Using Your 401K to Invest in Real Estate?

Would you empty your 401k to buy real estate in hopes of a better return on your money? Depending on the amount you have saved, your current rate of return, and your appetite for adventure (aka becoming a landlord) this could be a viable option.  Initially most people would cringe at taking 'secure' money and using it to purchase 'volatile' real estate in the Atlanta market, with an election year upcoming.  However, if you do your homework, you may wonder, "Why didn't I do this LAST year?"

A conversation I had last week with a savvy investor & his contractor peaked my interest as they discussed bidding on an auction property in Dallas. He's pulled out $45K to purchase two homes totalling $50K. The first home was $23,000 and is already rented at $1200/mo. and he's in the process of purchasing the second. He has enough to cover the tax implications at years end.  He explained how his gains were 36-40% higher than what he was currently getting through the investments in his 401k.  The basic math on the first property is that outside of what was spent to get the home rent ready, at $1,200/mo barring no major repairs, he stands to have repaid his 401K in under 22 months. So after the break even, he's looking at a 'free & clear' positive cash flow property after repaying himself the initial investment. But with the prices of some homes that I've sold in the last 36 months (the cheapest $8,900), I know that these numbers are not only realistic, but can be even better!

Right now there are 178 homes listed for sale under $15,000 in Gwinnett, Cobb, Fulton, Dekalb, Clayton, Henry, Douglas combined. These are all metro area counties within a 40 minute or less drive to Atlanta.  Even with $850 in monthly rent you can pay off one of these properties in 18 months.  Now before you empty your nest egg, there is a LOT of homework you need to do regarding your 401k plan. Talk to your 401k administrator to find out what types of investments are permitted in the plan. If your plan allows you to buy real estate, examine whether it would be easier to buy the property outside of your 401k. The IRS imposes numerous restrictions on real estate purchases in a retirement account. Most 401k plans allow loans, which you can use for any purpose. The IRS limits 401k plan loans to the lesser of 50 percent of your account value or $50,000. After the 401k homework you'll need to create a strategy to pursue properties in a certain area, within your price point, and condition requirements--don't want to put $20,000 into a $20,000 house! You'll also need to prepare to be aggressive as the competition on $30,000 & under properties is fierce as you would expect, but someone has to win the bid.  With the right price, the right terms, some timing, and a little luck, that someone could be you!

Three Ways to Lower Your Mortgage in 2012

First off, if you just purchased your home, you can file homestead exemption with your county. All counties now have the same deadline of April 1, 2012 to file for this.  Since the home you purchased is your primary residence your are eligible for a discount on your property taxes. Even if you you already have a home check your drivers license. If you're over 62 (especially over 65) there are NUMEROUS discounts that you could be eligible for! If you're not eligible yet, I'm sure someone you know is so inform them.

Second, you can dispute your current tax assessed value with your county. If you haven't been mailed a new tax value in the last year or so, this is crucial since it's likely that your tax assessed value is not reflecting your home's current market value! In some cases, the local municipalities have raised the millage rate (Millage is the tax rate used to calculate your ad valorem taxes) to offset the slew of homeowners successfully lowering their tax assessed value by tens of thousands of dollars.


Third, contact your mortgage company and see if they collected more for property taxes than they paid out with the mortgage payments you made. Most mortgage payments have escrows which divide your tax/insurance bills over 12 months and pay them annually so you don't have to come up with a chunk of money when the bill is due.  The problem is that if your insurance premium or tax bill goes down, your mortgage payment remains the same and now there is extra money being collected! When you contact your mortgage company and discover an overage, they'll give you an option to mail you the difference or apply to the next year's taxes--I'll let you decide what to do with that. This will also in turn lower your overall mortgage payment since the previous year's payment is based on collecting more in escrows.


Notice I did not recommend a loan modification. That is a new blog all by itself! Loan modifications have become THE most frustrating and sometimes demeaning processes next to doing a short sale on your own. Don't attempt a loan modification on your own use a third-party housing counselor (NACA is my favorite). Only used HUD approved housing counselors and NEVER pay anyone to do a loan modification for you.

Do a Short Sale or Apply For a Loan Modification?

A short sale is when your lender allows you to sell your property for the current market value (or a price agreeable to all parties) that is less than your current mortgage balance. The difference is usually split between the lender and borrower (percentages vary) via a 1099, promissory note, or with cash contribution from the borrower. A short sale is only a viable option if you are looking to move out of the property. But what if you want to stay but you cannot afford the current mortgage? That's when the dreaded loan modification is your only hope.
Loan modifications--a new way to elevate your blood pressure. More than half of the clients who hire me to assist them with facilitating a short sale have tried to modify their loan with their current lender--often to no avail. They borrower is forced to provide tons of paperwork, wait for months on end only to get declined or they receive an unreasonable proposal. The proposals given to consumers from their lenders range from a small reduction in payment to an increase in the payment!!! The truth is banks do not make it easy to do a loan modification and seem to only be interested in meeting federal guidelines of providing clients with a proposal or a decline to meet the requirement that they have to do one or the other, whether it makes sense or not, within a certain time frame. The phone conversations with condescending customer service representatives are enough to make anyone irate. The best option is to use third party companies like NACA to successfully get an affordable payment option. The process is simple, but not a fast one. On average it takes 6-12 months, but in some cases the lender will suspend foreclosure attempts while a borrower is in the loan modification process. I have personally used NACA for a loan modification, represented one of their borrowers in purchase and another in a short sale. There are other outfits that assist with short sales, however, any that require money to begin the process are a SCAM! Use only a HUD approved counseling agency. This way you can be sure the company is legitimate.
Some lenders will require that you contact one prior to allowing you to do a loan modification.

Flopping. The new method of flipping in the housing market

So you've heard about and seen shows about 'flipping' houses. Buying distressed homes at a steep discount below market value, fixing them up, and then re-selling them for a profit. This is common and easy to do in a home market where values are stable and increasing. While it can be good to get rid of properties that are eyesores and make a transitional, 'up-and-coming' area desirable, it opens the door to fraud. Fraudulent appraisals and inflated home values cause over saturation of properties and are followed by a steep decrease in property values (reference the 2008 real estate market) which causes a 'down' market. Since we are currently in a market where values are declining and slightly stable in some affluent areas (Sandy Springs, Johns Creek), the opportunity to flip remains, but if you're not an investor with cash on hand, the competition is stiff and the loan products available are not as favorable as they once were with 15%-20% down payments. You also have most homeowners owing more on their homes than they are worth and some in the process of losing their homes so short sales are all the rage. This has opened up an opportunity for investors to 'flop' properties.

Flopping is when an investor purchases a home from a homeowner through a short sale and then turns around and sells it for a profit. Sounds like an okay deal right? Well in some cases, investors are purchasing the homes and then re-selling them the same or the next day without even doing anything to them and not disclosing this to the seller's lender or the new buyer. That is where you have fraud.

I personally had a transaction on a Snellville home where the short sale was advertised as being investor owned. We submitted an offer, negotiated the price, went under contract, and completed the home inspection. When the title was ran, it showed that the owner of the property was a different person than the seller on our contract. We discovered that this investor (with help from the listing agent) had the home under contract with the bank at a short sale price ($80,000) negotiated with the REAL seller. The agent then marketed the property at $10,000 below market value and got a contract with my buyer at $115,000 ($15,000 below market value). My client's lender would not lend on a property that had not been owned by the seller for at least 91 days. We terminated the contract when we discovered the shady dealings of this agent.

Understand this, flopping cannot happen without a third-party facilitating the process with the seller's lender. In most cases, it is the listing agent who is in collusion with the investor. Even if the agent discloses that the investor is 'flopping' the property, it is an illegal practice because the listing agent's duty should be to sell the property to the investor ONLY. Once the investor purchases the property, they are free to do with it as they please (unless a deed restriction is in place)---even use the same agent to re-sell the property at a profit. The problem is when the agent is mis-representing the sale as being a short sale for a distressed homeowner, when it is really a 'flop' to an investor who usually pays the agent a kickback or percentage of the profit made. Also, no lender would co-operate with a short sale if it is disclosed that the purchaser is intending to immediately re-sell the property for a profit. In this case, the listing real estate agent has to be aware of the investors intent in order to facilitate a short sale like this so it's flat out wrong. Things to look out for are any extra addendums or documents required for you to sign that outline a legal entity (S-corp,trust,llc.) as the seller or a name difference of the name on title and the seller of a contract you have in place. There was a recent article of house flopping on MSN News. The biggest dangers to home buyers are the risks of losing earnest money if their loan cannot progress due to the title issue, the time wasted pursuing a property that would not work in the first place, and being accused as an accessory to real estate fraud if the original seller's lender discovers that all parties involved were aware of the 'flop'. Real estate fraud is a hot topic and sensationalized on the news so I'd rather my 5-minutes of fame on a more positive topic. Thank you.

Strategic Foreclosure

Strategic foreclosure has become a HOT topic as of late. With property tax assessments coming out (forcing homeowners to see the neighborhood values), property values still dropping in some areas (3 years before we see any bottom in my opinion), interest rates under 4.5% (WOW!), and aggressively priced, rehabbed foreclosures looking good (Fannie Mae is setting the trend) it makes a homeowner wonder, "Should I just let my home foreclose instead of dumping payments into a black hole?"

The reality is that some of us (yes I'm in that group too!) may NEVER see our current loan balances match our property values in the next 7-10 years. Those who purchased in 2006-2007 with 100% financing have the extra pain of buying at the peak of the market so they are even more upside down. Once you get over the anger of the values dropping, get through the anguish of thinking of 'wasting' money on a depreciating asset, and get a grip on what you need to do next, you need to figure out what you want to do and what you are able to do. Let's look at some popular options:

1. Allow the home to foreclose and down-size to rental for 5-7 years.
2. File a bankruptcy including the home and purchase another home in 2 years.
3. Buy a new property and let the old property foreclose.

Any route you go, you need to know what it takes to cover yourself from any deficiency judgements from your current lender. Also, if you plan to buy again, to know exactly what you need to do following the foreclosure. I've always felt that you should look at it as a business would look at an asset and take all of the emotions out of play. Here is the best synopsis I found about strategic foreclosure:

"Society has put a stigma on foreclosure. If you foreclose on your house, that means you are a deadbeat loser who won't pay their bills. Society has turned what is in essence a business and financial decision into a black mark against the character of the person themselves. It is important to understand that having a foreclosure is not an indication of your character as a person. Life can happen. Medical bills and emergencies arise. Step back from the emotional aspect and look at the situation from a business perspective. No one wants to foreclose on their house. Sometimes, it is unavoidable." (link to full article)

Want more house for the money? Retail & Real Estate

Outside of school districts, retail is a very close second to what drives property values in metro Atlanta's suburbs. Once you get past that your commute will suck no matter where you live (sad but true), how you much time you spend driving to do errands will become the lesser of two evils.

Alpharetta started the trend when Northpoint mall was created. This mall anchored out parcels and blocks of retail which turned into streets of bustling retail. The housing market around it benefited and still does to this day. It lessens the blow of how GA-400 is the only way in & out of Alpharetta because there isn't much you need to leave the city for outside of a museum or the fox theater. Gwinnett piggy backed on that idea by adding 2 malls (Discover mills & the behemoth Mall of Georgia) to compliment Gwinnett Place mall. Gwinnett took it a step further adding the Gwinnett arena, Braves minor league stadium and the Park of Suwanee which rivals Centennial Olympic Park. This retail growth has brought both counties other big box retailers (best buy, WalMart, home depot, etc.) that add to the surrounding retail.

Douglas & Clayton counties never quite grasped that idea. In the boom of 2000-2004 a lot of new construction went up in these counties. Lower prices & property taxes began to lure potential home buyers as values began to rise in the competing counties. The problem came when the buyers flocked to Clayton, Henry, & Douglas county, they soon discovered a simple Saturday of running errands involved a lot more driving than they were used to. Coupling that with buyers noticing that they were shopping where the moved away from!

With gas not being your wallets best friend right now, it's definitely a factor to consider when thinking about moving to a certain county to get more for your money. You could be giving that money back in gas and patience with every trip to the store!

Tips on finding a good deal---that REALLY work!!!

In a buyer's market, finding a good deal is what every buyer entering the market demands. With a glut of foreclosures entering the market monthly (roughly 11,000 homes monthly), lingering short sales, and stale re-sales, it actually makes it more difficult to find one because you have so many choices. If you are unable to filter through properties you can end up wasting precious time on homes that aren't worth your energy and missing out on real deals. So after reading my last blog on how to spot a good deal, now you just have to know how to FIND one.

NARROW YOUR SEARCH

You need to have a target in mind as broad as a zip code and as specific as a subdivision. This will enable you to keep a sharp eye on new listings as they enter the market. If your search is too broad, you will likely miss out on deals because you're busy looking in other areas. People wonder how a house can be on the market only a few days and already be under contract; that usually happens when buyers have been scouting an area and notice a sign go in the yard and they inquire (and even make offers) immediately. Some agents will post a sign prior to a home being listed on the MLS.

LOOK OFF THE BEATEN PATH

The very popular communities usually have the lowest possibility of finding a 'steal' because EVERYONE is looking there. These sellers know this so they will either have higher entry level prices or under price a home to create a bidding war (yes, even in a buyers market multiple offer situations are all too common). Some surrounding areas with less traffic will usually yield better prices, less competition, and still have the same location benefits/perks.

FIND A GOOD AGENT

Locating a good agent can be the difference in locating and successfully purchasing a phenomenal deal. Some agents specialize in certain neighborhoods, areas, & even school districts so not only do they know all of the current inventory, but they also may have insight to homes entering the market. Even if the agent doesn't specialize in a certain area, with the right amount of internet savvy (imperative for today's market) they can set up custom searches that locate these hot properties the second they enter the market.

Using these tips will definitely land you a good deal in any market. But remember this, with values so depressed now, whatever you purchase is still a good deal in the long term as values will eventually stabilize and increase. Maybe not to the 2007 values, but at least 30% than where we currently stand in this current market.