The buyers are scheduled to do another walkthrough on Thursday and hopefully everything will be to their liking and we can get serious about setting a closing date. Since they’re paying in cash we can blessedly skip underwriting hell, so I’m keeping my fingers crossed for a pretty quick close.

It’s been kind of nice to gear down slightly over the last week or two, with stress levels dropping dramatically and a chance to recover physically a bit after a fairly intense 3-4 weeks there tiling, grouting, and refininshing hardwood floors. My hands are actually clean and grout/paint/stain-free for the first time in, oh, probably a month or two.

As far as future REI scheming, I’ve been mulling that over in my head a lot of late. The short term plan is definitely NOT to run out and buy another house, as I have to get House #1 rented and re-financed, and there are a ton of upgrades I’ve been promising my very patient, very awesome wife to do on our own house.

What I’m unsure about, though, is just how far to go with upgrading our house. I’m considering tackling some pretty substantial projects, such as a complete kitchen upgrade, adding a workshop/guest house in the back, adding a deck, etc., and am currently rolling around the idea of doing all of that and then refinancing our house as well to extract some equity to build up more capital in the war chest to go after REI pursuits.

I can’t get as excited in the past about the prospects of flipping more properties, but some of the foreclosure listings out there are pretty dang attractive right now. There’s too much economic uncertainty floating around for me to feel comfortable tackling another flip like House #2, but I think with the right game plan I could make a go of picking up beat-to-hell foreclosures for cash, rehab them to the point that they’re rentable, rent ‘em, do a cash-out refinance to get my cash out, and rinse, lather, and repeat.

 I looked at a couple of foreclosures the other day and one was listed at $30,000 cash for a 3-2 1400 sq. ft. house on a .3 acre lot. It’s definitely beat to hell but it’s far from a scrape and I could probably get it for $25,000, put $15,000-$20,000 into it, rent it for $700/month, and get a loan to get my cash out, as similar houses in the neighborhood appraise for $80,000-$90,000.

I’m pretty bullish about the long-term prospects of property values in our area 5-10 years from now, and picking up a bunch of rentals at (hopefully) artificially depressed prices could be a very good thing. I’d be giving up any short-term dreams of flipping houses for a living as a full-time job, but that’s increasingly a bit of a pipe dream in the current market that we’re in.

I ran all of that by Contractor #2 and he’s pretty much on board and willing to scope out potential properties with me, so we shall see. The biggest issue is speed, as far as cranking out projects like that, and while I’ve been happy enough with Contractor #2′s work, I’m not completely convinced that he can scale up and hire the folks to knock out a complete remodel job in 3-4 weeks, but he claims he’s run crews of up to 18 guys in the past, cranking out 25+ houses/year, doing exactly the sort of work I’m considering, so we shall see.

That’s obviously getting way ahead of myself, though, as all of the above (selling House #2, renting and refing House #1, and upgrading our own house) has to happen before I’m allowed to even contemplate buying another investment property.

“One of the suggestions Bernanke made was for mortgage and other financial companies to reduce the amount of the loan to provide relief to a struggling owner. “Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure,” Bernanke said.

With low or negative equity in their home, a stressed borrower has less ability — because there is no home equity to tap — and less financial incentive to try to remain in the home, he said.

Bernanke acknowledged this idea might be a tough sell to lenders. Lenders, he said, are reluctant to write down principal. “They said that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again,” Bernanke said.”

Are you kidding me? While I appreciate the linguistic hedge of “relatively more effective” (i.e. slightly better than worthless, wasted efforts…like, uh, you know, not quite worthless?), the rest of that is pure batshit crazy talk. Lenders should write down the principal so that stressed borrowers suddenly have equity then can tap into? Isn’t that more than likely what got them “stressed” in the first place?

I mean, Jebus. That’s your best “relatively more effective” solution? To be fair, yes, I do see your point as far as the benefits of people having some equity in their home, as far as a deterrent to simply walking away. But that’s an incentive to such a tiny slice of borrowers facing foreclosure (and remember that that is a tiny slice of a tiny slice, as the vast majority of mortgage are being paid promptly and on time) that it’s almost ridiculous to mention, especially when you’re asking banks and lenders to just give up and write down the principal.

Yes, indeedy, if the property does go to foreclosure it’d essentially amount to the same thing, as the banks will never recover the full amount of the principal owed, but what bank or lender would agree to that? If you can’t afford the house, you can’t afford the house. Why we continue to delude ourselves by pretending that handing people free money or equity will fix the situation, I do not know.

Which I suppose is your anecdotal evidence that things are rough in the world of real estate all over, even here in central Texas where we’ve avoided a lot of the carnage. In this particular case, though, I think it’s much more an example of why it’s good not to burn bridges, especially in small towns where everyone knows everyone.

I’m too lazy to dig up the actual post, but I was fairly pissed at the last loan we got from this guy, as he pulled a bit of a bait and switch with me. He was very aware of my goals and objectives yet somehow or other when we switched loan products mid-stream he neglected to tell me that the loan we ended up going with carried an absurdly high loan origination fee. When this became apparent at the very last minute and an explanation was demanded, he fell back on the “But it’s an investment loan, yada yada yada” spiel.

Which, to be fair, has some validity, but the real issue wasn’t that so much as failure to communicate that there were some key differences between the two loans I was considering, and the lack of a GFE provided to me for the loan we went with (but one provided for the original loan I considered).

Also muddying the water was that the mortgage banker (who’d moved to our small town just a year or two earlier) already had a few black marks on his reputation due to his girlfriend (a realtor) basically blatantly stealing some listings from another local agent. Our realtor let me know about all that when we were looking for our last loan, but I ended up going with the guy again, as I was happy enough with the first loan we got through him for House #1.

When I told our realtor about my wife buming into mortgage banker guy while shopping, I was kind of surprised at his immediate “And that’s why you don’t piss on people in small towns” reaction. Turns out I wasn’t the only client of his recently that was suddenly surprised by an unexpected loan origination fee, even for traditional mortgages that weren’t investment properties or anything exotic at all.

Lots of talk in the news about mortgage bailout plans, which I have to admit I have pretty mixed feelings about. It’s just such a hot button topic of late, as either side of the debate can trot out great examples of predatory lending and struggling homeowners that truly deserve a break, as well as the flip side of lazy, greedy folks suffering from Serinitis and debt up to their ears who fully deserve exactly what foreclosure hell they would otherwise suffer.

Emotion aside, I can’t think of many examples where bucking the free market trend worked out well, so I suppose I’m against bailout plans for that general reason. If there’s excess in the market that needs to be flushed out, it’s better to flush it out now than delay the inevitable, so that hopefully we can get back to a reasonable state of equilibirum where things make sense. The longer the doom and gloom drags out, the longer buyers are going to stay on the sidelines, and all the bailout proposals I’ve seen just delay the inevitable, and don’t address any of the root causes that lead to people living in houses they can’t afford to live in.

Then again, I’m not getting foreclosed on, so that’s an easy and convenient belief system to uphold.

Still plugging away at House #2, although I switched over to painting to give my still protesting back a bit of a break. One odd thing that I finally realized last night is that other than ceilings, nothing in House #2 is painted white. Pink; salmon; all shades of yellow; sky blue; weird tan colors, yep, present and accounted for. White; nowhere to be found. Which probably explains why painting simple white trim has been giving me so much pleasure over there, and keeps me remarking “Damn, this looks so much better”.

The only silver linings there is that July should be chalked up to a pretty large anomaly, due to the largely unsubstantiated complete freak-out that occured in the general markets at large and the lending industry in particular, and the rising foreclosures story continues to be pretty schizophrenic. Subprime borrowers continue to default like crazy, while prime borrowers continue to largely be good to go, with only a very slight rise in foreclosures by prime borrowers. Which is sort of good news, but not the best of news, as there still is likely a large overhang of dodgy subprime loans to work through, especially as ARMs reset.

As far as what that means to the real estate investor, well, who knows. Some people claim that the recent real estate bubble is the mother of all bubbles, and that we’re just at the beginning of a prolonged five to ten year slide, that will result in home values being roughly halved, across the board. Property values skyrocketed while interest rates were near historic lows, creating an unsustainable situation. To resolve it and return to equilibirium, interest rates have to climb dramatically (which the Fed seems very disinclined to do) or housing prices have to fall dramatically.

I just don’t buy that argument, though. Maybe it’s my relative inexperience and lack of having lived through such a thing firsthand, but housing seems to me to be a slightly different sort of commodity beast, much different from tulip bulbs or shares of stock in Koop.com. But, again, who knows.

As far as profiting from all this, the more I poke around, the more I’m intrigued by the idea of owner financing, after buying and rehabbing. The basic drill would be to pay cash for the property, complete your rehab, then get a loan based on the FMV of the rehabbed property (typically you can get a loan for 75-80% of the FMV in that situation).

Offer owner financing with a 5% down payment and an interest rate higher than your own (and possibly a 2-3 year balloon payment due to encourage the buyer to refinance.) Use the funds from the loan you received to purchase the next property with cash, pocket the 5% down payment, collect positive cash flow each month due to the difference in interest rates, and realize the bulk of your profits on the back end when they refinance.

In theory, you could basically rinse, lather, and repeat that same process infinitely, paying essentially no money down and 100% financing. The real upside, though, is that you’d be solving two of the major problems facing investors/rehabbers right now, not only finding a buyer to unlock your profits, but also securing financing for them.

Would that make up for the potential headaches of going the owner financed route? Quite possibly, especially if it remains difficult for some potential buyers to secure financing in coming months and/or years. That seems to be the biggest hurdle in my mind, more so than more and more inventory piling into the market as foreclosures continue to pile up.