To better understand what a real estate investor is dealing with in his business, I have been reading various books that teach people how to invest in real estate. Most of these tomes seem nothing more than ways for their authors to earn an income than to actually teach, but they do give you outlines of how to best make a profit. Here is an outline of one such plan.
A homeowner is heading towards foreclosure, and he needs to sell his home soon. You as an investor come in to be their guardian angel. Instead of buying the home, you arrange that you will sell the property for them. The homeowner signs several documents which gives you control of the property (not legal ownership, but more like a power of attorney), and then you work with the owner to prepare for the sale. Usually, the investor takes on the current mortgage payments and maybe some repairs. The idea is to get some money to the lender before foreclosure, so the property is not seen as being foreclosed. The investor works towards finding a buyer quickly by offering the property as a great deal. The quicker this task is accomplished, the investor's profits will be better. The main ways an investor makes money is by having the buyer pay more in mortgage costs than he is, so the buyer has a house that will cost less, but higher monthly payments. Subprime borrowers go for this idea. Immediately the investor will make money by having a closing cost that covers his expenses with some extra money for his profit. There are other variations, but this is the general idea. The story ends happily for all. The homeowner and the lender do not go through foreclosure, and the homeowner has relief from the mortgage payment. The buyer has a home which may cost much less than market value in that neighborhood. Finally the investor makes money. Capitalism seen at its best.
The reality is that the investor will want a property with no liens against it. A lien is a way for someone you owe money to collect, when you sell an asset, like a house. Someone who is facing foreclosure will most surely have great debts, which has caused their lenders place a lien on that house. The way that the scheme works, the investor is acting as a middle man, and the seller has not sold the house, but they are having someone else take over their mortgage. The liens stay with the house, so the new buyer will be responsible for that debt. In most cases, the seller may not know of the lien. The investor may discover the lien, but it would not be to his benefit to reveal it, since this could cause the sale to be lost. Many investor may feel that the picture in the scheme above that they are the ones helping every one is true, but they are just out to find fast money by any means.
A new Texas law going into effect with the new year, 2008, will put an end to this practice. The law is HB2207. Within seven days of a person (the investor) selling a home, they have to inform the buyer of these liens. The buyer has seven days from being informed of the liens to terminate a contract. This would leave the property in the investor's hands. The hope is that investors cannot pass debt to others for their own profit. The law applies to everyone, but it is meant to prevent investors who are only looking for profit, and who are not fitting the image as presented in the scheme. At least one step has been taken in Texas to prevent consumers from being hurt by unscrupulous investors. If you are an investor, consider always having good business practices in dealing with customers. Any firm should have this practice, and an investor still can make good money without the fear of being stuck with debts.
A professional real estate inspector in Texas, who writes about consumer issues for home buyers and about examining your own home. I also have a background in business management/consulting. I live and work in the Houston area.
Frank Schulte-Ladbeck TREC#9073 http://www.fschulte-ladbeck.com
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