Seller Financing

Go-zone Get Away!

This isn’t about private lending, but this scam is so dangerous, I felt I had to warn you about it.

I recently heard a webinar about investing in the Gulfport-Biloxi area of Mississippi. The marketing story is that the US Treasury is providing generous tax breaks for investors that buy property down there (true). However, remember that you have to Make Money Before you can Pay Taxes on it! And the truth of the matter is that Biloxi is being sold by desperate speculators and developers to the unwary investors.

Here’s how the scam goes. The developer is offering very attractive terms to purchase the property and build a townhouse. 10% cash down and the rest financed. Once the property is built, it will be managed by a local management co. and all the investor has to do is pick up the check. The only “fly in the ointment” is that these properties cannot be sold for the cost of the build out, and cannot be rented to anything close to the mortgage payment, operation costs and management fee!

For example, I saw a developer claim that a $250,000 townhome could rent at $2050 a month! Really?? I don’t think you’d get that in Florida in it’s heyday–in Mississippi, one of the poorest states in the country–come on! In fact, students tell me that getting even $1000/mo for rent would be a stretch.

And oh yes, even if you were in fairy land and got $2050/mo, your net cashflow would only be $67/mo! Heck, if your home went empty for 2 weeks you’d be in the red for the entire year!

Bottomline: the developer has unloaded his massive debt and the investor is stuck paying a large fee on an empty property until he is forced into foreclosure!

Here’s the hard evidence as shown in the 2 graphs: the first is an inflation adjusted home price index. I shows that home prices have peaked and are starting to fall.

The second-the more telling one plots the home price appreciation index. This graph clearly shows that appreciation rates peaked late in 2006 and have been falling precipitously ever since. In fact, home values are now depreciating.

We also have gotten reports from students who have gotten burned by swallowing the hype and are now stuck with big mortgages and property they can’t rent or sell! This is the classic losing scenario–buy high, sell low.

My advice, stay away from the Gozone - it looks pretty, but it will kill you financially. If you really want to invest in this area, wait about 18-24 months, then pick up these newly built properties which will now be in foreclosure with a short sale from the lenders, and then flip them or rent them out.

biloxi price chart

Posted to Institutional Lending, Marketing in Real Estate, Seller Financing

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“Nothing Down” Can Cost a lot

Years ago Robert Allen introduced the concept of “nothing down”, meaning being able to acquire property without any cash out of your pocket for the purchase. For real estate investors today, these deals take the form of taking over a homeowner’s property “subject to” meaning that you the buyer gets a deed to the house, and only has to pay the former owner’s mortgage to avoid foreclosure. There are also seller financing deals where the seller creates a note which obligates to the buyer to certain payment terms.

Both these strategies can work well…If it’s a good deal. I mean that there is often a fine line between taking over someone’s property, and taking over someone’s problem. Some of the problem’s the unwary investor can encounter are:

1. additional liens that the seller didn’t reveal

2. mortgage arrearages the buyer will have to satisfy

3. repairs and operating expenses. And these repairs can be a lot more than the buyer counted on.

4. back taxes and unpaid utility bills

5. Not being able to rent the unit for enough to create a positive cashflow.

6. no financial “safety net” if things don’t work out as planned (holding the property without a tenant, eviction costs, etc.)

Bottomline - don’t be suckered into getting a “free” house, because it can seriously drain your finances unless you’ve done your homework and have done the math. How do I know this?? This is why I developed my Expert Deal Evaluation Tool. It’s an expert system that will tell you to the penny your projected costs, profit, cashflow, and quantify the risks so that you can always choose the best deal and terms. Click here to get it now.