’s assertion that he had come to the realization that there were a few tasks that he routinely did every day, and if he had to perform them, why not do each well? His thought was, “I’m already at the sink, just brushed my teeth – flossing will only take about 2 more minutes.” He then purposed to make it a habit, and after 30 days flossing became routine, so much so that he referenced it in his book.

If Massey could do it, so could I, and it’s true… I just returned from my annual dental check-up and received high marks from my hygienist that my gums were the best ever. Who knew that it would be so easy to establish such a sensible habit?

Most of our negative habits are formed, not by thinking, but by the absence of thought. I have little doubt that most people’s attitude about money is formed the same way. Do you see the extra dollar in your pocket as a measurement of what you can consume, or how much more you can invest?

My friend Greg tells me that he drives an older model truck, despite his ability to afford something new, because for the price of a $40,000 truck he can buy a run-down property that he can rehab and rent for $600 per month. Greg, instead of purchasing an asset that quickly depreciates, is purchasing a type of an annuity with an income stream of about $5,000 per year after expenses, and Greg gets a bigger kick out of his balance sheet than what is parked in his garage.

Unfortunately, most Americans do not share Greg’s values. According to a recent survey by the Federal Reserve, about 1/3 of non-retired US Households have no retirement savings or pension. Among those aged 55-64, more than half said they expect to work “as long as possible” rather than work full time to a set date and stop working. (Federal Reserve Report on the Economic Well-Being of US Households, Aug 7, 2014)

Why is such a large portion of our citizenry unable to prepare for retirement? For a small number of households, it may be due to dire economic hardship. However, for most the habit of saving was probably never established in the first place.

I can see it with our clients – there are those who have been faithful savers as well as those who waited way too long to start with retirement age rapidly approaching.

Just think of savings like flossing. It is far more valuable if you start young, yet any day you start will produce results immediately and will accrue long-term benefits once it is established as a habit. So rather than setting a large savings objective, just start with a percentage of your earnings, and as your earnings improve just increase the percentage. Then teach your children and grandchildren to do the same.  Better yet, when those savings are in a self-directed retirement plan you avoid the tax bite – and that’s an idea to sink your teeth into.

Demographics and Scarcity Converge: The Boomers Move South

Guest Article by Michael Cobb:

If you had a time machine and could see the future, would you be able to make better decisions? Would you be a better investor? They seems like silly questions, but we would make better decisions if we knew the future, wouldn’t we? If we could see what was going to happen, we would develop products and services that everyone wants and needs, and then of course, we’d do very well for ourselves.

While we can’t go forward in time for a sneak peek, we can spot emerging trends. When the macro-demographics line up behind that trend, get ready. There is going to be a lot of money to be made by somebody. Why not you?

I was among those fortunate enough to be a part of the early computer wave of the late 1980’s and early 90’s. Now the truth be told, it wasn’t foresight that put me there…just plain luck. But there I was, and it was a great time to be in the computer business.

The major reason the tech sector performed so well when it did was the combination of two factors. The Baby Boomers moved into management positions in industry at the same time that the personal computer became a product mature enough to be of significant useful value for individuals and corporations. It was a powerful convergence of two factors that lead to the great adoption of PC’s and their massive widespread use. It also helped that the Baby Boomers generally rebelled against centralized authority.   Remember the Apple commercial railing against Big Brother?

The success of the PC and the fortunes made is a great example of the convergence of demographics and scarcity. More people wanted PC’s more than were available for a significant period of years. It produced huge opportunities for investors and entrepreneurs. Profits from computer and software sales were enormous because initially scarcity reigned. Consumers demanded a product and production facilities were not in place to produce the quantities demanded.

Over a period of about 10-12 years, the scarcity element waned because thousands of factories were built to supply the components needed to assemble the millions of PCs required each year. Prices and profits fell. The number of players in the market also constricted substantially leaving only the companies that produced a high quality product.

Interestingly, the names of these companies are largely the same as the ones who entered the market first, IBM, Dell, HP, Toshiba, Apple, and Microsoft. Those that arrive first, and perform well, stake a strong claim in the most fertile territory, and reward customers and shareholders alike for the long term.

A huge convergence of demographics and scarcity is happening again. This time it is in preparation to serve Baby Boomers as they retire and age.  There are numerous sectors like health care poised to do well, but much of that future success has already been priced into the market. In order to really profit from this convergence, one must look under different rocks as my friend Steve Sjuggerud says.  Find opportunities others are overlooking. That is where the real pay dirt is.

One such opportunity is under our noses right now. We all know that the real estate sector has been hammered over the past 5 years and rightly so. In many parts of the world, price gains were fueled by a speculative bubble. The true consumer demand wasn’t there to feed the ultimate usefulness of the product and prices tumbled in response. It was a bloodbath for many, but the strong survived. The companies in business right now are those that stayed true to the consumer and produced a product that people wanted to own and use.

Products People Want – Sun City South-of-the-Border

The most successful retirement community brand in North America is Sun City. The developer, Del Webb, wanted to provide real community to active senior adults, and then let the retiree decide what part of the United States made the most sense for them. They developed communities in the deserts of Arizona, along the coasts of Florida and California, in Texas and the Mid-West, and the piedmonts of the East Coast. Del Webb knew how to build the services and amenities that everyone wanted and then offered clients the option to choose what type of climate and environment suited their needs and wants best. Their success has been unparalleled in the industry.

It is now possible to advance the Sun City concept one step further and create a menu of attractive lifestyle options to serve the millions now searching for retirement homes in Latin America. This is an already large market and it continues growing quickly. However, once outside of North America, a new set of considerations becomes critical.

Today’s consumers largely take for granted the basic comforts of reliable electricity, excellent water pressure, high-speed bandwidth for internet, access to top notch medical care, and quality construction.  In Latin America, many developers fail to provide even these basic services. They are often little more than a collection of barren lots with limited infrastructure. Most have few or no homes or residential product in place. The major reason that so few projects achieve this lever of product is that it requires that significant resources be invested up front. These “ghost towns” are likely to remain just that.

Boomer retirees want life, activities, neighbors, and community, something that the majority of these projects, sadly, cannot offer. Only a few developers deliver the excellent infrastructure and amenities needed for a high quality of life experience that North Americans have come to expect. A “Sun City of Latin America” would provide high quality products in a variety of climates like a home along the Pacific or Caribbean coasts, in the cool tropical mountains, or in the arid, high deserts of South America. Investors and companies who can provide such a product are likely to do very well.

The Demographics

The Baby Boomers represent more than 84,000,000 individuals in the United States and 9,000,000 in Canada. Over the last 60 years almost everything that was popular with the baby boomers became a huge commercial success. They have produced a disproportionate impact on the economy at each stage of their lives and companies that placed themselves in the path of this “age wave” did very well. This wave of opportunity continues right now as they enter the age of retirement.

Today 500,000 U.S. retirees receive Social Security checks overseas. These are people who were born before 1946 and are not part of the huge demographic bubble about to hit the market. The Baby Boomers proper, people born 1946 to 1964 are just now entering retirement and many will be relocating and building warm-weather, retirement and second homes in Latin America.

With a half a million already retired outside the US, the projected demographic data is even more powerful. Several large surveys map the nature of emigration attitudes in North America. The Zogby Company surveyed 103,000 Americans and discovered that 18% of the respondents representing more than 26,000,000 Americans have a desire to move or own property outside the United States. 4,500,000 listed Latin America as their first choice.

TD Waterhouse recently surveyed Canadian Baby Boomers. 45% of the respondents plan to spend one month or more outside Canada in retirement. With 9.3 million Canadian Baby Boomers this equates to over 4 million retirees who will be renting or owning property outside Canada in their golden years.

The bottom line is that Baby Boomer retirement will largely drive this market over the next 20 years. The trend is in its infancy. As many more retirees look to the tropics for affordable, yet enhanced retirement lifestyles, phenomenal growth in these in these already large numbers is likely.

Why Latin America? 

The region of Latin America is growing by leaps and bounds. Proactive policies on the part of the countries themselves have become instrumental in attracting foreigners, and hence their capital, to the region. More than 1,000,000 North Americans reside in Mexico part or full time, 40,000 Americans have homes in Costa Rica, and 20,000 call Panama home part of all of the year. Each country in the region has its own attractions and incentives that draw tourists and permanent residents alike, and they are all competing to provide excellent retirement packages.

Latin America is in the middle of a successful transformation with real GDP increasing at a rate of over 5% per annum through 2008. While the period 2009 – 2010 slowed, the region is already rebounding economically and GDP growth for 2011 was over 6%. Growth in conjunction with improving economies and regional stability drives the improvement of infrastructure, economic situation, and position in the global marketplace. These, in turn, make the region more viable economically, while at the same time improving quality of life, safety, and marketability of the countries therein.

But perhaps the most important reasons retirees are looking at Latin America are the “soft” factors like proximity to the US, Canada, family, and friends. Flying north to south limits the time zones crossed to two or three making travel and communications back home simple and easy. Safety, stability, and services are important base lines, but convenience is perhaps just as, or more important in the end for consumer satisfaction.

Financial Factors and Emigration

Ernst & Young produced a study in July of 2008 that predicted 60% of US retirees would need to cut back on spending in retirement or face the prospects of outliving their nest eggs. What would you cut back, food, medicine, heat? Imagine living your life every day wondering if you were going to outlive your funds.  It’s a scary proposition.

In addition, the U.S. Commerce Department reports that Baby Boomers are now saving almost nothing. Although the recent economic shocks are changing that trend, for most Boomers, there is simply not enough time to accumulate what was not saved or lost in the markets in 2008. Even today, almost half of U.S. Boomer retirees (48%) expect to count on Social Security during retirement and 15% expect to rely on it for most or all of their retirement needs.

This is a dire situation for many. Where can they do that and have a high quality of life in North America? The ability to enjoy the kind that they’ve always dreamed of is simply not feasible in the United States on the limited funds and Social Security payments they posses. More retirees will look elsewhere, many to Latin America, looking for ways to cut costs in retirement. Wonderfully they will also discover that they can enjoy a higher quality of life on a budget that they can afford.

Capitalizing on a Crisis of Supply

When one examines the supply of high quality home sites in the region, one quickly sees the impending shortage. If one considers the amount of residential product with world-class infrastructure and amenities, the shortage is magnified immensely. Knowing why there is a shortage of supply is critical to understanding why investment in the region makes so much sense.

Most developers in the region sell a speculative type of product. It has also been called “cut and run.”  This literally means that a developer buys a large tract of land, adds the minimum infrastructure like dirt roads and electric poles, then sells the lots to speculation buyers. Large expenses like water and sewage treatment are often offloaded onto the consumer, who must drill wells and build septic systems if they decide to build a home. In many cases soils are heavy clay which won’t perk, and water tables are located deep underground. In addition to the obvious environmental issues, this ends up costing buyers much more than their share of a centralized system.

A 2009 developer survey by Christopher Kelsey & David Norden clearly points to the growing consumer demand for products with high levels of infrastructure, amenities, and “reality.”  Prior to the real estate and economic crisis in 2008, most consumers were willing to “bet on the come” and buy pre-construction and speculative product. Today their attitudes are very different.

When surveyed again in 2011, developers agree by an overwhelming 94% that consumer’s expectations for clarity and commitment from the developer for the delivery of promised amenities will be greater. 92% agree that consumers will want to see the infrastructure and amenities complete before purchase. 85% see an increased trend by consumers to purchase completed homes and condominiums rather than vacant lots and pre-sales opportunities.

Consumers who are now retiring want and need something different as the Norden survey and other research data suggests. Retirement overseas is already happening with more than 500,000 receiving Social Security checks outside the United States. If the Ernst and Young State of Retirees report is accurate, then we will see this trend grow even faster as more people search for ways to lower their cost of living without giving up the important quality of life issues.

The Sun City of Latin America

The Baby Boomers are about to enter their next stage of life with more time and more money than any other demographic group of people in history, this even after the 2008 meltdown in the financial markets. As a result of longer life expectancies, these consumers know that they will have many more years of life after retiring than the majority of their predecessors ever did or do. With this time, they want to travel, continue working, and even start new careers. They want infrastructure, amenities, activities, neighbors and community. They are willing to pay a premium to get it.

Latin America offers exceptional and diverse climates with a high quality of life at an affordable price.  Our company, ECI Development is already serving this market and is, right now positioned to capture an even larger segment as it grows and expands.

You may want to look at what we are doing and how you can participate. Visit our website and be in touch. The opportunities are dramatic and timely. We don’t often get the chance to spot the trend this early with vehicles in place to ride the wave. Seize the moment. You’ll be glad you did.

 

Michael Cobb

Chairman and CEO

ECI Development

www.ecidevelopment.com

15 Critical “Must Ask” Questions When Buying Real Estate Overseas – Part 3

December 29, 2014

Guest article by Michael Cobb:

Part three of the 15 Critical “Must Ask” Questions when Buying Real Estate Overseas deals with “Knowing the Developer” and using the marriage analogy here is appropriate. Not many of us meet a girl in a bar and get married the next day, but it does happen. When it does it might fall under the category of “Margarita Madness,” a malady that sadly affects many travelers to Latin America as well as they are struck by marriage at first site.

So when you decide that you want to own a piece of property outside North America, you should consider it like a marriage. Generally, we get to know several ladies in our lives, find one that is a very good fit, court her for weeks, months, or even years, and then after we know her pretty well we ask her if she’ll marry us. If she says yes, we tie the knot.

Tie the knot is a great way to look at owning real estate overweas. In the previous article we discussed big brother and here is the good news/bad news about big brother again. Good news, he isn’t generally around much south-of-the-border. Bad news, you are responsible for what happens. Just as there are few or no zoning laws as discussed in part two of this series, there are also no bonding agencies, or fair reporting commissions to protect you from outright lies at one end of the spectrum, or just good intentions gone awry at the other.

The questions in the “Know the Developer” section below is all about who the developer is, why they exist, how they plan to get from point A to point B, and do your philosophies and values align with their own. A very simple way to know a lot about the developer is to ask them for a business plan. Do they have one? Developing real estate is a business after all and a wing and prayer is hardly the best way to come about it. Ask to see the business plan. Read it and make sure it is comprehensive and makes logical sense to you. Also, who are the people on their team? What experience do they have? Is there a proven track record or is this their first experiment with you as a guinea pig? What is their commitment? When the going gets tough what is keeping them there to grind it out through the middle of the marathon? Everything takes longer and is far more difficult in Latin America. Why will they stay? Look for answers in this case that make sense in your heart.

Again, owning a piece of property is like a marriage. If it’s a good one you’ll be happy. If not, you’ll be stuck with the developer for the next decade or two. You might want to know who they are a little better than what you can learn over a few drinks under some palm trees in paradise.

A great sales psychologist states that “we buy emotionally and justify logically.” Margarita Madness sets the euphoric mood to buy emotionally. These 15 critical questions, the last 5 of which are below, show us how to justify logically. Both parts of our brain, the emotional and the logical, are critical for happiness and satisfaction with property ownership. It’s a marriage after all. Get it right the first time. Divorce is expensive.

Knowing the Developer

How will you build your home from thousands of miles away? Who can oversee the construction of the home, and what is included? Look for projects that show homes as examples of what you will actually receive. What are the written specifications? What do the Architectural CC&R’s dictate? Are you in agreement with them? Have they planned property for 220v water heaters and air-conditioners, are there hot water lines to all the sinks and showers? Are lights, fans, faucets and other fixtures included in the price? Are appliances and AC units included? Is there a dryer vent or a water line to the fridge? How about the telephone and cable TV wires? Are they included in the price? What are the engineering guidelines? Who is going to validate these specifications as the home is constructed? All of these things and more we assume as North Americans. Verify and assume nothing. Remember, you get what you inspect, not what you expect.

Is the Development Company financially solid and do they have a record of success? Is financing available for Property Ownership? Remember buying a property in a foreign country is like getting married. You should know very well who you are marrying. Hopefully the developer will be around for many years and, if so, you want to be sure you are comfortable with the long term association. Ask to see a copy of a business plan. Ask to see financials. You are the buyer and you have every right to ask to see financials, especially if they’ve promised something like future amenities. You need to know who they are and if they will be around for a long time. Remember, you are going to send them your hard earned money. There are no bonding agencies holding their feet to fire to complete anything they promise. You are counting on the people and company involved to make good now and for upcoming years.

If they’ve promised an ROI on rental return, ask to see cancelled checks to owners. If they’ve returned 8-12 percent returns to owners, they’ll be proud to show you the cancelled checks. In addition because financing is rare in the region, the developer should provide a form of financing as a buyer’s option. This shows financial stability. It also will indicate that they are not using your money to build promised infrastructure and amenities. Build outs based on sales flow can stall in down markets leaving buyers with half built projects to complete and fund as a HOA.

Is there a central sewer system? This may seem like an odd question to put under the heading of “Know the Developer,” but here’s the logic. When a developer doesn’t plan a central sewer system, what they are in fact doing is pushing the cost of the waste disposal off to the property buyer. Depending on soil type, this may or may not be a big issue. But either way, property owners will be responsible for paying for and installing septic systems. If septic is the provided solution, request to see a copy of a perk test. Many soils of Latin America are heavy clay. Lot owners may be forced to install expensive systems to meet environmental codes. Worse, without proper zoning and environmental inspections from big brother, many property buyers may not install what is hygienically required leading to a nasty situation, especially in rainy season.

What about safety and security access? Around the clock security should be provided at any public entrance with cooperating backup from local and national police. Generally, the municipalities will not have the funding or staff to provide the kind of security North Americans are used to. Prevention and deterrence is the key here, and a strong visible presence prevents the kind of petty theft so often happening in the region. Be sure it exists and works. Were you let through the gate no problem? Who else can get through? A tough time getting in through the gate yourself, means others will face it as well.

What kind of title guarantee can be provided? If you can’t get title insurance, you should seriously reconsider the purchase. There are no legitimate reasons you should not be able to get this protection from a major company like First American or Stewart. This is a black and white issue. Either the seller has title and you can get a policy, or you should walk away. There will always be a story. Believe it at your own peril.

About Michael Cobb

At the height of a successful career in the computer industry, Michael Cobb left to pursue pioneering opportunities in the emerging markets of Central America. He formed ECI Development, a multi-country developer with projects in 5 countries: Belize, Nicaragua, Costa Rica, Panama, and Ecuador. The model is based on the Del Webb Sun City active senior communities in the U.S., and it serves North American consumers with familiar product in multiple geographies.

Don’t Forget the Title Insurance

December 10, 2014

Guest article by Greg Fencik:

In real property law, title is the means whereby a person’s right to property is established. Title should not be confused with a deed. A deed is merely a piece of paper that serves as evidence of title. The possessor of a deed may not, in fact, have legal title to the property described in a deed. For example, a deed may be forged. A deed may be one of multiple deeds issued by a prior property owner. A deed may stem from a deed that was one of multiple deeds issued by a prior property owner. There may be a mistake in the description of the property in a deed. In these instances, the person who has the deed may not have legal title.

Title isn’t just a piece of paper, be it a deed or otherwise. Title is the right to do with the property whatever the title holder sees fit (provided, of course, that it’s legal). Title insurance is a means by which buyers of real property and mortgage lenders protect their respective interests in the property against losses due to flawed titles.

Most people are familiar with health insurance, auto insurance and homeowner’s insurance. Each of these types of insurance provides coverage against future losses – things that may occur in the future. For this future coverage, healthcare insurers, auto insurers, and homeowner’s insurers charge periodic premiums from the date of purchase of the respective policy until the policy is cancelled or non-renewed.

Title insurance provides insurance against defects in the title to real property. Title insurance ensures that the purchaser/owner of real property to which the policy applies has legal title – the right to do with the property whatever the title holder sees fit (e.g. develop the property, sell the property). Unlike providers of healthcare insurance, auto insurance and homeowner’s insurance, title insurers charge a one-time premium for the provision of what is essentially a lifetime insurance policy. There are a number of title insurance providers in Florida – First American Title, Stewart Title Guaranty Company, Old Republic National Title Insurance Company, and Fidelity National Title of Florida, to name just a few.

In Florida, title insurance is regulated by statute and by administrative rules. See, generally, Fla. Stat. §§ 627.7711 – 627.798.

Florida statutes define a title insurer as:

Any domestic company organized and authorized to do business under the provisions of chapter 624, for the purpose of issuing title insurance, or any insurer organized under the laws of another state, the District of Columbia, or a foreign country and holding a certificate of authority to transact business in this state, for the purpose of issuing title insurance. Fla. Stat. §627.7711(3).

By statute, title insurers are obligated to perform title searches and to examine information upon which a determination can be made that there is valid legal title:

A title insurer may not issue a title insurance commitment, endorsement, or title insurance policy until the title insurer has caused to be made a determination of insurability based upon the evaluation of a reasonable title search… has examined such other information as may be necessary, and has caused to be made a determination of insurability of title… in accordance with sound underwriting practices. Fla. Stat. §627.7845(1).

A title search is “the compiling of title information from official or public records.” Fla. Stat. §627.7711(4). What constitutes such other information as may be necessary is not defined by statute. It stands to reason that a title insurer will engage in a thorough investigation of title before providing insurance for the title so as to minimize the likelihood that it will have to pay a claim. [1]

Title insurance is issued to owners and/or to lenders (e.g. North American Savings Bank or NASB). Title insurance policies are, thus, referred to as owner’s policies and lender’s or loan policies, respectively. First American Title explains the difference here.

The premium charged for title insurance in Florida is dictated by statute and by administrative rule. SeeFla. Stat. §627.727, Fla. Admin. C. 69O-186.003. The premium charged for an original owner’s policy is a function of the value of the property to which the title applies:

Per Thousand
$0 to $100,000 of liability written $5.75
Over $100,000, up to $1 million, add $5.00
Over $1 million, up to $5 million, add $2.50
Over $5 million, up to $10 million, add $2.25
Over $10 million, add $2.00

Fla. Admin. C. 69O-186.003(1)(a)1.a. [2]

The premium for a loan policy, which the Florida Code refers to as original mortgage title insurance, is the same. For a one-time premium, title insurance policy holders obtain insurance against a number of covered risks. Covered risks typically include:

1. Someone else owns an interest in the title.
2. Someone else has rights affecting the title because of leases, contracts, or options.
3. Someone else claims to have rights affecting the title because of forgery or impersonation.
4. Someone else has an easement on the land.
5. Someone else has a right to limit the use of the land.
6. The title is defective due to:

6.1 Someone else’s failure to have authorized a transfer or conveyance of the title.
6.2 Someone else’s failure to create a valid document by electronic means.
6.3 A document upon which the title is based is invalid because it was not properly signed, sealed, acknowledged, delivered or recorded.
6.4 A document upon which the title is based was signed using a falsified, expired, or otherwise invalid power of attorney.
6.5 A document upon which the title is based was not properly filed, recorded, or indexed in the public records.
6.6 A defective judicial or administrative proceeding.

In the event a policy holder suffers a loss as result of a covered risk, the title insurance company will generally do one or more of several things:

1. Pay the claim.
2. Negotiate a settlement.
3. Bring or defend a legal action related to the claim.
4. Pay the policy holder the amount required by the policy.
5. End the coverage of the policy for the claim by paying the policy holder the actual loss resulting from the covered risk, and those costs, attorneys’ fees and expenses incurred.
6. End coverage for certain risks by paying the policy holder the amount of the insurance then in force for the particular covered risk, and those costs, attorneys’ fees and expenses incurred up to that time.
7. End all coverage of the policy by paying the policy holder the policy amount then in force, and those costs, attorneys’ fees and expenses incurred up to that time.
8. Take other appropriate action.

Given all of this, it should be obvious why lenders such as NASB require title insurance. To understand why purchasers of real property, such as IRAs should insist upon title insurance for themselves, consider the following hypothetical scenario:

1. An IRA purchases property in Florida.
2. The purchase price of the property is $100,000.
3. 70 percent of the purchase price ($70,000) is financed by means of a non-recourse loan provided by a lender such as NASB, which lender requires the purchaser (the IRA) to obtain mortgage loan insurance or loan insurance.
4. All that is obtained is mortgage loan insurance or a loan policy; there is no owner’s policy obtained.
5. The loan policy is obtained from a company such as First American Title.
6. The IRA pays for the title insurance. [3]

In this scenario, the cost of the insurance policy would be $402.50 (the premium is a function of the amount of the loan, $70,000, not of the value of the property). That cost would be paid by the purchaser (the IRA) as part of the cost associated with obtaining the financing – it was required by NASB.

In this scenario, because the policy is a loan policy, the policy would only protect NASB. The limits of coverage would initially be $70,000 (the amount of the loan), not $100,000 (the value of the property at the time of the purchase). The amount of coverage would decrease as the loan to NASB is paid off until, eventually, when the loan to NASB is paid in full, there would be no coverage at all.

Now, in this scenario, First American Title likely did a good job investigating the title of the property. It was obligated to do so by statute, and good business practices would dictate as much, as well. As such, one might think: though the IRA did not obtain a title insurance policy in its name (an owner’s policy), it did, nevertheless, have the benefit of the title search and assessment of title resultant from the title examination First American Title conducted prior to issuing the loan policy. But bear in mind: title companies are not infallible; they sometimes make mistakes. And if First American Title made a mistake, the IRA would be left to suffer the loss of a title defect on its own, without insurance.

Consider this, alternative hypothetical:

1. The IRA purchases property in Florida.
2. The purchase price of the property is $100,000.
3. The IRA pays for the property in cash; there is no financing.

In this scenario, there is no financing. That means there is no lender to insist and require that the IRA obtain any kind of title insurance. In the absence of a requirement that the IRA obtain title insurance, the IRA might not obtain title insurance. If the IRA does not obtain title insurance, it assumes the risk that it may have acquired defective title; and the IRA would be left to suffer the loss of a title defect on its own.

Now in either of the two scenarios discussed herein above, the IRA could hire a company to perform a title search. In such a case, in the event the title search company performed a bad search, and the IRA suffered a loss due to a defective title, the IRA might have recourse against the search company.

If the IRA pursued a case against the search company, the IRA’s recourse would be limited by the terms of the contract between the IRA and the search company. It’s likely that the contract would limit warranties of the work performed by the search company. As such, the recourse would be not nearly what the IRA could hope to obtain in the form of benefits from a title insurance policy.

So, consider this hypothetical scenario (a variation of the first hypothetical):

1. An IRA purchases property in Florida.
2. The purchase price of the property is $100,000.
3. 70 percent of the purchase price ($70,000) is financed by means of a non-recourse loan provided by a lender such as NASB, which lender requires the purchaser (the IRA) to obtain mortgage loan insurance or loan insurance.
4. A loan policy is obtained.
5. An owner’s policy is obtained as well.
6. Both the owner’s policy and the loan policy are obtained from a company such as First American Title.
7. The IRA pays for the title insurance.

In this scenario, the total cost for the two policies would be $600. That’s based on a $575 premium for the owner’s policy and a $25 premium for the loan policy.

Understand that the premium for a loan policy, alone, in the amount of $70,000 would be $402.50. And an owner’s policy, alone, in the amount of $100,000 would be $575. In this scenario, because both a loan policy and an owner’s policy are issued, the premium for the loan policy is reduced or discounted to $25. This is commonly referred to as a simultaneous issuance discount. In this scenario, the IRA obtains the title insurance required by its lender, NASB; NASB is satisfied. And, for just $25 more, the IRA obtains title insurance for itself as well; the IRA has piece of mind.

The loan policy will eventually cease to exist. The owner’s policy (the IRA’s policy), on the other hand, will last for so long as the IRA owns the property. If the policy issued by First American Title tracks the language of the policy promulgated by American Land Title Association or ALTA (and it likely would), coverage afforded under the policy (the Coverage Amount) would actually increase by 10% of the Policy Amount each year for the first five years following the policy date, up to 150% of the Policy Amount. Thus, the IRA has a title search and analysis and title insurance (essentially, a warranty by the title insurance company, First American Title, of its search and analysis). After considering the various scenarios presented herein above, it should be obvious that an IRA engaged in the purchase of real property should not forget the title insurance.

About the Author

Greg Fencik is an attorney licensed to practice law in Florida since 1992. He is admitted to practice before Florida state courts, the U.S. Supreme Court, the 11th US Circuit Court of Appeals, and the Federal District Courts for the Middle and Southern Districts of Florida. He is a certified circuit court mediator. He received his bachelor’s degree from the University of Pennsylvania. He received a juris doctorate degree from Tulane University. He engages in business law, business consultations, and real estate law, as well as handles financing placements and credit facilities. In addition, Greg teaches real estate law at the University of Central Florida. He may be reached by email here.

Disclaimer: Anything read in this article is not to be taken as legal advice. It is up to the reader to consult with their own local attorney for any and all legal questions. This article is for educational purposes only. NuView IRA, Inc. does not render tax, legal, accounting, investment, or other professional advice. If tax, legal, accounting, investment, or other similar expert assistance is required, the services of a competent professional should be sought.

Author Notes

[1]  To get a better idea of what exactly title insurers do when it comes to the investigation of and assessment of title prior to providing a policy of title insurance (underwriting), consider Chicago Title Insurance Company’s 333 page Basic Underwriting Manual.

[2] Many title insurance companies offer online title insurance premium calculators. First American Title, which utilizes policies promulgated by the American Land Title Association (see ALTA.org), provides an online calculator here.

[3] Either the purchaser or the seller of real property may pay for title insurance; in general, it may be negotiated in the purchase agreement.

Year-End Tax Planning & Retirement Accounts

December 4, 2014

Guest article by James K. Duerr:

So you thought you could defer taxes on your IRA forever?    

Sorry, the IRS will not wait forever. Although pretax money going into a Traditional IRA is tax deferred, there is a requirement at age 70 ½, to take RMD’s (required minimum distributions). The minimum distribution is based on tables of life expectancy and the balance in your account. There are worksheets on the IRS website, and many brokerage companies have calculators available to find out your RMD’s. If you do not take the RMD distributions, you may be subject to penalty. Per the IRS, “You cannot keep retirement funds in your account indefinitely”. The penalty could be up to a 50% excise tax on the amount not distributed as required.

 Roth IRAs & Roth Conversions

Roth IRA’s, do not require minimum distributions until after the death of the owner. Be careful with Roth 401K’s, as those plans do require RMD’s. That being said, it may be wise to roll the Roth 401K into a Roth IRA, if possible.Many clients consider converting Traditional IRA’s into Roth IRA’s. The amount converted is subject to tax, but is not subject to penalty. If you are in a low income year, you can have your CPA project the tax that you would owe on conversion.  You do not have to convert all of the funds at once. In fact, you can minimize the tax implications by converting the funds a little at a time.

Solo (or Individual) 401K Plans

For people who are in their own business, and do not have outside employees, the individual 401K plan can offer you flexibility and the opportunity to make large pension contributions to the plan.  If made pre-tax, the contributions may lower your tax liability. For example, if you took a $50,000 payroll, you have the ability for your company to contribute up to $12,500 to your pension plan, and you could, if under age 50, contribute another $17,500, for a total of $30,000 being contributed to the plan, and becoming a tax deduction. Assuming a conservative tax rate of 20%, you would save $6,000 in taxes. The plan has (2) components, an employer portion (up to 25% of earned income) and an employee deferral portion (up to $17,500, or if  age 50 and over, $23,000 with a catch up provision). The employee piece can be either pre-tax, or  Roth, if the plan allows.  Be sure that the original paperwork is completed correctly, and these plans can also allow borrowing rights. Most retirement plans are available as self-directed plans. These self directed plans allow you to have more control over your investments, by purchasing real estate or other assets, such as gold, notes, joint ventures, tax liens, etc.

Maximizing Profits and Minimizing Taxes

Whether you are in your own business, or not, it is smart tax planning to have a professional review your taxes, prior to year end. By doing this, you may be able to make some decisions that could significantly lower your taxes, and provide for your future financial freedom. As I always advise my clients, “It’s not what you make, it’s what your keep.”


 

James K. Duerr, CPA

CFRI Business Member

Small Business Resources USA, Inc.