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Hello,

I signed up for MF after being impressed with the quality and intelligence of the postings on the Real Estate board – what sealed the deal for me was a decision chart that Gamemaker suggested and Sailrmac contributed to (see “What do you guys think” thread from earlier this year).

I would be very happy if any members would provide some constructive criticism.

I'm thinking of buying a condo in need of TLC next November/December, renovating it over the slow winter months, and flipping it in the spring/summer. Unfortunately I have no savings so I would need to use my credit cards to come up with the down payment (25%) and finance the rest with an investment mortgage. This would be my first real estate purchase, though I've been helping family members renovate their investment properties for years, and I would do the vast majority of the renovations myself.

I suspect many people would automatically reject the idea of financing a real estate venture with their credit cards. Indeed, I may decide not to go ahead with the plan myself – but only after I've thoroughly investigated the idea and decided for myself that it's a bad idea. What I'm looking for is guidance on HOW to make that decision, i.e., process-oriented suggestions that will give me the tools needed to make a reasoned decision.

For the purposes of this exercise, I am assuming that prices in my area will, at worst, level out and not contract. The following are some of the issues I will need to address.

WORST CASE SCENARIO:
If I default on the loan and the bank forecloses, will the property necessarily be sold below market value? If not, what factors would cause the property to be sold below FMV? If the property will be sold at a discount to FMV, how could I determine the size of the discount? Obviously, this is a vital consideration because I can't determine my WCS without estimating the risk and size of a discount. The discount, in turn, is a major factor in determining how much money I could lose.

Also, does anyone know whether I might be able to move into the unit if things go wrong, and thereby avail myself of the extra legal protections afforded the owner of his principal residence?

As far as the credit card companies go, it seems the worst they could do is start a civil action to recover the debt, but considering their ridiculously low “minimum payment” amounts it seems to me that I could delay this for a very long time (but get killed on the exorbitant interest, I realize).

FINANCING
I would like to create a detailed financial schedule which breaks down all of the costs and revenues of the venture, so I know exactly what I'm getting into. However, I've never done this before so perhaps someone could suggest software that would allow me to crunch the numbers on the two loans (credit card and mortgage) and different scenarios (purchase price, cost of renovations, time between purchase and sale, interest rates, etc).

When applying for an investment mortgage, does the bank only care about demonstrating that you have the required down payment in cash? Do they consider the applicant's income like they do for a personal mortgage?

Since I would need to cash out several of my credit cards to finance the deal, is it possible that one or more might realize that I'm maxing out all of my available credit and refuse to forward me the funds? If so, how might I minimize the risk of this happening?


Any guidance is greatly appreciated.

Thank you,
Nemo
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As far as the credit card companies go, it seems the worst they could do is start a civil action to recover the debt, but considering their ridiculously low “minimum payment” amounts it seems to me that I could delay this for a very long time (but get killed on the exorbitant interest, I realize).

Quite the game you are looking to play, one fraught, IMO, with many dangers. To start with, are you aware that starting IIRC in 1/06 credit card issuers have to make their minimum payment calculations much more stringent? There is quite a bit of debate on this worsening the real estate "bubble" when people looking to continue the cycle of pulling cash out of their homes to pay off their credit cards will find they are no longer able to do so AND stuck with higher payments, causing their need to sell at any price.

Renovating structures is not for the weak of budget. Unless you are talking pure cosmetics, each layer of renovation peeled back tends to magnify the job that needs doing. For instance, when you rip out a wall that needs to go, what are you going to find behind it? Rotting timbers? Knob and tube wiring? Leaking pipes? For this, you want a buffer of cash, not another credit card to whip out.

You have some strong ambitions, not bad in and of itself. Throw a little temperance in there and some day you will be successful. Meanwhile, save up some money and learn your market so that you'll be ready to pounce when you recognize a bargain. Depending on your location, I wouldn't count on the next year or two being wonderful ones to be flipping properties. For the most part, that party has moved on.

IP
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There's a good chance you will be able to buy at dramatically lower prices a year from now:

http://business.bostonherald.com/realestateNews/view.bg?articleid=118181&format=&page=2
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Thank you for your response.

Yes, I definitely appreciate that this is an aggressive, risky proposition. That is why the purpose of my post is to concentrate on the problems, not the virtues.

Anticipated profits would come from the renovation itself, not any increase in market prices. The renovation would be largely cosmetic in nature -- paint, flooring, perhaps new cabinets and plumbing fixtures. Certainly nothing along the lines of new windows, skylights, or upgrading the wiring.

I appreciate that renovation costs can balloon (the best insurance against which being a very thorough inspection). Again, the reno costs would be limited to materials only.

Thanks,
Nemo
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Two years ago this might have been only a very risky plan. Now it sounds very dangerous to me. Assuming you decide to ignore this advice and go ahead anyway, read on.

What you have left out is "where are you living now?"

I have been there & done that with renovations, and one cost you may be overlooking is simply the mortgage (and credit card) payments on the condo.

If you move in yourself while doing the renovations, you can at least eliminate your current cost of housing.

Essentially there is no way for a bank to get FMV on a foreclosure, the rules are stacked against it. I don't follow foreclosures closely, but I have seen a few go for ~50% of FMV here in CA, and that does not seem out of line with reality. The buyer of a foreclosed property usually can not get many of the types of financing available to "normal" buyers. This means they have to come up with a hefty payment, sometimes 100%. Plus, there is always the chance that they may have to defend their title. Sometimes, the bank is desperate enough to sell the house that they will lend on it, but this is a distress sale, not the extreme distress sale done by auction on the courthouse steps.

Depending on your state, you are FAR better off to look for a "no down" mortgage than to tap your credit cards. The reason is that many states have what are called "no recourse" mortgages. The bottom line in these states is: if you buy a home for use as your own residence, and there is a foreclosure, the lender can not come after you for any deficiency between the selling price of the home and the amount of the loan. (I suspect this hoses your credit for 7 years, but you knew that anyway.) This is a second reason to move in to the unit.

As you will readily see, in a no recourse state you will be off the hook entirely if disaster strikes and you have a 100% loan. If you have used your credit cards, you will still owe the credit card balance.

A third reason to move in is that the commute to do the renovations is very short if you are living there.

I seriously doubt your plan will work because taking a substantial cash advance on one credit card will raise red flags which may very well cause your other cards to shut off cash advances.

A much better, although still unsafe, plan would be to save up enough to get into the condo on your own, move in, and then use the credit cards to pay for materials for renovations. Keep records of every nickel you spend on renovations, because when you sell the IRS will claim that the increase in price is all profit and is taxable @ short term rates.

As I said, I have been there and done that with self-renovation of older houses. A far better plan than flipping the property in a short time is to move in, renovate, take money out through a refinance (non-taxable event) and put the money back to work in another property. If you do this right, both the initial purchase and the re-fi can be at owner-occupied rates, and at a minimum, you can increase your holding period to get into the long-term capital gain brackets.

I suspect we are entering a period of much lower real estate appreciation rates, and another cost you may not realize is the transaction cost of selling a home. Real estate commission, costs of moving out, cleaning, new carpet, etc. If you have just done renovations, count on 8% of appraised value, if you are selling even a year after finishing renovations, think 10%.

I personally would start saving, keep my powder dry, and think about doing a much more financially sound deal in ~ 5 years.

In the mean time, I would talk to the relatives you have been helping with renovations about a quick course on financing. The concept of a newby getting an "investment mortgage" is not a good one. DW and I work with one mortgage broker for most of our loans, and one of the things which gets us good rates is the fact that we have a track record of buying and managing rental properties, which he can point to. I doubt you could get financing to buy and flip a property without some history of success. You MIGHT get financing for a "buy a rental and hold" strategy. Easier still would be to get financing for an owner-occupied unit.




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Flipping is yesterday's news. It is a dangerous game right now. I was also planning to do the same down here in Atlanta, but after much investigating, decided against it. The rists are much too high, even though Atlanta is not in a "bubble" like some other parts of the country. People who are trying to flip here right now are already getting burnt. They are dropping their prices 10% or more because there are too many flippers in every building.

Stay away! You should be able to buy the same condo at a better price when all the flippers have moved on (maybe 2-3 years from now).
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Did I read that right? Some random guy started a condo flipping MUTUAL FUND?
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