In todays email:

• 💬 State of the market: $230 million up in smoke!

• 👀 Featured Video: How to make money tax free in self directed IRA.

• 🤑 Show me the money: What happens at the foreclosure auction.

• 🥶 Cool Tools: My favorite background/credit check service.

State of Real Estate

$230 Million Up In Smoke…Apartment Owner Loses 3200 Units

Recently, there has been alot of talk about the foreclosure in Houston TX on 4 multifamily complexes. I wanted shed some light on why this happened and some takeaways for us all. But before I do, let me give the summary of what happen as I understand it.

Arbor Realty Trust lent money on 4 apartment complexes to a sponsor called Applesway Investment Group between August 2021 and April 2022. The properties were in Houston TX and totaled 3,200 apartment units. Arbor lent Applesway an estimated $69 million for the Redford Apartment, $66 million for Reserve at Westwood Apartment, $48 million for Heights at Post Oak Apartments and $47 million for Timber Ridge Apartments, according to the Harris County Clerk’s Office. These were low income multifamily properties in Houston valued at around $230 million.

Arbor initiated the foreclosure on March 13 after Applesway defaulted on its mortgage payments. The properties went to auction on April 4, but no bids were made. Arbor initiated a credit bid, in which the lender can use the outstanding debt owed on a property as collateral for their bid at a foreclosure auction, for each property. That allows the lender to bid without bringing cash to the table. The lender won the bid and took over all four properties.

Why did this happen? All the details are not out yet, but here is what I have gathered to date. The rising interest rates forced the debtor to default on their floating rate loan when their rate went from 3.4% to nearly 8%. As the Federal Reserve increased rates, the rates on their commercial loan(s) also went up to a point where the debtor could no longer make the payment with the income from the properties. Apparently, they did not purchase a rate cap which would have limited their rate exposure by capping the interest rate on the loan(s).

Takeaway lessons:

1. It is super important to vet your sponsors and make sure they have experience in the type of asset they are buying and a track record of success in good and bad times.

2. When investing into a larger deal that has a floating rate make sure the sponsor gets a rate cap to protect all parties involved. It is like buying insurance, you hate to pay for it but you have to have it.

3. Never put money into deals or syndications unless you are able to continue to live without that money if, for some reason, you lose it all.

4. Making sure that the underwriting policies of the sponsor are sound and conservative. There should be several months operating reserves in the sponsors underwriting to help mitigate risks.

Featured Video 

Investing In Real Estate With Your IRA

SELF DIRECTED IRA (SDIRA) EXPLAINED:

• There is NO legal distinction between self directed IRAs and any other IRA except that a self directed IRA allows the broadest possible spectrum of investment choices.

• SDIRAs have been around since the IRA was established in 1974.

• When setup correctly or when using a proper SDIRA custodian you are allowed to invest not only in stocks and bonds, but also in real estate, notes, private placements, syndications and much more.

• The potential benefits of a self directed IRA is that you are able to invest your tax-advantaged retirement dollars in investments you know and understand.

• I love SDIRAs especially the ROTH SDIRA since there are many benefits like:

  1) getting tax-free growth 2) you can take tax-free withdrawals in retirement 3) you decide when, if, and how to take withdrawals.

SDIRA RULES:

There are a few rules one has to follow when investing money from your IRA. We will talk briefly about prohibited investments and prohibited transactions. This is not an all inclusive list, but some of the main things to keep in mind. Read my book “IRA & 401K Income Builder” for more details and consult a SEC attorney and your tax advisor before investing.

• Prohibited Investments

  • Can’t invest in collectibles such as antiques, cars, art, etc.

  • Can’t invest in life insurance.

• Prohibited Transactions

  • Selling property to IRA you already own – self dealing

  • Buying property for personal use

  • Borrowing money from IRA

  • Can’t use IRA as collateral (i.e. security for loan)

  • No personal guarantee - for example, no signing personally for a loan

• What Can You Invest In (some examples below)?

  • Single Family Homes

  • Apartments and Commercial RE

  • Raw Land

  • Tax Liens/Tax Deeds

  • Mortgage/Deed of Trust Notes

  • Private Equity

  • Precious Metals (Gold/Silver)

  • Commodities (Oil, Gas, Grains, etc)

  • LLCs and C Corporation

  • Car Notes

  • Commercial Notes

  • Private Placements and Stock Offerings

  • Equipment Leasing

  • Factoring

  • Structured Settlements

  • Stocks and Bonds…

Show Me The Money 

How To Make Money At Foreclosure Auction

I currently have several mortgage notes on properties (see pics above) in different stages of the foreclosure process. I purchased the debt on the property (i.e. the mortgage note) and all borrowers were deceased and were over 12 months in arrears and none of the family members had any interest in keeping the property.

So what happens when the property goes to the foreclosure auction sale? Either the property reverts back to the lender as an REO (Real Estate Owned) or a 3rd party investor buys the property for the opening bid or higher.

For example, on Friday April 21 one of my properties (mortgage notes) went to auction and no one bid on the property even though the opening bid was lower than the value of the property. So, I now own that property. My opening bid as the lender can be the full amount (also called full debt bid) or a “specified bid” which is less than the full debt. The opening bid is calculated based on several factors like the value of the property and possible exit strategies. We will cover the exit strategies in the next newsletter.

I have another property going to auction on Tuesday, April 25 and feel strongly that the opening bid will attract investors and will sale at the auction to a 3rd party investor. The returns vary, but I am looking for 25%+++ which is good since it not only helps me to recapitalize, but also less work for me as compared to getting the house back (no clean outs, no rehabbing, no property management, etc.). I will report next week on the outcome and share lessons learned.

Cool Tools

Smartmove is the cool tool of the week. What is Smartmove?

Smartmove is a service from Transunion. Website: MySmartMove.com It is a convenient tenant screening service for people who don't manage hundreds of properties. This is an easy way to get a person’s credit, eviction history, criminal background and even income estimates. All of this information is contained within one easy-to-read tenant background/credit report.

In a nutshell, SmartMove allows rental history reports to be delivered to you while protecting consumer information in a manner consistent with the Fair Credit Reporting Act and applicable regulations.

And… these tenant background checks are completely paperless and online. It's free to sign up for an account. Accounts can be created and screening reports delivered in a matter of minutes. SmartMove has a pay-as-you go screening process. Only pay for the reports you need. Additionally, SmartMove gives you the choice to pay yourself or pass the cost (approximately $40) onto your tenants, buyers, etc. The process is shown below and some examples screenshots of what you get in your report.

🖐️ IF YOU HAVE A QUESTION, PLEASE RAISE YOUR HAND AND ASK BY SIMPLY REPLYING TO THIS EMAIL.

Last weeks POP QUIZ was…What is PMI (Private Mortgage Insurance) and when is it required?

ANSWER: Private Mortgage Insurance (PMI) is a type of insurance that protects the lender in case the borrower defaults on their mortgage loan. If a borrower puts down less than 20% of the home's purchase price as a down payment, lenders will typically require them to get PMI.

PMI allows borrowers to qualify for a mortgage with a smaller down payment, but it comes at a cost. Borrowers pay a monthly premium, which is added to their mortgage payment. The amount of the premium varies depending on the size of the down payment and the loan-to-value ratio.

This weeks POP QUIZ: What information is typically included in a mortgage note and is the note recorded?

Check out next weeks newsletter for the complete answer.

PLEASE RECOMMEND THIS NEWSLETTER TO OTHERS. THE BIGGER THE COMMUNITY THE BETTER FOR ALL. NO SCARCITY MINDSET HERE!

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