What Is A Good Free Cash Flow Per Share Ratio Outrageously Low Real Estate Offers Are Now Getting A Second Look From Sellers and Lenders

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Outrageously Low Real Estate Offers Are Now Getting A Second Look From Sellers and Lenders

Foreclosures in the country have exceeded more than a million homes. Couple that with people just trying to sell their home for whatever reason and there is a glut of homes in many markets. Although this level is high, it is within many historical changes in the past. The point of this discussion is to point out the incredible buyer’s market that exists in many parts of the country.

Arbitrage in financial markets exploits price differences between more than one market. Money is made by exploiting the differences. In real estate, with the benefit of trained certified property managers and the like, there is potential to invest in areas that are depressed and have good future value. As an examination of the company’s finances so that the same type of game can be matched to investment situations across the country. In trade deals, returns in the range of 25% plus over, say, a two-year period have to be considered even if we consider the increase in these places outside of our own backyard. Finding yard work would be best, however, failing that one must look elsewhere. In the example of buying a rental property in a tourist area that has plenty of inventory and has many foreclosures forcing prices down, some investment may be possible. If the rental property is listed at $300,000.00 and has an existing mortgage of $280,000.00 with a pending foreclosure pressing the owner, this could be a deal worth noting. Owners with ARM mortgages have accelerated payments and/or other pressures imposed on owners who find themselves in a bind. Many of these rental apartments with on-site rental offices generate decent cash flow. In some beachfront properties, gross rents will approach more than $30,000 per year. When trying to negotiate with a foreclosure lender, it’s best to have your own financing or cash on the table. That lender will not reduce the price (mortgage) if they are required to keep the mortgage. In this example, the proposed “Short Sale” would be examined as a possible action. In this case, the owner gets nothing. The owner can save a foreclosure nick on their loan, but that’s about it. On the other hand, the lender will receive an offer in the $240,000 range IF the return is calculated. The lender takes more than $40,000 in agreement with additional costs for legal fees, past payments, late fees, etc. with a “short” settlement. This is a big hit for the lender. However, real estate owner-occupiers (REOs) must be liquidated. If the lender foreclosed on the home and stayed on the home for another six months and got hit again at the time of sale, the proposed $40,000 plus hit starts to look pretty good.

The investor must determine the market situation in a year or two. The economy still has strength, employment is strong, so the question is what will happen next on the market. If that analysis is positive, then we would continue on that path. An external force on these residential real estate investors on the coast will come into play like when the dollar falls against the euro or the pound. Those buyers entering the market with stronger currencies will see these situations as strong buying opportunities and prices could rise again. The Realtor must offer these buyers immediately. Plus, with stronger currencies abroad, vacationing in these waterfront condos can seem almost cheap with plenty of security. A few years down the road, rents may increase and the demand for these specific properties that can be rented out when the owners are not using them. Of course, there’s no guarantee it will play out exactly that way, but it’s an educated analysis based on the facts currently in hand. When depreciation, interest deductions, and other factors are factored into the equation, maybe $40,000 “short” isn’t enough. It may take a little longer. In any case, investor information should be shared with the lender to support the case for a “short sale” and give some cover to the underwriting professional. The lender will have several BPOs (Broker Price Opinions) of value as well as several AVMs (Automated Value Models) to further determine value. However, if things haven’t moved with say six months of exposure to the market, the lender may be forced to pull the plug.

Much like when the cap on accelerated depreciation was pulled in the 1986 Tax Code, real estate must stand alone. Limited Partnerships and REITs were offered with low (50% LTV) leverage to generate any kind of cash flow. In this case, a highly leveraged mortgage would provide negative cash flow. Therefore, the ROI will be calculated based on a low leverage situation. A return of 25% plus would then be possible. Each box should be turned upside down before bidding. If there have been several price cuts during the listing period with offers to pay all closing costs and the like, this will warrant further investigation. To save a lot of time, the question is phrased like this: “To save both of us a lot of time, I want to buy at a deep discount from a motivated seller or lender who will consider a deep “short sale”. I am very liquid in cash and can close quickly. Are there chances of an agreement on this property?” If not, move on.

This real estate glut won’t be here forever. It took a few years to absorb the savings and loan fiasco and the large write-offs that occurred, but it was absorbed and many made money. The original owner who was in an over-indebted mortgage situation may have initiated the initial foreclosure situation. High leverage kills when the underlying financing is adjustable rate mortgages in a rising interest rate market. Cash flow disappears. Bleeding begins.

It is not a place for the faint of heart. Like arbitrageurs in the financial markets, it takes a strong will, liquid cash and a good sense of the current market and the future market and how it will all play out. The climate for the show is here and now in some targeted areas. Over 1,000,000 foreclosures, plenty of listings, a falling dollar making situational purchases attractive to foreign borrowers is now up for grabs. “Knock Knock.” “Who’s there?” “Deal” “Deal with who?”

“To be or not to do business, that is the question”

Dale Rogers

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