PROMISES OF FAST AND EASY CASH

We receive hundreds of financing requests each month for fix and flip projects. People think they can make money with no risk and little to no investment of their own money. And why wouldn’t they?

Late night infomercials tout seminars “guaranteed to make you money fast in real estate investing”, DVD programs promise to teach you how to cash in on the house flipping market with no risk, and an internet search returns endless pages of information available for free and for sale.

The market has crashed down from an unprecedented real-estate high – just a few years ago it seemed impossible to lose in real estate. Lenders were approving loans for 100% or more of property values, bidding wars between buyers were frequent, houses were selling for more than the asking price within days of listing. Investors were making money hand over fist.

TODAY’S REAL ESTATE MARKET LOOKS NOTHING LIKE IT DID

Today’s real estate market is operating on an entirely different playing field. The melt-down in the economic markets and the subsequent decline in real estate values has led to the highest inventory of available properties in 40 years at the lowest prices in years. Many folks see this as an opportunity to get into house-flipping and are looking to cash in. Times are different, and so are lending standards.

WILLING TO INVEST? THEN WE ARE TOO

Here’s the truth about risk and reward in the house flipping business in this economy. There’s no free lunch these days, and it takes money to make money. Our fix and flip lending philosophy at ACC Mortgage is simple – no risk, no reward. If you are willing to take a risk, we are too. If you are willing to invest your hard-earned money in a project, then we are willing to lend you money for the project.

We are certainly willing to underwrite fix and flips, and have successfully partnered with investors in many such endeavors. However, the finances must make sense and the risk appropriate for both borrower and lender. So what does that really look like?

A RECENTLY APPROVED FIX AND FLIP LOAN

Here’s a great example of how ACC Mortgage approaches lending for fix and flip investment properties:

• Bank-owned property
• Selling price – $130,000
• Cost to make marketable – $20,000
• Total investment – $150,000

• Estimated selling price after “fix” – $200,000

• ACC Loan Amount – $85,000
• “Flipper” Investment – $65,000

We completed a thorough review of the plans, a market analysis of the area, and an accurate property valuation prior to underwriting the loan. The investor was willing and able to invest in the project and by doing so assumed an equitable share of the risk. The property sold for $200,000 within 6 months of purchase. The investor made close to $50,000 on the deal.

WHY SOME LOANS AREN’T GOOD DEALS

In many of the loan applications we receive the borrower is not willing to take on a fair share of risk. Using the above example, many investors are asking for a $150,000 loan on a house that is projected to sell for $200,000. What if the house sells for $160,000? After realtor fees and other associate selling costs the lender has an extremely high risk of taking a financial hit.

THE BOTTOM LINE

We consider ourselves your financial partner, and as such we require that you share in the risk. Because the lion’s share of the reward will be yours if your investment choices are solid.

Back in the summer of 2005 I accurately predicated that the real estate market had reached its peak. My opinion was based on the fact that the largest growth in the purchase market was predicated on the fact that most people buying homes during that time were the least sophisticated buyers. The lending guidelines had become so lax, that honestly, people were getting loans that really had no business getting a mortgage. You don’t have to believe me, just look at the foreclosure notices in your local paper.

I parallel this time in real estate to the late 90’s of the stock market. Every wannabe Gordon Gecko with $10,000 was opening an ETRADE or online stock trading account in order to get rich. It didn’t matter what you bought during that time. People were making more money in one day trading stocks then they could normally could make in a given month. The same had become true with real estate. People were putting deposits on real estate and selling their right to buy the home at a profit!!! Money was being made simply because financing was so loose and speculation was at a frenzy – not because we had a sudden influx of millions of well financed individuals looking for a home. Simple supply vs. demand. The fundamentals of real estate and making money had become completely ignored or forgotten.

Here is one truth: Trees don’t grow to the sky.

I personally believe that we are very near the bottom. As this recent report from S&P/Case-Shiller Home Prices Indices shows (http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_032544.pdf), we are well off those 2005 highs. I believe we have fundamentally found the bottom or the true valuation of real estate. These values are more inline with 2003 prices, which is where the market was in a perfect state of harmony. Also, note the DJIA chart which also shows the DOW in the 8,000 range during 2003, which coincidentally is where we are now.

Does this mean you should start buying up all the real estate and stocks you can afford? Of course not, but this does give you some proper base line of long term investing in both real estate and stocks. Of course this could all be thrown out of whack by excessive government spending!

BOB’S BILLION DOLLAR BLOG

Hello, my name is Robert Senko and I have been in the mortgage business since 1993. I have been self-employed in the mortgage industry since 1995 and I am presently in my 10th year of owning ACC Mortgage.
Since I closed my first loan, a $130,000 cash-out loan for women with below average credit to pay for credit card bills and her husband’s medical expenses, I have seen just about every conceivable loan scenario and situation.
Without exaggeration or hyperbole, billions upon billions of dollars worth of loans have come under my direction. This is not to say I have run a large organization, quite the contrary. I have always enjoyed running smaller, more manageable operations. This is the primary reason why we are still in business in the midst of the mortgage industry fall-out. This is also the reason I have been able to study first hand the human element of lending and money.
One of the primary reasons the mortgage industry is in the pickle we are now is because Wall Street tried to put every client into a neat and orderly box. Wall Street and their associates tried to define, bundle and package loans according to some mathematical formulas. Ivy League types created these complicated formulas to lend, mitigate risk and create huge incomes for themselves.
I ask you: How can these Ivy League types decide how to lend when they have never taken a loan application while sitting at the kitchen table of a couple trying to pay for their kid’s college education and make ends meet?
This blog will be broken down into three elements: education, entertainment and enlightenment.
Education will be used to explain the nuts and bolts of the mortgage industry. You could probably get most the education in reading Mortgages for Dummies book.
Entertainment will hopefully be something that I find amusing. I enjoy my work, I enjoy my life and I like to laugh. My sense of humor has helped me during my most difficult moments in life and I like to make people laugh.
Enlightenment is what I hope to really give back to the world. Having been in the mortgage industry since 1993 and seen tens of thousands of loans offers me a unique perspective on human psychology and money. I hope to share stories, parables and anecdotes that may offer some meaning to life.

Thank you for reading,

Robert M. Senko

As I am sure you have learned by now, the mortgage and banking situation in our country is in dire straights. This amateur cartoon does a good job of explaining what went wrong.

Video: SubPrime Mortgage Mess Explained (with voice)

The reason ACC Mortgage is still in business is because we have focused on the good old fashion tenants of lending: Credit, Collateral, Cash and Character. You will hear us talk a lot about the 4Cs in years to come.