All serious real estate investors understand the importance of having a hefty HELOC in their back pocket. At least I think they do or I wouldn’t make that kind of bold statement.

I am in no way intimating having or using a HELOC is the only way to buy property. I’m simply saying it is a very comfortable feeling to have a six figure backdrop you can rely on when that oh so nice property becomes visible on the real estate radar screen.

Unfortunately for me, my hefty HELOC has been reduced to a mere shadow of its former self. It seems my bank decided the value of my home has decreased to the point the equity could no longer support the numbers.

They unilaterally cut it by two-thirds and unfortunately for me, there isn’t a darned thing I can do about it. It seems the original contract gives all the control to the bank and one of those controls is the ability to lower it when they so decide.

I received their letter in the mail earlier this week and its tone was very polite but very harsh. I think you know what I mean without me saying another word.

A Life Raft Full of Passengers…

I would also say I’m not the only one in this boat. You may have had your home equity line of credit downgraded by two-thirds or more as well. The resulting sinking feeling just adds to the frustration, right?

It isn’t the end of the world that is for sure. It only looks like it. Here’s why.

One of the “FAQs” on page 2 of their letter says:

Q. How did you determine the value for my home?
A. We used an automated valuation method commonly used to evaluate the worth of real property. It uses both historical data and projected property values. We believe the valuation of your property is accurate.

On the surface, the answer appears to be vague gibberish. However, I believe their answer is really saying, we think your property is going to continue to slide in value so we limited our risk exposure by downgrading your limit. Taking my thinking one step further, their Q&A is telling me that the so called real estate recovery is farther out then any of us may have imagined/guessed.

I don’t know that for sure. I’m simply reading between the lines of their 2 page letter. I also am factoring in the absolute truth of their ranking in the industry. They always receive the highest marks from their policy holders and investment analysts.

When I encounter a person insured with this company, I never try to move them into another company. They are that good.

Again, I don’t believe I am the only one in this boat. For all I know everyone with a HELOC received the same type of letter from their bank.

By the way, they never bothered to inquire about the balance on my first loan. That also tells me their real message is the market has some stumble still left in it.

Insurance companies shouldn’t be the risk takers in the market…

I won’t fault the bank for lowering my HELOC because they are a subsidiary of the insurance company that insures my cars and my home. I want them to be as solvent as possible with as little risk exposure as possible.

As some of you know, I co-own an insurance agency with my son and AIG is one of the companies we have in our stable. Fortunately for us we only have the life side of their operation.

I say fortunately because if what I’ve read about their risk/leverage exposure is true, they were the highest in the industry. While every other insurance company had a 4 to 1 or 2 to 1 exposure or thereabouts, AIG had an 11 to 1 exposure. This information is directly from The Motley Fool weekly newsletter. The Fool usually doesn’t print bad info so I have to believe their analysis.

I would ask that you please don’t take any of my babblings as me being a cheerleader for the insurance industry as a whole. I see first hand some of the nonsense they can pull on customers so I would never be the insurance industry chamber of commerce (so to speak).

What I am saying is I applaud those companies that actually run a tight a ship as possible in this tumultuous environment. Let’s face facts. All of us have insurance on our cars, homes and investment properties. We want to feel secure that they will actually perform, read pay their claims, should we get hit by an Ike or a Gustav type of event.

Regardless of what kind of financial institution gave you your HELOC be prepared to see it shrink if it hasn’t already. And, if you are like me, and have a HELOC from a bank that is a subsidiary of an insurance company, you may have just been told you have a good insurance company regardless of what I believe is the “hidden” message.

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Tags: heloc, real estate, real estate investing, real-estate-finance

“BOOM!  Here comes the BOOM….ready or not!” - from the song Boom by P.O.D.

Greetings from the Metropolis of Cedar Crest, New Mexico!

With a torn achillies tendon, I hobbled my way into the gym and turned up my Ipod.  The song Boom by P.O.D. (one of the best workout songs there is) came on and I started to tear it up…pain and all.   Pull ups, bench press, back rows……..Arrggh!

I hate working out…but I have a body type that if I do not workout I will ballon.  Bad memories of being called “fat tard” back in the sixth grade start to infiltrate my mind when I move up pant sizes.

Anyway…..

After my workout, I sat on a bench and listened to the song again…..and I started thinking real estate.  “Boom…here comes the Boom…ready or not!” The chorus continued to repeat itself in my mind..and I  thought long and hard about all the articles and books I have read in the past about what is to come in the Real Estate Market.  Unfortunately, the “boom” is not in regards to “good times”…but…bad times for most…and opportunistic times for the smart investor.

One thought that sticks in my mind is what I read in Harry S. Dent’s April 2008 newsletter “….due to the fact that we have three major concurrent bubbles - stocks, real estate, and commodities - all unwinding in a similar time frame within a global economy with very different demographic and bubble trends.  The last time all three major assets cycles peaked was the crash from 1835 to 1843, which led to the depression of the early 1840s”  (there is a lot more to the report….but this caught my eye and my simple mind).  Interesting huh?

“Obviously things are not going well.” - Captain Obvious

So….assuming things are going to get worse (which they are) and assuming real estate values you are going to plummet (which they are).  Also assume that gas prices go up (which they will) and the population starts to hoard it’s money (economics 101). One more thing….assume we are heading into what most experts agree…deflation.  Now the questions are….what is a real estate investor to do?  Is it too late?

What do the experts say?

Well… here are three schools of thought (there are hundreds more…but who would read all that?) that come from a range of so called experts (Harry S. Dent, Robert Kiyosaki, Nouriel Roubini,  Robert Prechter, and  John Williams) and they all have to do with the philosophy that “cash is king” (This is how I interpreted the information and by no means should you think that I interpreted the information correctly…do your own research please):

1. Raise as much cash as possible via LOC (lines of credit…if you can get one), HELOC (Home Equity Line of Credit…if you can get one)…then hold on.  Be a scavenger and cherry pick deals as they come up.  My feeling is you will not see the “cherries” until early next year.  Remember…when the market hits bottom…here is where you will make your money….on the purchase…and you will be ready if you have cash.
2. Sell everything….and hold on to your cash.  Same as number one…but with the thought that if you sell now, most experts believe you can buy it back at 40 - 50 cents on the dollar in the future.  Holy cow!
3. Sell your non-cash flowing properties (i.e. land) and under performing assets now (if you have a buyer).  Also sell your A and B properties.  Hold on to properties that serve lower income populations.  The thought process here is that class “C” apartments, mobile home parks, and retail shopping centers (retail that caters to lower income populations) will provide nice cash flow and probably over perform (if you purchased right) in the coming years.

Smart investors make their money in good markets and in bad ones……which one will you be?  Only time will tell.

OH…..I would love to hear what you are doing to prepare.  If you are not…I want to hear from you anyway..so please comment….

Until next time…..rob

Tags: cash, cashflow cash flow, depression, Economy, finance, Harry S. Dent, heloc, investor, real estate, Real Estate Investing, recession

Watch out. The home mortgage crisis may be about to belt you in the face and you may not even be aware the blow is coming.

A truly frightening article in the New York Times about the “shrinking lines of credit” and what it may mean for homeowners–and we are not talking about homeowners facing foreclosure,either.

What we are talking about are home equity lines of credit, often used to finance a whole range of things from vacations, to medical care, to new furnishings.

Simply put, such lines of credit are being abruptly taken away or greatly reduced, says the article.

Washington Mutual and others drop the ax

The troubled Washington Mutual, according to the article, has reduced or suspended “about $6 billion of available credit under existing home equity lines.” Other lenders are doing the same.

A main reason for having your credit line reduced or even suspended is a decrease in the value of your home.

“We will increase, decrease or suspend lines based on a number of factors, including a customer’s entire relationship with WaMu, their payment status and history, changes to their creditworthiness, and changes in the value of their property…We believe this is part of being a responsible lender,” says WaMu spokeswoman Sara Gaugl, as quoted by the Times.

A big problem is that most lending institutions apparently do not make public the guidlines they use to make their cutting decisions, so it may not be so easy to find out if you are about to have your own credit line severed.

The 20 percent solution?

According to the Times, as long as borrowers have in excess of 20 percent equity in their homes, they should qualify for credit. That benchmark sort of went away when real estate prices were skyrocketing, but now it is back in a big way!

And, there is one more thing to worry about—sorry.

According to the article, if you had, say, a $25,000 credit line, and you have already used $10,000 of it—-if the lender reduces your credit limit, credit reporting agencies are likely to lower your all important credit score making the argument that now you are over-stretched.

Heads you loose; tails you loose.

credit repair leads

Tags: Credit, default, heloc, lender, lines of credit, mortgage

You’ve been hunting for that perfect rehab deal like a Neanderthal stalking a mighty Mastodon. You’re sure you’ve found it. The after repair value and renovation costs will allow for a hefty profit. You should even be able to set a price that will result in a quick sale when the rehab is complete. There is only one teensy-weenie thing left to do – find the money to make the purchase of the property.

Back in the ancient, olden times (early 2007) it was fairly easy. You would seek out a hard-money rehab lender. Sure, the terms were steep, but the financing cost was built into the equation. As long as the numbers penciled out you could get funded. It was even pretty common to include the cost of purchase and repairs and have the interest financed right into the deal. If you did it right you didn’t need much, if any, of your own money.

Things Ain’t What They Used To Be

Here we are a short time later and the easy money is gone. Rehab loans can still be had, but things sure are different. A novice rehabber has little hope of obtaining financing at all. The experienced rehabber is facing a lending environment that has changed dramatically. No money down? Forget it. All costs rolled in? Fat chance. All repair costs included? In your dreams. These days the lenders want you to have significant skin in the game.

It’s hard to blame the lenders. They have been burned so often in the recent past that they had to change the rules. While it is easy to say that they had no one to blame but themselves, you can’t fault them for adjusting to the realities of a changing market. The rehabber has to adjust as well, unless he is going to pack up his tent and go home until things change.

What’s a Rehabber To Do?

It’s more important than ever to seek creative ways to fund a deal. If you have equity in your own home, try using a Home Equity Line of Credit, or HELOC. Lately many banks have been reducing the credit limits on existing HELOCs, so be careful there. The advantage of HELOCs are that you are a cash buyer, you can use the money as needed for the deal and repairs, and when you pay it back it is there to use again.

Can’t use a HELOC? Look for owners who are willing to hold a short-term note while you complete the rehab. A friend of mine made an offer on a house with no money down, the owner holding a note for two years and payments deferred for six months while he completed the rehab. The seller accepted the terms without a fight. It can be done.

Learn about “subject to” deals where the existing financing remains in place. This allows you to buy a property without have to obtain financing. If the seller still has equity in the property, ask him to defer taking his share until you complete the rehab and sell the property. When people are in desperate need of selling a property, they will agree to all sorts of crazy terms. Try it, you’ll like it.

Creativity Is Key

The point is to look for alternative ways of making deals happen. Instead of thinking, “it can’t be done”, ask yourself, “how can I do it?” In a nutshell, think outside the box. These are challenging times. Those who rise to the challenge will succeed.

Tags: creative finacing, financing, hard money, heloc, home, lender, property, real estate, real estate investing, rehab, Rehabbing