Foreclosure Investing: The Risks and Rewards

Real Estate Foreclosures: Four Tips for Investing

Reduce Your Taxes: Contribute More Than
$2,000 to Your Real Estate IRA

Plan

Employer
Contribution

Employee
Contribution

Maximum Total
Contribution

SEP

15% Up To
$25,500

N/A

$25,500 (2000)

SIMPLE

3% Match
Up To $6,500

Up To $6,500

$12,500

Frequently Asked "Short Sale" Questions

Do the homeowners still owe the bank money after a real estate foreclosure? That is a good question. When you negotiate a successful short sale, keep in mind that the agreed upon price is payment in full.

However, the homeowners may still owe the difference between the mortgage balance and the discounted amount as a result a "deficiency judgment." If granted, this judgment will affect the homeowners and their credit report just as any other judgment.

You must get the bank to accept "payment in full without pursuit of any deficiency judgment." You need to explain to the homeowners that the discounted amount (the difference between the mortgage balance and the short sale) may be declared as income on their income tax return by means of a "1099."

Since the homeowners have been under such extreme duress and probably haven´t made much income, a 1099 may not adversely affect them. The homeowners can speak with an accountant for advice.

What is a 1099?

The 1099 is given to the homeowners as a result of income they've received. For example, if the bank is owed $100,000 and agrees to accept $65,000 on a short sale, the homeowners actually made $35,000 (the short sale amount) and can receive a 1099 for that amount.

You must explain this to your homeowners when discussing a short sale and advise them to speak with an accountant as to how a 1099 might affect them.

Typically, the homeowners are showing no income or have had limited income for quite some time. If this is the case, a 1099 will not affect them to the extent that they would refuse to go forward with the deal.

When we explain the results of the foreclosure sale and the 1099 to the homeowners, they never seem to care. They just want us to help them so they can start their lives fresh. Banks are so backed up with paper work, many times the homeowners get lost in red tape and never receive the promised 1099.

Deficiency judgment

The bank can seek a deficiency judgment for the shortage on the actual amount received versus the amount that was due. Using the example above, the judgment would be recorded against the homeowners for $35,000.

Likewise, the same judgment can be sought when the property sells at the courthouse for less than what is owed or after the REO department sells the property for less than the full amount.

When negotiating a short sale, you can require that the bank waive its right to a deficiency judgment. More often than not, the bank will because we have proven such a desperate hardship. Again, this is explained to the homeowners and left to them to decide whether to pursue the short sale.

Keep in mind that if their property does go to the foreclosure sale, the same result may occur. Why wouldn´t they be inclined to work with you now and receive some money?

If the bank does pursue a deficiency judgment, the homeowners may have to file bankruptcy at a later date to remove the judgment. Another option is to short sale the judgment amount at a later date.

We find that 99% of homeowners don´t care about the 1099 or deficiency judgment as long as they can move forward with their lives. Many times we give the homeowners enough cash to cover any tax implication they may incur.

Do the homeowners save that money for taxes? Probably not, but we give it to them, help them start over, and we can sleep soundly at night.

It´s important for you to know that the lender cannot pursue a deficiency judgment and issue a 1099. They can only do one or the other, not both. If the deficiency is waived as a condition to the short sale, the homeowners will receive a 1099.

If the judgment is not waived, we leave the decision up to the homeowners as to whether to pursue the deal. If given the choice, the lender will opt for the judgment over the 1099 because of the chance to possibly collect something at a later date.

It is important to remember as stated earlier, if there is no equity and the property goes to the sheriff´s sale, and the bank receives less than what was owed, the bank can pursue the judgment or issue the 1099.

Likewise, if the lender gets the property at the sheriff´s sale and sells it at a loss, they can then pursue the judgment or issue the 1099.

As you can see, the best option for the homeowners is to deal directly with you because you can help to avoid at least one of these consequences, help them start over, and possibly help them financially.

Limited Liability Entities for Real Estate Investments

How do you know what a commercial income property is worth? How do you know that you can get your desired return on your investment? Is there a way to calculate the maximum you can pay for an investment and still achieve your investment goals? This article will answer these questions and more about valuing income property.

Many real estate investors determine the value of an income property by using the capitalization rate, aka cap rate. It is probably the one most misused concept in real estate investing.

While brokers, sellers, and lenders are fond of quoting deals based on the cap rate, the way it is typically used, they really shortcut the true use of a valuable tool. A broker prices a property by taking the Net Operating Income (NOI), dividing it by the sales price, and voila!--there's the cap rate.

Example:
Say the property has an NOI of $125,000, and the price is $1,125,000.

But what does that number tell you? Does it tell you what your return will be if you use financing? No. Does it take into account the different finance terms available to different investors? No. Then just what does it show?

What the cap rate above represents is merely the projected return for one year as if the property were bought with all cash. Not many of us buy property for all cash, so we have to break the deal down, usually by trial and error, to find the cash on cash return on our actual investment using leverage (debt).

Then we calculate the debt service, subtract it from the NOI, and calculate our return. If the debt terms, loan-to-value, or our return requirement change, then the whole calculation must be performed again. That's not exactly an efficient use of time or knowledge.

Brokers are fond of quoting a "market cap rate." This is an effort to legitimize an assumption, but it is flawed in its source. As a comparison tool it is almost impossible by any means to find out what other properties have sold for on the basis of the cap rate.

In order to correctly calculate a cap rate, and get an apples to apples comparison, you must know the correct income and expenses for the property, and that the calculations of each were done in the same way explained below.

This information is not part of any public record. The only way to access the information would be to contact a principal in the deal, and that just isn't done because the information is confidential.

A broker may have the details of several deals in the marketplace, and if there is enough information about enough deals, the information may rise to the level of a market cap rate. But few brokers are involved in enough deals in one market to have that much information.

So the conventional wisdom becomes a range of cap rates for property types, which may or may not apply to the property you are looking at, and certainly does not take into account your own return requirements. So what do you do when you've found a property that looks promising, and the broker tells you the cap rate is 11.1% and you better act fast? How do you know if it is worth pursuing?

For years, I immediately jumped in the car to take a look, and then started crunching numbers making assumption after assumption to arrive at some estimated value. The truth is I was guessing. I wasn't looking at the right numbers. There is a better way. It is not a magic bullet, but it is a powerful tool to use in gauging value.

What's it worth to you?

The real question is not how much I (or another investor, or even an appraiser) value a property at. Nor is it the value from a cap rate estimated in the market. It's the value at which YOU can attain YOUR investment goals, that is reflective of YOUR borrowing power, and gives you an intelligent starting point for the analysis.

I promise you if you learn how to do this, it will give you a leg up on 90% of the brokers and investors out there. Critical to this calculation is that the NOI is figured consistently with industry norms. The generally accepted definition of NOI is:

Please note that the operating expenses do not include debt service or the interest component of debt service. Obviously, the income and expenses must be verified, or all calculations that flow from them will be flawed. Verifying the income is usually easier than the expenses. Rent roll analysis and a contract contingency for tenant estoppel letters at closing can settle the income stream conclusively.

On the expense side, normal due diligence includes verifying with third party suppliers as many of the expenses as possible. But take care evaluating the operating expenses to uncover any anomalies that exist under the present ownership.

Owners often take a management fee that may or may not be market based; maintenance expenses may or may not include labor charges; items such as "office expense," "professional fees," or "auto expense" (I love that one myself!) may or may not be property specific.

In short, before accepting the NOI presented, understand what is behind the numbers. This is known as "normalizing" the numbers. You can also tweak the numbers to reflect the way you will own and manage the property.

No two investors will own and operate a property the same way. It is entirely possible for two investors to look at the same property and come up with two different NOIs, and two widely divergent values, and both are right.

That's why appraisers use comparable sales, replacement value, and the income approach as part of a three-pronged method in estimating value. They make the appraisal representative of the market conditions and the typical requirements of investors and lenders active in the market.

The third method, the income approach, is usually given the most weight. That method is also known as the "band of investment" method of estimating the present value of future cash flows. It addresses the return required on both equity and debt, and leads to what can be called a derived capitalization rate.

Deriving your cap rate

The best way to get an initial value (after I am reasonably certain that the NOI is accurate) is the derivative capitalization rate. It requires two more pieces of information: You have to know the terms of financing available to you and the return you want on your investment.

We then use these terms for both debt and equity to indicate the value at one precise point in time--the instance of when the operating numbers are calculated--to derive the cap rate that reflects those terms. (The value in future years is another discussion.) Deriving a cap rate works like a weighted average, using the known required terms of debt and equity capital.

The bank's return: the loan constant

Let's start with the finance piece. We need to know the terms of the financing available. From that we can develop the loan constant, also called a mortgage constant. The loan's constant, when multiplied by the loan amount, gives the payment needed to fully repay the debt over the specified amortization period.

IT IS NOT AN INTEREST RATE, but a derivative of a specific interest rate AND amortization period. When developing a derivative cap rate, one must use the constant since it encompasses amortization and rate, rather than just the rate.

Using just the interest rate would indicate an interest only payment and distort the overall capitalization process. The formula for developing a constant is:

You can use ANY principal amount for the calculation, then calculate the debt service and complete the formula. The constant will be the same for any loan amount. For example, say your bank says they will generally make an acquisition loan at a two points over prime, with twenty-year amortization, with a maximum loan amount of 75% of the lower of cost or value.

Say prime is at its current 4.5%. That means the loan will have a 6.5% interest rate. Using a payment calculator or loan chart, find the payment for those terms. On a loan for $10,000, the annual debt service required is $894.72. Divide that by $10,000 to find the constant.

Using the terms given then, the loan constant for that loan would be .08947 (I usually round to four or five digits. Depending on the exactness desired, you can use as many as you like.)

The answer will be the same if you use $100,000 or any other number as the principal amount. (One hint: do not use a principal number with less than five digits, because the rounding will affect the outcome.)

You might note here that the mortgage constant is basically the lender's cap rate on his piece of the investment. Both the mortgage constant and "cash-on-cash" rates for equity are "cap" rates in their basic forms. A cap rate is any rate that capitalizes a single year's income into value (as opposed to a yield rate).

Your return: cash-on-cash return

The next step is to provide for the return on the equity. Start with the return you want on your money: Say the cash-on-cash return you are seeking is 20%. The cash-on-cash rate is also known variously as the equity dividend rate, equity cap rate, and cash-throw-off rate.

It represents the cap rate to the equity position, and to keep things simple we will call it the equity constant. If an investor puts in $30,000 and requires a 20% pre-tax return, then his annual cash in the pocket after paying the mortgage (but before income taxes) would have to be $6,000. In this case, the equity constant is .20.

Put it all together: Weighted average

Each of these cap rates is then weighted based on the loan-to-value ratio of each of the debt and equity positions to build the "overall cap rate." The formula looks like this:

To finish the example, using the mortgage terms given above, and the desired 20% cash on cash return, the following would be the overall cap rate with a 75% loan-to-value on the debt component:

To convert to a percentage, move the decimal two places, and therefore, under the stated conditions, the required cap rate for the property (income stream) is 11.71%. Using the normalized NOI figure, then the indicated value is calculated with this formula:

For the original deal above, the value would be calculated thusly to attain the desired return:

The asking price of $1,125,000 is very close to my target of $1,067,464. This is a deal that would definitely be worth hurrying to take a look at. Had the deal been priced at a 10% cap rate, or $1,250,000, then I might still take a run at it since my price is within ten to fifteen percent of the list price.

In a normal market, California aside, most sellers do not expect the property to sell for the asking price.

Not a magic bullet

Now please note that I said at the beginning that this is a starting point. It is not the end all and be all of valuation, nor should it be. That doesn't exist.

Many factors can influence the value of an income property both up and down. Some of the most important include deferred maintenance; security of the income stream (strength of the tenants and length of the leases); comparable sales in the area; general economic and market conditions; and local market conditions.

All these factors speak to the relative risk and effort involved in the continuance of the income stream, and must be investigated during the due diligence. As the instability or cost of any of those factors increases, I would increase the required return on my cash invested to offset the increased risk taken and the increased effort required to mitigate that risk.

Increase the required return and the cap rate changes, and so does the price. At this point you are writing your own paycheck. This is a powerful tool if understood and applied correctly. Play around with some alternative scenarios of returns, loan terms, rates, etc. and you will see the effect of changing different parts of deal structure.

You should now see why it is so critical to verify EXISTING income and expense BEFORE establishing value. This little exercise also shows why I harp all the time on no two investors coming up with the same value for the same property. DO NOT use this as a "magic bullet," and stop your analysis after the calculation.

I cannot stress enough the importance of performing thorough due diligence in commercial income properties. That alone is what determines the difference between being a true "investor," and the next "don't-wanter" seller.

Four years ago, credit scoring had little to do with mortgage lending . When reviewing the credit worthiness of a borrower, an underwriter would make a subjective decision based on past payment history.

Then things changed.

Lenders studied the relationship between credit scores and mortgage delinquencies. There was a definite relationship. Almost half of those borrowers with FICO scores below 550 became ninety days delinquent at least once during their mortgage.

On the other hand, only two out of every 10,000 borrowers with FICO scores above eight hundred became delinquent.

So lenders began to take a closer look at FICO scores and this is what they found out. The chart below shows the likelihood of a ninety day delinquency for specific FICO scores.

If you were lending a couple hundred thousand dollars, who would you want to lend it to?

What affects FICO scores--How do lenders look at them

Imagine a busy lending office and a loan officer has just ordered a credit report. He hears the whir of the laser printer, and he knows the pages of the credit report are going to start spitting out in just a second.

There is a moment of tension in the air. He watches the pages stack up in the collection tray, but he waits to pick them up until all of the pages are finished printing. He waits because FICO scores are located at the end of the report.

Previously, he would have probably picked them up as they came off. A FICO above 700 will evoke a smile, then a grin, perhaps a shout and a "victory" style arm pump in the air. A score below 600 will definitely result in a frown, a furrowed brow, and concern.

FICO stands for Fair Isaac & Company, and credit scores are reported by each of the three major credit bureaus: TRW (Experian), Equifax, and Trans-Union.

The score does not come up exactly the same on each bureau because each bureau places a slightly different emphasis on different items. Scores range from 365 to 840.

Some of the things that affect your FICO scores

• Delinquencies
  
  

• Too many accounts opened within the last twelve months
  
  

• Short credit history
  
  

• Balances on revolving credit are near the maximum limits
  
  

• Public records, such as tax liens, judgments, or bankruptcies
  
  

• No recent credit card balances
  
  

• Too many recent credit inquiries
  
  

• Too few revolving accounts
  
  

• Too many revolving accounts

Sounds confusing, doesn't it?

The credit score is actually calculated using a "scorecard" where you receive points for certain things. Creditors and lenders who view your credit report do not get to see the scorecard, so they do not know exactly how your score was calculated. They just see the final scores.

Basic guidelines on how to view the FICO scores vary a little from lender to lender.

Usually, a score above 680 will require a very basic review of the entire loan package. Scores between 640 and 680 require more thorough underwriting. Once a score gets below 640, an underwriter will look at a loan application with a more cautious approach. Many lenders will not even consider a loan with a FICO score below 600, some as high as 620.

FICO scores and interest rates

Credit scores can affect more than whether your loan gets approved or not. They can also affect how much you pay for your loan, too.

Some lenders establish a "base price" and will reduce the points on a loan if the credit score is above a certain level.

For example, one major national lender reduces the cost of a loan by a quarter point if the FICO score is greater than 725. If it is between 700 and 724, they will reduce the cost by one-eighth of a point. A point is equal to one percent of the loan amount.

There are other lenders who do it in reverse. They establish their base price, but instead of reducing the cost for good FICO scores, they "add on" costs for lower FICO scores.

The results from either method would work out to be approximately the same interest rate. It is just that the second way "looks" better when you are quoting interest rates on a rate sheet or in an advertisement.

FICO scores as guidelines

FICO scores are only "guidelines" and factors other than FICO scores affect underwriting decisions. Some examples of compensating factors that will make an underwriter more lenient toward lower FICO scores can be a larger down payment, low debt-to-income ratios, an excellent history of saving money, and others. There also may be a reasonable explanation for items on the credit history which negatively impact your credit score.

They don't always make sense

Even so, sometimes credit scores do not seem to make any sense at all. One borrower with a completely flawless credit history had a FICO score below 600. One borrower with a foreclosure on her credit report had a FICO above 780.

Portfolio & sub-prime lenders

Finally, there are a few "portfolio" lenders who do not even look at credit scoring, at least on their portfolio loans. A portfolio lender is usually a savings and loan institution who originates some adjustable rate mortgages that they intend to keep in their own portfolio instead of selling them in the secondary mortgage market.

They may look at home loans differently. Some concentrate on the value of the home. Some may concentrate more on the savings history of the borrower.

There are also "sub-prime" lenders, or "B & C paper" lenders, who will provide a home loan, but at a higher interest rate and cost.

Running credit reports

One thing to remember when you are shopping for a home loan is that you should not let numerous mortgage lenders run credit reports on you. Wait until you have a reasonable expectation that they are the lender you are going to use to obtain your home loan.

Not only will you have to explain any credit inquiries in the last ninety days, but numerous inquiries will lower your FICO score by a small amount. This may not matter if your FICO is 780, but it would matter to you if it is 642.

Don't buy a car just before looking for a home!

In conclusion, a word of advice not directly related to FICO scores. When people begin to think about the possibility of buying a home, they often think about buying other big ticket items, such as cars.

Quite often when someone asks a lender to pre-qualify them for a home loan there is a brand new car payment on the credit report. Often, they would have qualified in their anticipated price range except that the new car payment has raised their debt-to-income ratio, lowering their maximum purchase price.

Sometimes they have bought the car so recently that the new loan doesn't even show up on the credit report yet, but with six to eight credit inquiries from car dealers and automobile finance companies it is kind of obvious.

Almost every time you sit down in a car dealership, it generates two inquiries into your credit.

Credit history is important

Nowadays, credit scores are important if you want to get the best interest rate available. Protect your FICO score.

• Do not open new revolving accounts needlessly.
  
  

• Do not fill out credit applications needlessly.
  
  

• Do not keep your credit cards nearly maxed out.
  
  

• Make sure you do use your credit occasionally.
  
  

• Always make sure every creditor has their payment in their office no later than 29 days past due.
  
  

• And never, ever be more than thirty days late on your mortgage--ever.

This article is designed to provide general background information for those who invest in residential real estate to aid them in making reasonably informed decisions about the merits of using a mortgage broker to arrange loans for purchases, sales, refinances, cash out transactions, rehabs or construction projects, as well as for personal needs.

Understand brokers and the services they provide

On the most basic level, mortgage brokers act as intermediaries between a borrower and a lender. While some loans a broker may arrange are also available directly from a lender, many lenders work only through brokers.

In addition to negotiating loans with third party lenders, some brokers also perform the role of a lender and self-fund loans.

Most banks provide a very limited range of mortgage loan products; usually a mix of the standard conventional loans (fixed, adjustable, balloon and buy down), a few portfolio loans with less strict underwriting, and one or more credit lines.

A typical mortgage broker will have 20 to 50 times the number of loan products, frequently having all that a bank has to offer and many, many programs that banks do not provide at all.

The additional products that brokers provide frequently have much more liberal underwriting guidelines which will allow these loans to have one or more of the following features:

1. Cash out up to 100% of the value of the property
   
   

2. Debt ratios of 50% and higher
   
   

3. Availability to borrowers whose recent credit history includes serious derogatory information (late mortgage payments, judgments, liens, foreclosure, etc.)
   
   

4. No income verification
   
   

5. Refinances with very little seasoning
   
   

6. New employment permitted
   
   

7. No employment permitted
   
   

8. Other major deficiencies

With a larger number of lenders and programs to choose from, brokers can often find the ideal balance between cost, loan terms, liberal underwriting standards and speed.

Most mortgage brokers are very knowledgeable about all phases of the loan process. Since brokers are commonly paid only when they close a loan, they have great incentives to package the loan applications correctly and to intercede when the inevitable snags occur.

Though not every problem is curable, many are. Brokers typically maintain good working relationships with appraisers, title companies, underwriters and the other professionals often needed in the process.

If you need an appraisal done quickly, an opinion from an underwriter, a closing at your home or office, a payoff from a creditor, correction of inaccurate credit reports or a letter explaining credit problems a good mortgage broker can either handle the problem for you or advise how best to accomplish the task.

Additionally, most brokers know when to contest a low appraised value and when to dispute a turned down loan application and, failing those challenges, which lender to try next.

Consider strengths and limitations of particular brokers and establish relationships before you need them

It is the rare company or individual that can be all things to all people. But many brokers can come close. The critical determination is whether or not they will meet your needs. Though not always possible, the best time to shop for a broker is before you actually need one.

They can evaluate your ability to get various kinds of loans, uncover credit problems that may be correctable, point out strategies to reduce your debt and/or debt ratios, inform you of the consequences (if any) of assuming additional debt not related to real estate, help you deal with the late payments on your credit from a loan you co-signed, suggest purchase scenarios that fit with your capabilities, and guide you towards putting together a loan package that, with minor updates, will allow you to apply for and close on loans in the shortest amount of time.

Additionally, the loan application forms and statements of net worth that they can provide will help you better understand your financial position.

By talking to several brokers you gain valuable insights into their style and methods of conducting business, their ability to communicate what you need to understand, the types of loan products they have available, the costs of the various loans, the level of their expertise and the quality of their references. If you are established with a bank, compare their products and service with the offerings of the brokers as well.

Determine the benefits you need

The more precisely you can define what it is you want to accomplish, the more likely a broker can provide what will serve you best. Is the loan needed for a relatively short term? Perhaps a balloon or adjustable product will be less expensive overall.

Do you need to close in under one week, to finance with none of your own money, to get cash out at the closing when you buy? A broker who funds their own loans or who arranges hard money loans may be the answer.

Do you want to pay interest only, be able to pay down the principal and borrow again without reapplying for a loan? Brokers can arrange credit lines.

Is the loan for a buyer who doesn't have cash? The broker may suggest ways around the dilemma. Do you need to consolidate debt to create more cash flow or need to negotiate short payoffs on liens or buy six properties in 3 months or get a loan while you are facing foreclosure? Ask a broker for assistance.

Understand the basics of lending and underwriting

Historically, most lenders have felt that the safest real estate loans are those provided in circumstances where some portion of the equity (usually the purchase down payment) is supplied by the borrower, with a principal amount not exceeding 80% of the appraised value or the purchase price (whichever is lower), on owner occupied, residential single family properties, with urban lots five acres or under, in areas with recent sales of comparable properties, made to borrowers with no credit delinquencies, and who have enough verifiable income such that their housing expense (principal, interest, property taxes, hazard insurance) does not exceed 28% of their gross monthly income. And such that their total monthly debt payments (housing expense plus payments for auto, credit cards, school loans, child support, etc.) do not exceed 36% of their gross monthly income and who have been employed in the same line of work for at least two years. Conventional, conforming loans would meet these guidelines.

Mortgage loan products (also called mortgage loan programs) are designed and created to fill the needs of a group of borrowers and to provide the lenders with a particular yield (return on their investment).

Typically, the riskier the lender perceives the type of loan to be and the group of borrowers to be, the higher return they will require. The higher return is necessary to maintain profitability after they cover the higher costs of collecting delinquencies and the higher losses they expect to incur due to the greater numbers of defaults that come the more a loan deviates from the "safe" standard above.

The availability of loans with less restrictive guidelines tends to change over time. From 1990 through the date this article is written (early 1997), non-conforming lenders have made available an ever increasing array of products with higher risk factors--loans that make borrowing as an owner occupant or investor easier.

Higher debt ratios, lower credit quality, higher loan-to-value ratios, shorter seasoning, less strict income verification are features of some of these newer loans. If time tends to show that the lenders have misjudged the profitability of these programs or if the government intercedes for some reason, these programs may become more restrictive or disappear altogether.

There are thousands of loan products that have more lenient standards than the "safest." The more lenient (and, therefore, risky) the standards, the more expensive the loans tend to be.

Some combination of higher interest rates, higher points and/or prepayment penalties are typically used by lenders to increase their yield to the point where the extra income covers the added risk and provides a better assurance of profitability.

Also, when the risk for default is high, lenders will demand a greater margin of safety by way of a lower loan-to-value ratio.

Familiarize yourself with various loan products

Loan products are tools. Each one has a different purpose. Using the right tool for the job always makes the task much easier. Take the time to learn about the available loan products in your area, and you may find yourself closing more deals this year.

Abstract of Title
A compilation of the recorded documents relating to a parcel of land, from which an attorney may give an option as to the condition of title. Also known in some states as a "preliminary title report."

Acknowledgment
A declaration made by a personal signing a document before a notary public or other officer.

Adverse Possession
Most states have laws which permit someone to claim ownership of property which is occupied by him for a number of years. This is common where a fence is erected over a boundary line (called an "encroachment") without the objection of the rightful owner. After a number of years, the person who erected the fence may be able to commence a court proceeding to declare that the property belongs to him.

All-Inclusive Deed of Trust
See "wraparound mortgage."

ALTA
American Land Title Association

Amortize
To reduce a debt by regular payments of both principal and interest.

Appraised Value
The value of a property at a given time, based on facts regarding the location, improvements, etc., of the property and surroundings.

ARM
An adjustable rate mortgage--that is, a loan whose interest rate may adjust over time depending on certain factors or a pre-determined formula.

Arrears
Payment made after its due is in arrears. Interest is said to be paid in arrears since it is paid to the date of payment rather than in advance.

Assignment of Contract
A process by which a person sells, transfers, and/or assigns his rights under and agreement. Often used in the context of the assignment of a purchase contract by a buyer or the assignment of a lease by a tenant.

Assumable Loan
A loan secured by a mortgage or deed of trust containing no "due on sale" provision. Most pre-1989 FHA loans and pre-1988 VA loans are assumable without qualification. Some newer loans may be assumed with the express permission of the note holder.

Assumption of Mortgage
Agreement by a buyer to assume the liability under an existing note secured by a mortgage or deed of trust.

Balloon Mortgage
A note calling for periodic payments that are insufficient to fully amortize the face amount of the note prior to maturity, so that a principal sum known as a "balloon" is due at maturity.

Basis
The financial interest one has in a property for tax purposes. Basis is adjusted down by depreciation and up by capital improvements.

Binder
A report issued by a title insurance company setting forth the condition of title and setting forth conditions that, if satisfied, will cause a policy of title insurance to be issued. Also known as a "title commitment."

Buyer's Agent
A real estate broker or agent who represents the the buyer's interests, although typically his fee is a split of the listing broker's commission. Also known as the "selling agent."

Capital Gain
Profit from the sale of a "capital" asset, such as real property. A long-term capital gain is a gain derived from property held more than 12 months. Long-term gains can be taxed at lower rates than short-term gains.

Chain of Title
The chronological order of conveyance of a parcel of land from the original owner to the present owner.

Closing
The passing of a deed or mortgage, signifying the end of a sale or mortgage of real property. Also known in some areas as "passing papers" or "closing of escrow."

Cloud on Title
An uncertainty, doubt, or claim against the rights of the owner of a property, such as a recorded purchase contract or option.

Commitment
A written promise to make or insure a loan for a specified amount and on specified items. Also used in the context of title insurance ("title commitment").

Community Property
In community property states (CA, LA, TX, WI, ID, AZ, NV, NM, WA), all property of husband and wife acquired after the marriage is presumed to belong to both, regardless of how it is titled.

Comparables
Properties used as comparisons to determine the value of a specified property.

Condominium
A structure of two or more units, the interior space of which are individually owned. The common areas are owned as tenants in common by the condominium owners, and ownership is restricted by an association.

Contingency
The dependence upon a stated event which must occur before a contract is binding. Used both in the context of a loan and a contract of sale.

Contract of Sale
A bilateral (two-way) agreement wherein the seller agrees to sell and buyer agrees to buy a certain parcel of land, usually with improvements. Also used in reference to an Installment Land Contract (see below).

Contract for Deed
See "Installment Land Contract."

Closing Cost
Expenses incurred in the closing of a real estate or mortgage transaction. Most fees are associated with the buyer or borrower's loan.

Conventional Mortgage
A loan neither insured by the FHA, nor guaranteed by the VA.

Cooperative Apartment
A cooperative is a corporation which holds title to the land and building. Each coop owner has shares of stock in the corporation, which corresponds to an equivalent proprietary lease of his apartment space. Coops were popular in New York City at one time, but are now less common because of their lack of marketability due to high association fees.

Deficiency
The difference between the amount owed to a note holder and the proceeds received from a foreclosure sale. The lender may, in some states, obtain a "deficiency judgment" against the borrower for the difference.

Depreciation
Decrease in value to real property improvements caused by deterioration or obsolescence.

Documentary Tax Stamps
Stamps, affixed to a deed, showing the amount of transfer tax. Some states simply charge the transfer tax without affixing stamps. Also known as "doc stamps."

Double Closing
A closing wherein a property is bought and sold simultaneously. Also called "double escrow" and "flipping."

Due on Sale Clause
A provision in a mortgage or deed of trust that gives the lender the option to require payment in full of the indebtedness upon transfer of title to the property (or any interest therein).

Easement
An interest that one has in the land of another. May be created by grant, reservation, agreement, prescription, or necessary implication.

Eminent Domain
A constitutional right for a governmental authority to acquire private property for public use by condemnation, and the payment of just compensation.

Encroachment
Construction or imposition of a structure onto the property of another.

Encumbrance
A claim, lien, or charge against real property.

Equity
The difference between the market value of the property and the homeowners mortgage debt.

Equitable Title
The interest of the purchase under an installment land contract (see below).

Escrow
Delivery of a deed by a grantor to a third party for delivery to the grantee upon the happening of a contingent event.

Escrow Payment
That portion of a borrower´s monthly payment held in trust by the lender to pay for taxes, mortgage insurance, hazard insurance, lease payments, and other items as they become due. Also know as "impounds."

Estate
From the English feudal system, this defines the extent of one's ownership in a property.

Estate for Years
An estate limited to a term of years. An estate for years is commonly called a "lease." Upon the expiration of the estate for years, the property reverts back to the former owner.

Fee Simple
The highest form of ownership. An estate under which the owner is entitled to unrestricted powers to dispose of the property, and which can be left by will or inherited. Also known as "Fee" or "Fee Simple Absolute."

Federal Housing Administration (FHA)
A federal agency which insures first mortgages, enabling lenders to loan a very high percentage of the sale price.

Freddie Mac (FHLMC)
Federal Home Loan Mortgage Corporation--A federal agency purchasing first mortgages, both conventional and federally insured, from members of the Federal Reserve System, and the Federal Home Loan Bank System.

Foreclosure
A proceeding to extinguish all rights, title, and interest of the owner(s) of property in order to sell the property to satisfy a lien against it. About half of the states use a "mortgage foreclosure," which is a lawsuit in court. About half use a "power of sale" proceeding which is dictated by a deed of trust and is usually less time consuming.

Ginnie Mac (GNMA)
Government National Mortgage Association--A federal association working with FHA which offers special assistance in obtaining mortgages and purchases mortgages in a secondary capacity.

Good Faith Estimate
A lender's estimate of closing costs and monthly payment required by R.E.S.P.A.

Grant Deed
A deed commonly used in California to convey title. By law, a grant deed gives certain warranties of title.

Grantor/Grantee Index
The most common document recording indexing system is by grantor (the person conveying an interest, usually the seller or mortgagor) and grantee (the person receiving an interest, usually the buyer or mortgagee). All documents conveying property or an interest therein (deed, mortgage, lease, easement, etc.) are recorded by the grantor's last name in the grantor index. The same transaction is cross-indexed by the grantee's last name in the grantee index.

Heirs and Assigns
Words usually found in a contract or deed that indicate the obligations assumed, or interest granted, or binding upon, or insure to benefit of the heirs or assigns of the party.

Homeowner's Association
An association of people who own homes in a given area for the purpose of improving or maintaining the quality of the area. Also used in the context of a condominium association.

Impound Account
Account held by a lender for payment of taxes, insurance, or other payments. Also known as an "escrow" account.

Index
The measure of interest rate changes that the lender uses to decide how the interest rate on an ARM (adjustable rate mortgage) will change over time.

Installment Land Contract
The ILC is an agreement wherein the buyer makes payments in a manner similar to a mortgage. The buyer has "equitable title." However, the seller holds legal title to the property until the contract is paid off. The buyer has equitable title, and, for all intents and purposes, is the owner of the property. Also known as a "contract for deed" or "contract of sale."

Installment Sale
A sale which is involves the seller receiving payments over time. The Internal Revenue Code contains specific definitions and promulgates specific rules concerning installment sales and tax treatment of them. Also known as an "owner carry" sale.

Insured Mortgage
A mortgage insured against loss to the mortgagee in the event of default and failure of the mortgaged property to satisfy the balance owing plus costs of foreclosure.

Interest Rate
The percentage of an amount of money which is paid for its use for a specified time.

Joint and Several Liability
A liability which allows a creditor to collect against any one of the debtors for the entire amount of the debt, regardless of fault or culpability. Most mortgage notes that are signed by husband and wife create joint and several liability.

Joint Tenancy
An undivided interest in property, taken by two or more joint tenants. The interests must be equal, accruing under the same conveyance, and beginning at the same time. Upon death of a joint tenant the interest passes to the surviving joint tenants, rather than to the heirs of the deceased.

Judgment
The decision of a court of law. Money judgments, when recorded, become a lien on real property of the defendant.

Land Lease
Owners of property will sometimes give long-term leases of land up to 99 years. A lease of more than 99 years is considered a transfer of fee simple. Land leases are commonly used to build banks, car lots, and shopping malls upon.

Land Trust
A revocable, living trust primarily used to hold title to real estate for privacy and anonymity. Also known as an "Illinois Land Trust" or "Nominee Trust." The land trustee is a nominal title holder with the beneficiaries having the exclusive right to direct and control the actions of the trustee.

Lease Option
An agreement by which the lessee (tenant) has the unilateral option to purchase the leased premises from the lessor (landlord). Some lease option agreements provide for a portion of the rent to be applied towards the purchase price. The price may be fixed at the beginning of the agreement or be determined by another formula, such as an appraisal at a later time. Also referred to as a "lease purchase."

Lease Purchase
Often used interchangeably with the expression "lease option," but technically means a lease in conjunction with a bilateral purchase agreement. Often used by agents to mean a purchase agreement whereby the tenant takes possession prior to close of escrow.

Lien
An encumbrance against property for money, either voluntary (mortgage), involuntary (judgment), or by operation of law (property tax lien).

Life Estate
An estate in real property for the life of a living person. The estate then reverts back to the grantor or to a third party.

Lis Pendens
A legal notice recorded to show pending litigation relating to real property and giving notice that anyone acquiring an interest in said property subsequent to the date of the notice may be bound by the outcome of the litigation. Often filed prior to a mortgage foreclosure proceeding.

License
An authority to do a particular act or series of acts upon the land of another without possessing any estate or interest therein (for example, a ski lift ticket). A license is similar to an easement in that it gives someone permission to go across your property for a specific purpose. An easement is a property interest, whereas a license is a contractual right.

Liquidated Damages
A contract clause which limits a party to a sum certain in lieu of actual damages. In the case of a real estate purchase and sale contract, the seller's legal remedy is limited to the buyer's earnest money deposit.

Loan-to-Value Ratio
The ratio of the mortgage loan amount to the property's appraised value or the selling price--whichever is less.

Market Analysis
A report estimating the resale value of a property. Usually prepared by an agent showing comparable sales of properties in the vicinity based on tax records and information from the Multiple Listing Service.

Marketable Title
Title which can be readily marketed to a reasonably prudent purchaser aware of the facts and their legal meaning concerning liens and encumbrances.

Mechanic's Lien
A lien created by state law for the purpose of securing priority of payment for the price of value of work performed and materials furnished in construction of repair of improvements to land that is attached to the land as well as the improvements.

Mortgage Broker
One who, for a fee, brings together a borrower and lender and handles the necessary applications for the borrower to obtain a loan against real property by giving a mortgage or deed of trust as security.

Mortgage Guaranty Insurance Corporation (MGIC)
A private corporation that, for a fee, insures mortgage loans similar to FHA and VA insurance, although not insuring as great a percentage of the loan.

Mortgage
A security instrument given by a borrower to secure performance of payment under a note. The document is recorded in county land records, creating a lien (encumbrance) on the property. Also known as a "deed of trust" in some state. The borrower is also called a "mortgagor."

Mortgage Insurance
Insurance required for loans with a loan-to-value ratio above 80%. Also called "PMI" or "MIP."

Note
A written promise to repay a certain sum of money on specified terms. Also known as a "promissory note."

Option
The unilateral right to do something. For example, the right to renew a lease or purchase a property. The optionee is the holder of the option. The optionor is the grantor of the option. The optionor is bound by the option, but the optionee is not.

Origination Fee
A fee or charge for work involved in the evaluation, preparation, and submission of a proposed mortgage loan, usually about 1% of the loan amount.

Performance Mortgage
A mortgage or deed of trust given to secure performance of an obligation other than a promissory note

Periodic Tenancy
An estate from week-to-week, month-to-month, etc. In the absence of a written agreement (or upon the expiration of a lease once payments are accepted), a periodic tenancy is created. Either party can terminate this type of arrangement by giving notice, usually equal to the amount of the period or as prescribed by state law.

Points
Fee paid by a borrower to obtain a loan. A point is one percent of the principal amount of the loan. The borrower may usually pay more points to reduce the interest rate of the loan.

Prorate
To divide in proportionate shares. Used in the context of a closing, at which such as property taxes, interest, rents, and other items are adjusted in favor of the seller, buyer, or lender.

Purchase Money Mortgage
A loan obtained in conjunction with the purchase of real estate.

Quiet Title Proceeding
A court action to establish or clear up uncertainty as to ownership to real property. Often required if a lien or cloud appears on title that cannot be resolved.

Quit Claim Deed
A deed by which the grantor gives up any claim he may have in the property. Often used to clear up a cloud on title.

Real Estate
Land, anything permanently affixed to the land, and those things attached to the buildings.

Recording
The act of publicly filing documents, such as deeds or mortgages

Recourse Note
A note under which the holder can look to the borrower personally for payment.

Redemption
The right, in some states, for an owner or lien holder to satisfy the indebtedness due on a mortgage in foreclosure after sale.

Refinancing
The repayment of a loan from the proceeds of a new loan using the same property as collateral.

Reissue Rate
A discounted charge for a title insurance policy if a previous policy on the same property was issued within a specified period (usually three to five years).

Release
An instrument releasing a lien or or encumbrance (for example, a mortgage) from a property.

RESPA
Real Estate Settlement Procedures Act--A federal law requiring disclosure of certain costs in the sale of residential property that is to be financed by a federally insured lender. It also requires that the lender provide a "good faith estimate" of closing costs prior to closing of the loan.

Second Mortgage
A loan secured by a mortgage or trust deed in which the lien is junior to a first mortgage or deed of trust.

Secondary Mortgage Market
The buying and selling of first mortgages and deeds of trust deeds by banks, insurance companies, government agencies, and other mortgagees.

Security Instrument
A document under which collateral is pledged (e.g. mortgage)

Settlement Statement
A statement prepared by a closing agent (usually a title or escrow company) giving a complete breakdown of costs and charges involved in a real estate transaction. Required by RESPA on a form HUD-1.

Specific Performance
An action to compel the performance of a contract.

Sublet
To let part of one's estate in a lease. A subtenant is not in privity of contract with the landlord, and neither can look to each each for performance of a lease agreement.

Subject to
When transferring title to a property encumbered by a mortgage lien without paying off the debt or assuming the note, the buyer is taking title "subject to the existing financing."

Subordination
The process by which a lien holder agrees to permit his lien to become junior or "subordinate" to another lien.

Tenancy in Common
With tenancy in common, each owner (called a "tenant") has an undivided interest in the possession of the property. Each tenant´s interest is salable and transferable. Each tenant can convey his interest by deed, mortgage, or by a will. Joint ownership is presumed tenants in common if nothing further is stated on the deed.

Tenancy by the Entirety
A form of ownership recognized in some states by which husband and wife each owns the entire property. As with joint tenancy, in event of death of one, the survivor owns the property without probate. In some states, tenancy by entirety protects the property from obligations of one spouse.

Title
Title is the evidence of ownership. In essence, title is more important than ownership because having proper title is proof of ownership. If you have a problem with your title, you will have trouble proving your ownership, and thus selling or mortgaging your property.

Title Insurance
An insurance policy that protects the insured (purchaser and/or lender) against loss arising from defects in title. A policy protecting the lender is called a "Loan Policy," whereas a policy protecting the purchaser is called an "Owner's Policy." Virtually all transactions involving a loan require title insurance.

Truth in Lending
Federal law requiring, among other things, a disclosure of interest rates charges and other information about a loan.

Warranty Deed
A deed under which the seller makes a guarantee or warranty that title is marketable and will defend all claims against it.

Wraparound Mortgage
A mortgage that is subordinate to and incorporates the terms of an underlying mortgage. The mortgagor (borrower) makes payments to the mortgagee (lender) who then makes payments on an underlying mortgage. Also referred to as an "all inclusive deed of trust" in some states.

Yield Spread Premium
A "kickback" from the lender to the mortgage broker for the additional profit made from marking up the interest rate on a loan.

As a general contractor turned investor, it has been my goal to teach people as many ways as possible to get the highest quality work and results for the lowest possible price. Bringing up the value of an investment property and creating equity are two major factors in building wealth.

More profit is lost in the fix-up cost of real estate than any other aspect of investing. Therefore making a property look its best without losing your shirt is essential to the rehab business.

One of the most common things I have run across is kitchens and bathrooms with those old, stained cabinets. To give the house an inexpensive facelift, I use the following materials and techniques to renew the cabinets to a fresh, new, updated look.

You may use these same techniques to do stained trim work, stained doors, windows, and paneling. I prefer white semi-gloss look for updating older homes, and the new look can be done for under $100.

Step 1: Clean

First remove all the doorknobs or handles to the cabinets and drawers. Get a good sponge or cheesecloth and use white vinegar or distilled vinegar full strength to clean all surfaces. This step eliminates oil from cooking over the years and removes any greasy buildup on the surface.

Step 2: Sand

Get a sanding sponge and use some 200-grit sandpaper to lightly go over all surfaces. You are not trying to remove the stain color; you are just taking the gloss off of the stained area. Take a damp cloth or sponge to remove any dust from your project.

Step 3: Prime

Use an oil based primer such as KILZ or BIN brand and give all surfaces to be painted a good seal coat. This seals in any oils that will in time secrete through paints if not primed right. After your primer dries, use 100% acrylic latex paint on all cabinets and drawers.

I want to stress that I suggest good quality paint, brushes, and materials. You have not saved money or time if you have to do a project twice. With my quality brush and roller nap (3/8-inch nap), I will cut in the brushed areas and roll the other areas like normal painting.

Here´s a great tip: I use Sherwin Williams Pro Classic latex semi-gloss as my finish coat. No matter how it is applied, brush, roller, or spray, it is a self-leveling paint. What that means is that as it dries, it flattens out smooth like an oil-based paint and leaves a smooth look with no brush marks.

My color choice is always white. Clean white cabinets in kitchens and bathrooms make them look brand new and make the area look larger. Since it´s latex, all my clean up is with simple soap and water.

Here´s another tip: If your ever have to prime a surface or wall before painting and you're changing the color, have your primer tinted half-strength of the color your finish coat will be tinted. This eliminates an extra coat of paint trying to cover the white primer.

Last, replace all knobs and handles with fresh new hardware for great results and saving hundreds over replacing old cabinets.