Melanye Phipps

A few weeks ago, the first part of this series, "Getting Started", http://activerain.com/blogsview/684869/Investing-in-Real-Estate-Getting-Started-1 gave you an overview of the eight different types of real estate investments. Today we are going to learn more about this category.

What this investment is: A lease option (L/O) is Acquiring control of a property (though not necessarily ownership), then leasing the property to a tenant. The lease is bundled with an option, so the tenant can (but does not have to) purchase the property for a given price within a given time frame. Again you are seeking a tenant for a property, but usually for a slightly longer term (12-18 months) and frequently (though not always) with the goal that the tenant purchase the property from you at the end of the lease. If you purchase the property, then it's an easier process; if you find a highly motivated seller to let you re-lease the property to another tenant, it can be a lot of work to set up. However, the re-lease method doesn't require any cash out of pocket and does not rely on your credit score, so it is appealing to many investors. Great for beginners with the right skills and attitude.

Equity needed: If you get seller financing, potentially just a few thousand dollars for your operating account. If you purchase the property, 10% down (best case); more likely 20% down.

Importance of credit: If you leverage seller carry, not important at all. If you purchase the property, credit is important. A 720 FICO score would help a lot. Being able to document your income and your assets will be critical.

Importance of experience with contractors: Some exposure would be helpful, but you are not likely to encounter construction projects any more difficult than you have maintaining your own personal residence.

Important of experience with property managers: Not important; the majority of our clients manage their own rentals when they get started. We run classes on how to do this from time to time. Go to http://www.yourcastle.org/events.cfm to see when the next session is.

Next week, we'll continue to explore lease options in more detail!

A few weeks ago, the first part of this series, "Getting Started", http://activerain.com/blogsview/684869/Investing-in-Real-Estate-Getting-Started-1 gave you an overview of the eight different types of real estate investments. Today we are going to learn more about this category.

What this investment is: Purchasing a home that needs work. The scope can range from the basic "paint and carpet" to extensive overhauls to scraping a decrepit property and completely starting over. Usually does not involve tenants, and the objective is to get in and out of the property as quickly as possible. Great for beginners with the right skill sets or the willingness to learn.

Equity needed: With hard money loans (defined in next paragraph), potentially 0% and they'll finance the construction costs, too. Expect a LOT of strings to be attached. A small local lender might give you 75% of the purchase price and the renovation budget, and the terms will be a lot more pleasant than the hard money option. Or you can do 20% down and get a convention, non-owner occupied loan and pay for the renovation with cash or your Home Depot credit card.

Importance of credit: If you get a hard money loan, your credit will not matter as much. These are harder to find than they were last year. If you get a traditional loan, it'll be a non-owner occupant loan, credit score will be very important. A 720 FICO score would help a lot. Being able to document your income and your assets will be critical. A hard money lender will lend you money based on the value of the property you are purchasing. If the property is worth $200,000 and you are able to purchase it for $150,000, a Hard Money Lender will probably give you a loan regardless of your down payment or credit score. However, the fees and the interest rate will be much less desirable than more conventional forms of financing. Hard Money Lenders can usually close very quickly, and from the Sellers' point of view, you are purchasing with Cash.

Importance of experience with contractors: Critical. If you have never done it before, start with an easier "paint and carpet" project to build your skills. The more sophisticated the project, the better your contractor management skills must be to make money. Not surprisingly, the simpler projects have lower profit margins than the complicated projects. Make sure you can take the time to really focus on the project. We run classes on how to do this from time to time. Go to http://www.yourcastle.org/events.cfm to see when the next session is.

Important of experience with property managers: Not important.

A few weeks ago, the first part of this series, "Getting Started", http://activerain.com/blogsview/684869/Investing-in-Real-Estate-Getting-Started-1 gave you an overview of the eight different types of real estate investments. Today we are going to learn more about this category.

What this investment is: A synthesis of the fix and flip and rental operations - purchasing an apartment building in a neighborhood dominated by owner occupants, then converting the building from apartment building to condominium. Often requires renovation of the units to meet the expectations of owner-occupant buyers in that area. Complex and time consuming, but has wonderful tax advantages compares to fix and flips and often has superior returns to all other asset classes. Ideally suited for the sophisticated investor with extensive experience.

Equity needed: Being able to document your income and your assets will be critical. For a commercial loan, your net worth should generally be at least as much as the loan you are seeking. The good news is that the commercial loan usually does not show up on your credit report, so it doesn't count towards the "four investment home limitation" from Fannie / Freddie.

Importance of credit: Essential. A 720 FICO is a must. A 740 would be better.

Importance of experience with contractors: Critical. If you have never done it before, start with an easier "paint and carpet" project to build your skills. The more sophisticated the project, the better your contractor management skills must be to make money. Not surprisingly, the simpler projects have lower profit margins than the complicated projects. Make sure you can take the time to really focus on the project. We run classes on how to do this from time to time. Go to http://www.yourcastle.org/events.cfm to see when the next session is.

Important of experience with property managers: Not important; the majority of our clients manage their own rentals when they get started. Ideally you will have started with some smaller investment rentals and built property management experience. Now, when you have to finally manage a property manager, it will be easy since you have done the job yourself in the past.

Next week, we'll continue to explore condo conversions in more detail!

There are some signs of strengthening in our Denver market. The metro area's inventory of available resale housing decreased 20% to 23,120 units in October from October 2007. Some of this reduced inventory is attributed to homeowners taking their properties off the market in frustration because their property is not selling, but lower inventory implies a strengthening market. Remember, the Denver area had housing inventory of 31,989 units in July 2006. Home sales rose 14% to 4,265 in September compared to the same month last year. This is due almost entirely to the lower-end of the market (under $180K) selling like hotcakes. October's median selling price for single-family homes decreased 12% to $206,000 from the same month of '07, and was down 4.7% from September's median of $216,150. Median selling price for single-family homes dropped 10.5% to $222,000 through October, from $248,000 through October '07.Prices are still falling, but at a slowing pace. This trend should continue into 2009 when it is expected to bottom out and slowly climb back. Hang on, it's gonna continue to be a wild ride!

My agency, Your Castle Real Estate, was just featured in the Denver Post Newspaper with the information below. I have added my comments in parenthesis.

The Denver metro area has been hard-hit by foreclosures, but the reality of the situation is vastly different depending on which neighborhood you live in. (This is true - each neighbhorhood can be very different!)

While numerous reports tell a bleak story of rising foreclosures and flat house prices, an analysis of data from the Multiple Listing Service by Your Castle Real Estate shows some neighborhoods are struggling while others are untouched.

The analysis drills down to the neighborhood level, giving a detailed look at foreclosures and home values.

While the data are available in some form or another to many Realtors, Your Castle's analysis, presented in an interactive map at denverpost.com, (Check this out if you haven't seen it before. It's very cool!) for the first time provides

Neighborhood View

• Explore a detailed interactive map of home prices and other data, across the Metro area.

homeowners with a deeper understanding of what is happening in their neighborhoods.

The data show that neighborhoods where the average home price is less than $250,000 are taking the worst beating, while higher-priced communities remain relatively unscathed.

Housing values metro-area-wide decreased by 1 percent in the first six months of the year; 25 percent of sales in the region were a result of foreclosures, according to Your Castle.

During the first half of the year, there were 19,460 foreclosures started in the state versus 28,435 in all of last year, according to a recent report from the Colorado Division of Housing.

Still, the data compiled by Your Castle show that the story is different from neighborhood to neighborhood.

"When you're looking at a $500,000 house, it's a near-luxury house," said Lon Welsh, Your Castle's managing broker. "It's not the person's first home, and they've got a lot of cash in the bank. They're a lot better insulated from the economy."

A separate analysis conducted earlier this year backs Welsh's point.

According to DataQuick Information Systems, sales of homes priced at more than $1 million increased 22 percent between January and June compared with the same period last year. But sales declined - in some cases drastically - in nearly every other price range, according to DataQuick.

Stapleton and the surrounding neighborhoods are among the strongest examples of variations in the metro Denver market.

At Stapleton, where the average home price is $449,000, just 2 percent of home sales in the last year were either foreclosures or short sales, and values increased 10 percent, according to Your Castle. A short sale occurs when a lender agrees to accept less money than is owed on the property.

But the 4,700-acre master- planned Stapleton community is surrounded by neighborhoods where foreclosures are rampant and values are declining, including Montbello, Northeast Park Hill, East Colfax and Northwest Aurora.

In Montbello, where the average price of a house is $148,000, 72 percent of home sales were either foreclosures or short sales. Homes in the neighborhood declined in value by about 9 percent. About 14 percent of its population lives in poverty.

In Northeast Park Hill, 58 percent of houses sold in the last year were distressed. Home values in the neighborhood, where the average sale price is $150,000, declined 11 percent. About 24 percent of its residents live in poverty, according to the 1990 census.

"A lot of it comes down to jobs and how close to the edge people are," said Charles Roberts, a broker at Your Castle. "People who bought on the low end were probably only one month away from foreclosure from the get-go. They got option (adjustable-rate mortgages) and didn't realize they were going to adjust."

The data on Your Castle's map are valuable to people who are looking to make smart investments, said Jon Terry, managing broker of Realty Professionals of America Inc. Buying in neighborhoods that have about 5 percent appreciation makes sense.

"You want to buy in an area that even during a soft market is still appreciating," he said. "What gets troublesome and, frankly, you don't want, is when it appreciates more than 20 percent. That kind of growth can't be sustained."

Because Your Castle's analysis is based on MLS data, it's more useful to real-estate agents than information found on websites such as Zillow.com, which is based on public records, said Dee Chirafisi of Kentwood City Properties.

"It doesn't take into account when renovations have been done or additions have been made," Chirafisi said. "Public records are old news. It really doesn't adjust for current trends in the neighborhoods."