This week’s Blog is being written by my friend Peter Davidson. He is an expert with reverse mortgages. We will be having a seminar on October 22, 2009, at 6:30 at my office (5590 North Academy Blvd.) Please call me at 593-2963 if after reading the following article if you would like to come. Please enjoy and we hope to see you soon!!

Thanks,

Brian

What is a Reverse Mortgage?

Simply put, a reverse mortgage is a loan that enables homeowners aged 62 and over to tap into their home equity.  www.ReverseMortgageGuides.org says “A reverse mortgage is a low-interest loan for senior homeowners that uses a home's equity as collateral. The loan amount is a percentage of the home's value determined by the age of the youngest homeowner. The loan does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time, the estate has approximately 12 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. All remaining equity is inherited by the estate. The estate is not liable if the home sells for less than the balance of the reverse mortgage.”

History of Reverse Mortgages

Many people believe that reverse mortgages are fairly new, when actually the first reverse mortgage was done by Deering Savings & Loan in Maine during 1961.  Growth was very slow until 1988 when the Federal Housing Authority Insurance Program was signed into law.  The first government-insured reverse mortgage was given in 1989 under a pilot program initiated by the federal government under the guidance of the AARP.  The program was small to begin with, but was expanded nationwide due to its success.

Since then in excess of 400,000 reverse mortgages have been done in our country.

Why a Reverse Mortgage?

The FHA reverse mortgage was created to allow seniors to stay in their homes for the rest of their lives.  The homeowner can receive payments in a variety of ways; monthly payments, lump sum payment, line of credit, or any combination, and because they are receiving rather than paying, they can never be evicted or foreclosed on for non-payment.  Reverse mortgages are easy to qualify for because there are no credit or income requirements.

What Can Be Done With The Proceeds of a Reverse Mortgage?

According to a report on the 2006 AARP National Survey of Reverse Mortgage Shoppers, the top 5 uses of a reverse mortgage are:

Expenses for health or disability

Improve quality of life

Pay off debt

Home repairs and improvements

Everyday and emergency expenses

The proceeds are not taxable and the borrower can do almost anything they want with them.

This is part 3 of the investment series I’ve been blogging about. The previous 2 installments were about pure rental investment and fix and hold. This part is about fix and flip.

Fix and flip is where an investor/contractor buys a home that needs dramatic improvements. The hope is to make all the improvements to make it “Model Ready” and then sell it for a profit. This is not a bad business but I see more people get burned by this than those who are successful. So what separates success from failure? It’s knowing the numbers!!

Knowing your numbers is the key to success in a fix and flip, the main number that needs to be considered is what will the market allow for a sales price. By this I mean, that the market will only allow a certain price on any home. Many investors fail to realize this and make a price based on what they invested in it. Many people think they can create a value and a market and that is simply not true. The second biggest mistake is underestimating the repairs, the carry time, loan costs and exit expenses. Many inexperienced investors team up with inexperienced agents and don’t consider all the costs. There are several costs as I’ll outline that need to be considered. Here is an example: 

Let’s assume from our previous 2 blogs that you find a fix & flip for $130,000. The first number that needs to be considered is what will the market let the home sell for. The scenario I will outline happened earlier this year for one of our investors. The market said the high price was $210,000-$220,000 and $195,000-$200,000 for a fast sale. We used $200,000 as our end number. ALWAYS use the end number and WORK BACKWARDS:

                        Future Sales Price                                $200,000

                        Repairs                                                  $23,000

                        Exit Commissions                                   $12,000

                        Carry Payments and Insurance                 $2,100

                        Entry Closing Costs                                 $2,600

                        Exit Buyer Closing Costs                          $6,000

                        Exit Seller Closing Costs                          $2,000

                        Misc                                                        $2,000

                        NET                                                    $150,300

                        ORIGINAL SALES PRICE                $130,000

                        NET PROFIT                                        $20,000

Our investor in this scenario actually made $24,000 for 2 ½ months work. We did not use the miscellaneous expense and repairs and carry time were slightly less. This investor made 10%. This is a reasonable expectation.

In summary, know your numbers particularly the end sales price. Work backwards and work with an experienced agent. One other thing is if you are using a contractor, get a price commitment very early and hold them accountable. Please call me with your questions @ 719-593-2963

Thanks

Brian