Kathy Fettke

There is always opportunity in the midst of crisis. Right now, one of the greatest opportunities is picking up almost-complete development projects. Most small builders were in high-cost construction loans that made sense 3 years ago, but don't work today. The cost to build is far higher than the price per square foot of bank-owned properties. Builders just can't make the numbers work, and many are reluctantly handing the projects back to the bank.

A local contractor found this 10 single-family home subdivision in the Oakland Hills with views of the Bay. The builder owed over $7M in private loans and was holding on by a thread. Even if he were able to complete the project, it would not pencil out after paying off the debt. We were able to short the loan to $1.5M and take over the project. We needed to raise $3M to complete the project, so we decided to give our investors 40% of the profits. Conservative projections show a 47% return for investors. The heavy work was already done. We expect to have these on the market by this summer.

We started the Network Capital Fund last year as an opportunity for Real Wealth Network members to both borrow and lend to each other, and do it safely and legally. Some of our members have capital they want to invest, but they want to remain passive. Other members have the skills, expertise and ability to find incredible deals, and need cash to acquire them.

Network Capital Fund pools investor funds and then lends it out to local rehabbers at 12% interest rate and 6 points for a 6 month term. This means the capital gets recycled twice, increasing returns for investors. In some cases, the rehabber will also split profits with the lenders. The borrowers must have experience in rehabbing homes. Every deal they bring to Network Capital fund is scrutinized with local appraisers and inspectors. Once the deal is approved, the funds are released in phases, with each phase being signed off on before the next phase of funding is releases.

If you find great deals, bring them to us and we'll help you fund it. If you want to put your money to work, let us know here!

INVESTOR TIP OF THE WEEK

We get calls on a daily basis of members asking if we think it's time to buy in Phoenix, Vegas, or in parts of Florida and California. My answer is that while there are some great deals, you've got to be very careful. Every available index is showing red hot risk in those areas.

The top guys at Realty Trac and Foreclosure Radar tell us that defaults are way up from last year, yet NOD's (notice of defaults) and foreclosures are way down. How is this possible?

It's quite simple. Banks are playing a popular Wall Street game called, "Pretend." If they don't report NOD's, they don't exist. This creative accounting shows profits are up! They can pay back the TARP money, give themselves fat year-end bonuses, and attract investors.

As a result, foreclosure inventory in the high foreclosure areas is oddly low. Buyers who mistakenly believe lack of inventory means the market has turned are making multiple offers over asking price. Nothing could be farther than the truth in the bubble markets.

Linear markets, on the other hand, are stabilizing. We can earn high cash flow in these areas while enjoying stability. After 2012, we may start to see a return to normalcy in the bubble markets and can possibly consider a 1031 exchange at that time.

I just can't stand to see people lose money. And let's face it - most people lost money this year. Even Bill Gates is down $7B from his $50B and Warren Buffet lost $10B of his $40B. More importantly, 23% of U.S. homeowners are upside down on their mortgages. Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic.

While this is old news, here's my current concern: Even recent bargain hunters have been hit: 11% of borrowers who took out mortgages in 2009 already owe more than their home's value. Remember, this would only likely happen in areas where values took a double digit hit this year. I'm afraid many novice buyers could find themselves in exactly the same position next year. California, Florida, Nevada and Arizona are still declining markets. It doesn't appear that way because inventory is down and prices are up. But what will happen when the tax credit disappears in the Spring and the Fed runs out of money to keep interest rates artifically low? Rates could increase at the same time many Option Arms reset - 58% of which are in California.

If you're buying a primary residence to live in, it doesn't matter if prices go up or down 10-20%, as long as the mortgage payment is affordable and you plan to stay for awhile. But buying an investment property that could be worth less next year and generates negative cash-flow may not be the best choice. I'm usually an extreme optimist, but the data has me concerned that it may still be too soon to buy investment property in CA, NV, AZ and FL.

There are certainly exceptions on deals where the numbers work. And that's the key - what does that mean to you? What kind of cap rate do you need to feel comfortable? Linear markets never bubbled much and therefore, aren't busting up. Dallas and Cleveland are 2 markets showing the greatest market momentum in the right direction, according to Robert Campbell, author of Timing the Real Estate Market. In fact, Dallas real estate prices increased this past year. These areas are proving to be a safe harbor during this on-going financial storm.

At the bottem of this blog post is a link to an opinion article I recently wrote titled "Live where you want, Invest where it makes sense". I hope it gives you some perspective when it comes to making investment decisions.

"Live Where You Want, Invest Where it Makes Sense"

A caller challenged me on the radio last weekend saying that inventory was so tight that we certainly must have hit the bottom of the real estate plunge. While lack of inventory is normally a good indicator of a seller's market, there's nothing "normal" about this cycle.

We know that foreclosure activity is setting new records. In fact, it's up 23% from last year at this time. So how could we have a lack of inventory?

Some people blame it on government regulation that's forcing banks to slow down on foreclosures. Others say it's due to loan modifications. Many believe banks simply don't want to flood the market with inventory that would further depress prices.

While there's truth to all of this, most likely the reason is more simple and self-serving. When a bank forecloses, it must "book the loss." But if it doesn't foreclose, creative accountants can put a price on a mortgage asset for more than it's true market value. As a result, banks are showing profits (doesn't that seem surprising) and profits mean bonuses.

The government will likely not crack down on creative accounting if it shows our creditor nations that we've fixed the economy and are bouncing back.