What Is Trust Deed Investing?

You may have heard the term “Trust Deed Investing” or “Trust Deed Investments” bandied about recently is the press as well as private discussions.  Many people, eager to find a source of secure returns that can pay more than the 1-2% currently being offered by savings institutions and Treasury bonds have turned to trust deeds.  

Trust deeds are actually very similar to conventional residential mortgages, with a few key differences.  First, with a trust deed investment, the investor is the “bank.”  They loan money to a real estate professional for a particular real estate acquisition, and the borrower makes monthly payments to them for the duration, or term, of the loan...just like a conventional mortgage.  Trust deeds have locked-in rates of return, terms, and pre-payment details specified in the contract.

There are a few differences, however, between conventional mortgages and trust deed investments.  First, the typical borrower in a trust deed investment is not an owner occupant of a property, but rather a real estate professional looking to acquire an income property.  Many of these properties are purchased by the professional, renovated, and then refinanced or sold at the end of the trust deed term.  Second, trust deeds typically pay a much higher rate of return to the investor than banks charge on a regular residential mortgage.  Mortgage rates at the time of writing stand right around 4%, where trust deed investments are paying between 7-9%.  Last, trust deeds require a higher percentage of equity in the property than a mortgage from a bank.  Banks typically require owner-occupant buyers to put anywhere from 3%-10% down on a property.  This means the bank will finance between 90-97% of what the home is currently worth (90-97% LTV.)  With a trust deed investment, the borrower is typically only allowed to borrow between 65%-80% of what the property is worth. (65%-80% LTV or ARV.)  This larger equity spread provides greater protection for the investor in trust deeds.

Most trust deeds are negotiated by trust deed brokers.  These brokers act as connectors between investors who want to lend money and borrowers who need money for their projects.  The brokers pre-screen the borrowers and also handle all the necessary paperwork involved in the transaction.

Security

Trust deeds are generally viewed as a very secure form of investment for several resons. First, most trust deed brokers limit the loan amount to between 65% - 80% of the after repair value (ARV) of the property in question. This ensures that, in the case of default by the borrower, the property could be sold for more than the amount of the loan and the funds repaid to the investor. Second, the investor becomes the first position lien holder on the property and, as such, his investment is secured by the property itself.

One aspect of trust deed investing that does pose a risk to the investor and often scares potential investors away is the lack of control the investor has over who is borrowing the funds.  With typical broker facilitated trust deed investments, the broker screens the potential borrower and the investor has to trust that their decision and risk assessment is accurate.  We operate a little differently in that regard.  This is because we only broker trust deeds for our own properties. The investor knows that their funds will be going to purchase Team Plantone properties and we are happy to provide a long and detailed record of our years of success in the residential rehab industry in Las Vegas. This is important because it gives the investor an added layer of security. Not only do they know that the loan to value (LTV) ratio on the loan they provide will be strong enough to insure the security of their funds, they have the added peace of mind of knowing that Team Plantone has completed almost 200 rehab-to-rent projects in the last three years and has never defaulted on a single payment.  (If you are interested in learning more, see the testimonials page on our website: www.teamplantone.com)  In addition to increased security, private brokering provides an added cost savings as well.  Since we are only brokering for our own projects, we are able to provide the highest returns possible to our investors without those returns being cut by Brokers Premiums or other fees.

High yield trust deed investments are available to private individuals, corporations, non-profits, pension plans, 401Ks, retirement funds, IRAs, Roth IRAs, Self-Directed IRAs and SEP accounts. If you are interested in learning more about trust deed investments, the yield and secuity they provide, investment minimums and more please contact Glenn Plantone directly at (702) 656-3264 xt: 203

The Last House In Las Vegas

They say that a picture is worth a thousand words...but when this image crossed my desk it rendered me speechless:



This graph shows the Notice of Defaults that have been filed in Clark County from March of 2011 through February of this year (2012.) You will see that as soon as AB 284 passed the Nevada legislature banks became almost completely handcuffed against trying to pursue the foreclosure process. This lack of fresh inventory has pushed Las Vegas standing inventory to ridiculous lows. This is not helping the economic recovery!

I wrote an open letter to our local politicians regarding AB 284. In it, I outlined what the results would be if AB 284 was allowed to pass. My predictions are all coming true. A copy of the letter follows:

AB 284 - Fighting Corruption or More Red Tape?

The Problem

Free market capitalism rests on the idea that the best way to ensure a fair economy is to allow the forces of supply vs. demand to set prices within an open market. Real estate markets have traditionally been one of the purest examples of demand driving prices. A home owner (be it an individual or a builder) places their home on the market for the price that they believe the potential buyer will be willing to pay. Once a final price is agreed upon, in most cases, a third party enters the equation. This third party is the bank (or other lending institution.) The bank makes a contract with the home buyer that they will pay the seller the full amount of the purchase on behalf of the buyer, and, in exchange for that, the buyer will repay the bank over a period of time (usually 30 years.)

As we know from watching the world’s markets, perhaps most notably the commodities market, the price that real goods sell for does not always reflect their “real” value. Prices can become “artificially inflated” for a wide variety of reasons including speculation that many times proves to be incorrect. When this happens prices often rise or decline quickly to “correct” for these misperceptions.

Unfortunately, in 2008 we witnessed a very large correction in the nation’s real estate market. Over the previous several years, especially in states like Nevada, California, Florida and Arizona, home prices had risen dramatically. These price spikes were based on many factors including population growth, sudden shortages of supply, perceived continued economic growth in these regions, etc. During this time period, millions of consumers signed their names on the dotted line and agreed to pay what they felt was a fair price for their home. The banks agreed to finance these buyers and the sellers of the properties walked away with the money.

Fast forward 3-8 years. The economy has declined, population growth and economic growth have halted in these metro centers, and home prices have plummeted up to 75% in some areas. Individuals find themselves in the regrettable position of not being able to meet the mortgage payments on their homes and not being able to sell them for anywhere near the price that they purchased them for. Investors who purchased properties in order to generate income find that they cannot rent the properties for enough to cover their payments to the bank. Some homeowners decide to strategically walk away from properties are valued at 25% of what they once were and will likely take 10, 20, or even 30 years to return to their previous value.

Do I feel sorry for these individuals? Absolutely. Have I personally, as a real estate investor and realtor, been adversely affected by the decline in home prices? Absolutely. Do I believe that people who don’t make their mortgage payments deserve to be foreclosed upon? ABSOLUTELY! That’s right...you heard it hear...I believe that anyone who does not make their mortgage payments deserves to be foreclosed upon. This is the process that drives our economy. This is the core of capitalism. It is plain and simple and everyone knows and expects it.

The Solution?

On May 20th, 2011, the Nevada Assembly passed (33-9) Bill 284 with overwhelming support from Assembly Leader Marcus Conklin. This bill was widely touted as a measure to aid economic recovery and bolster housing prices in our troubled state.

One of the writers of the bill commented, “AB 284 will help the Nevada economy recover...AB 284 increases criminal penalties where “robo-signing” conduct occurs, and it creates a NEW private right of action for borrowers, which includes attorneys’ fees and a mandatory fine when a foreclosure has not proceeded properly. Ultimately, this will aid in stabilizing real property values and restoring transparency and integrity in the foreclosure process, both of which are key to recovery. The Bill requires that the foreclosing party supplement the Notice of Default with a notarized Affidavit of Authority. The Affidavit of Authority, i) states the identity of the trustee, ii) describes the amount in default, iii) lists the full name and address of the current beneficiary (and every prior beneficiary under the deed of trust), and iv) includes the penalties and costs related to the default and foreclosure.”

The Scapegoat

Ultimately, allowing the real estate market to correct itself through the foreclosure process may be painful, but it will work. Just as the stock market and the commodities markets regulate themselves and move forward, real estate will do the same thing...if left alone. The problem is that we can’t seem to let it alone and allow the process to run it’s course. Why? Because we must punish the scapegoat.

In ancient times a scapegoat was sometimes a literal goat and sometimes a criminal or a beggar who would be thrust out from a community or put to death after a natural disaster or other calamity in order to appease the gods or god of that nation. Our modern day scapegoat for the housing crisis has become the banks and other lending institutions.

Let me stop you for a moment as you remind me that the banks have re-packaged loans in ways that might not have been transparent and they have, in some very few cases, “robosigned” documents relating to foreclosure proceedings. Yes, I know. It doesn’t matter. Nothing that the banks have done has affected the price of real estate in any meaningful way WHATSOEVER. The banks are very large and have massive resources on hand so they have become a perfect scapegoat. But, as inconvenient as this truth may be, the banks have done nothing wrong here...at least nothing of consequence. Buyers came to the banks and mortgage lenders several years ago and asked for a loan to purchase property. The banks approved the loan, gave the money (mortgage) and the home was purchased. Whether or not the loan was sold, or packaged, or “robosigned” really does not matter. The buyer, somewhere along the line, stopped making payments. He received a notice of default. This was followed by a notice of foreclosure. At this point the bank has a right to foreclose. End of story. Or at least it should be.

The Scenario

As it stands currently, in default saturated areas like my hometown of Las Vegas, foreclosures are dragging on for unbelievable periods of time. I personally know individuals who have not made a payment on their homes for almost 5 years and have still not been FORECLOSED UPON! The banks are overwhelmed. They have lost money (as they deserved to as a result of their bad investments, just as homeowners deserved to lose money on their bad investments) and have cut staff in response. They are now trying to process a huge increase in foreclosures with limited personnel. The government’s recent response to this is to add a huge measure of red tape to the foreclosure process in the form of Assembly Bill 284. This bill forces banks to provide, among other things, affidavits proving that they have the right to foreclose on each individual homeowner. One of the attorneys who helped draft the bill summarizes the purpose of this law accurately when she states (as quoted above), “this will aid in stabilizing real property values.” How, exactly, will it accomplish this? There is only one way: by making it so difficult for banks to foreclose that the number of foreclosures decreases.

Why Not?

So what’s not to love? Fewer foreclosures means more people get to stay in their homes right? Yes, their homes that are still unsellable because the basis price is ridiculous compared to today’s values. The only way to “reset” a property’s value is for it to go through a foreclosure or short sale process. Delaying this is simply delaying the inevitable while also crippling the very lending institutions that you want to start making loans to new purchasers in order to defrost the current credit freeze.

As opposed to this delay, here is how things naturally take their course when foreclosures are allowed to move forward: Typical owner occupants in Las Vegas may have bought a home in 2006 for $300,000 with payments of $2650 per month. They had an FHA home loan and put down 3.5% (about $10,500) when they purchased the home. They made their payments for 3 years and stopped sometime in 2008. They stayed in their home making no mortgage payments and got foreclosed upon sometime in 2011 (3 years after they have made no payments on their home). Once foreclosed they move across the street into a totally rehabbed turnkey model match home bought by an investor for $80,000 at a trustee sale or as an REO (real estate owned bank foreclosure) and pay $1200 in rent per month to that investor (saving over $1450 per month from their previous home payment.) This savings is actually even greater as they are no longer paying property taxes, insurance, HOA dues, or maintenance on the home as these expenses are being covered by the investor, who by the way is getting a nice 10% return on his money if this is a cash investment and a 20% return if he was able to finance the investment home.

This is not the ideal situation, but this is how the economy works. This is how the housing market heals itself and moves on. If our politicians continue to take the “feel good” approach to economics they will hurt the very homeowners that they pretend to be helping. Politicians at both the local and national level have been playing the procrastination game for the last three years and it has only caused our city and our nation to slump further and further into the grips of recession and home value decline. As difficult as it may be, the only way to get out of this crisis is to walk through. Let the banks foreclose. Let the bleeding stop. Then the healing can begin.

Another Bulk REO Transaction in Las Vegas

Glenn Plantone of VIP Realty recently brokered another bulk transaction of foreclosed properties here in Las Vegas. This time, the bulk package was held by a Midwestern bank looking to move their Las Vegas inventory quickly. The package was comprised of nine REO properties and was sold to a local Las Vegas investor. This is the second such bulk deal that Plantone and his team have successfully brokered in the last few months. Late last year, Team Plantone completed a transaction of 15 homes for a Hawaiian investor looking to acquire buy and hold properties with great returns in Las Vegas.

The current bulk package consisted of four former model homes in the northwest part of Las Vegas and five other one-of-kind casita homes in North Las Vegas. The homes were built in 2007 (North Las Vegas) and 2004 (Northwest). Glenn Plantone represents buyers from all over the world that are looking to the Las Vegas real estate market for cash flow and future appreciation potential. Team Plantone has developed a reputation as a one stop shop for out of state investors looking for a full service real estate team that makes buying Las Vegas investment property easy. By catering to this need, Glenn has become one of the busiest buyers’ agents in Las Vegas.

The Las Vegas real estate market has become a hot bed for cash purchases in the last two years, as investors from all over the world flock to Sin City looking for 8-12% returns on their money. During the last three years, more than 50% of all single family home sales in Las Vegas have been all cash purchases. Many of these buyers are foreign nationals, with Chinese and Canadian investors leading the pack.

Plantone’s team represents buyers (and occasionally sellers) who are looking to purchase short sales, foreclosures, bulk packages, trustees’ sale properties, auction properties and distressed homes. Once the homes have been purchased at low wholesale prices Team Plantone manages the complete renovation of these properties and gets them ready for investors by placing long term tenants in the homes. These turn-key investment properties are generating average CAP rates of between 8-12%. A typical example from recent sales would be a 3 bedroom, 2 bath home built in 2005 that rents for $1000 per month and sold to an investor for $84,995. Most of these cash buyers are purchasing newer homes (2003-2007) for prices in the range of $80,000 to $150,000.

The full service team at VIP Realty is led by Plantone and specializes in accommodating the investor from the purchase to the rehab and from rental to management. Glenn Plantone truly understands what investors are looking for because, in addition to being a full time Broker and Agent, Glenn is also a full time investor. He currently owns over 30 investment properties himself.

Buy And Hold: It's The New Flip

After leading the nation in foreclosures for the past three years, the real estate market is changing quickly here in Las Vegas. Banks have literally stopped foreclosing on homes, and the lack of REO listings have combined with other factors to push Las Vegas REO inventories to record lows. As of March 2012, there are only 956 REOs (bank-owned, post-foreclosure homes) listed for sale on the Las Vegas MLS. When you consider that Las Vegas is still averaging approximately 4000 homes sold per month and that ½ of our sales consist of REO properties, these numbers mean that we currently have a two week supply of REOs available on our MLS. This is an unbelievably small amount of standing inventory.``

Now you might be thinking that this is surely good news for homeowners. Fewer REOs driving prices down means that homeowners will begin to once again sell their homes for reasonable prices and this will drive an economic recovery right? Not really. The problem with this theory is twofold. First, more than 50% of the sales in Las Vegas continue to be cash sales to investors. Why? Because banks are still keeping a tight grip on their funds and finding loans is continuing to present serious difficulties for the average home buyer. Second, even if potential owner occupants can find financing, we are seeing appraisers that, time and time again, are unwilling to appraise properties for their selling price. If you can’t get an appraisal for the home, it doesn’t matter how much someone is theoretically willing to pay for it.

On the other side of the fence we are watching foreclosure inventory continue to decline as banks shrink away from foreclosure proceedings. In February of 2012 the banks only took back 737 homes at the Las Vegas Trustees’ Sale. Even the “vultures” at the sale only picked up 597 homes. This is one of the lowest totals in the last several years. As a result of the robo-signing fiasco, AB 284, and government intervention in various forms, banks have ceased most of their foreclosure proceedings on properties that they have every right to repossess because they are worried that the foreclosure may be overturned on a technicality.

What does all of this mean for the Las Vegas real estate market moving forward? No one can really say for sure. What we do know is that we faced a similar situation at the beginning of 2010 where REO numbers began to decline dramatically and it became more and more difficult for our investor clients to acquire investment property in Las Vegas at reasonable prices. Now, as then, many REOs are going to a highest and best situation and are being bid out of the realms of cash flow for potential investors. In 2010, we dealt with this problem by developing a system for aggressively purchasing short sales. This succeeded and we were able to continue to provide properties for our investors. But we have learned and grown from our previous endeavors. This year, as REO inventory lightens, we are focusing on purchasing bulk portfolios, private auction properties, bank-owned non-listed REO packages, and some short sales as well. We recently closed on a 15 home package and a 9 home package purchased directly from the banks, who were looking to move their inventory quickly.

And so we get to our title: “Buy And Hold: It’s the New Flip.” Because it has become so competitive searching for properties with great spreads, the flipping market has slowed tremendously. The savvy investors are now buying and holding properties and taking advantage of the phenomenal interest rates that can currently be had (and will, most surely, soon be gone.) There has never been a more perfect time to leverage your investment or IRA dollars into real estate. Historically low prices, combined with rock bottom interest rates make this the perfect time to buy and hold cash flowing property in Las Vegas. Our cash buyers are getting returns of 8-12% annually on their money, and financed buyers are doing even better with returns of 15-25%.

If you are interested in learning more about what we do or investing in the Las Vegas real estate market, please contact Glenn directly.

Glenn and Ron Guests on Veterans Talk Radio

Glenn Plantone and Ron Aldinger of VIP Realty Group were guests recently on the February 11th evening broadcast of Veterans Talk Radio with Host Jim Lytner and co-host RJ Dough. The show is based out of Las Vegas and is webcast around the globe where troops in Iraq, Afghanistan, and U.S bases worldwide tune in. Along with Roy Mahan, the CEO of the High Rollers Chapter of American Merchant Marines and call in guest Beverly Frase with USA Cares out of Radcliff, Kentucky they covered a wide range of topics.

Ron Aldinger is a former Marine who served in Vietnam in the early 1970’s and has been working in real estate for over 35 years. Ron and Glenn Plantone specialize in the purchasing of distressed homes, many of which are foreclosures and short sale properties, and rehabbing them to “better-than-new” condition for potential renters or buyers. Plantone is proud of the service he is doing for the community by renovating these vacant or neglected homes back into move-in ready condition and adding value to neighborhoods and communities that were hardest hit by the recent housing collapse. Plantone, who is one of the top 10 busiest buyers’ agents in all of Las Vegas, concentrates completely on purchasing and renovating distressed homes and over the last two years has sold and rented 10-15 of these homes to veterans alone. Glenn and Ron accepted the invitation to be guests on Veterans Talk Radio in the hope that they could raise awareness for veterans that there are beautiful homes available in Las Vegas and elsewhere that qualify for V.A. loans. A typical V.A. loan requires zero money down from the veteran and Glenn is often able to help out even more by covering some of the closing costs that are involved in purchasing the home.

In total, Team Plantone completed and flipped over 60 properties last year in the Las Vegas area. Many were sold to owner occupants and many were sold to investors who have been moving heavily into the Las Vegas market to take advantage of rock bottom prices and the strong cash flow available from rental properties. Glenn’s team purchases properties at the Trustees’ sale, through bank owned REO foreclosures, short sales, and builders’ close outs. Once renovated, they offer military discounts and veterans’ discounts on their rentals. Glenn joked on the show that they should change the name of the brokerage from Vegas International Properties to Veterans Investment Properties Realty Group as they are continuing to do more and more business with Veterans. VIP is based in the northwest area of Las Vegas in Centennial Hills and many of the buyers and renters in the area work out of Creech Air Force Base (about 30 minutes north) or Nellis Air Force Base (about 15 minutes east) from their northwest office.

Beverly Frase of USA Cares spoke about many of the programs available to veterans including grants, education, medical, and housing benefits. USA Cares is an 8 year old non-profit company that specializes in aid to post 9/11 veterans. Host Jim Lytner has had a full career of over 35 years in the mortgage industry and has been doing the radio show for over a year and a half now. The show is webcast and recorded and can be replayed at anytime on www.vetstalk.info.

Three Methods for Valuing Property - And How They Matter to Investors

When we talk about what a property is “worth” we are making a judgment as to the value of that property. As real estate investors, it is crucial that we be able to accurately determine the values of our current holdings as well as our potential investments. In this article I am going to discuss the three main methods used to value property and how each of them pertains specifically to real estate investors.

Comparables

Sales comparables, or “comps”, are the most widely discussed and understood method for valuing residential real estate. This method of valuation has absolutely zero correlation to any tangible or permanent value (such as the cost of materials or land.) It is based solely on the laws of supply and demand. According to sales comparables, a property is worth exactly what consumers are willing to pay for it at that time. The most important aspect of correctly using comps to determine the value of a property is making sure that there is an apples to apples comparison. Every effort should be made to compare the home being valued with homes of similar size, location, amenities, finishes and condition.

Unfortunately, in the last year, we have run into major difficulties in the Las Vegas real estate market obtaining fair and accurate appraisals for our newly rehabbed properties. This is because some appraisers insist on valuing our completely turn-key, fully renovated properties at the same price per square foot as damaged foreclosures or REOs in the same neighborhood. I have spoken to numerous colleagues around the U.S. who are encountering similar difficulties. As an investor, when you are looking to value a property prior to purchase, it is important to note the condition of your prospective investment in comparison to other properties that might be listed as comparables.

Capitalization Rate

The most popular method used by investors to evaluate a potential purchase is capitalization or CAP rate. CAP rate is determined by dividing the Net Operating Income of a property by it’s acquisition cost. For a more detailed explanation of how to determine a CAP rate CLICK HERE to read my article on this subject.

Several factors go into determining what makes a “good” CAP rate for a particular investment property. Here in Las Vegas, we tell our investors to shoot for CAP rates of 10% or greater. For a more thorough discussion of what makes a good CAP rate please CLICK HERE to ready my article.

Builders’ Replacement Cost

The final method used to determine property value is builders’ replacement costs. This references how much it would cost in the current market to rebuild a particular property in the event of a total loss. To determine this, the total square footage of a structure is multiplied by the current cost per square foot of new construction in the area. This valuation is often used by insurance companies who are underwriting properties for homeowners’ policies.

For investors, builders’ replacement costs can provide a helpful benchmark for giving properties a more tangible valuation then comps alone. Investors who took note of the huge gap between builders’ replacement costs and actual market prices in Las Vegas in 2007 realized that a market correction was imminent and inevitable.

With completely renovated properties selling below builders’ replacement costs and CAP rates higher than we’ve seen in decades, now is the time to invest in real estate in Las Vegas. If you are interested in learning more about what Team Plantone has to offer investors, please contact Glenn.

Glenn Plantone Featured Again in CNN Money

Once again, Glenn Plantone has been featured as an expert commentator in a recent article from CNN Money. This piece by Les Christie was featured in CNN Money on Nov. 11, 2011 and is titled "Is Las Vegas' Housing Market Ready to Make a Comeback?" Excerpts from the article follow:

"NEW YORK (CNNMoney) -- Las Vegas has suffered through the housing bust like few other places and still has further to fall. But these days many real estate investors and home buyers are betting that it's poised to stage a comeback.

Sin City's metro area led the nation in mortgage defaults for 22 straight months through August and home prices plunged a whopping 60% from their 2006 peak, according to RealtyTrac. And prices still have further to fall. Financial analytics company, Fiserv, projects home prices in Las Vegas could fall another 16% by next June.

But to investors and home builders, there are enough positive signs to start betting on Vegas now.

Home sales, especially of bank repossessions, have picked up signi cantly. Nearly 36,000 homes have been sold so far this year through September 30, an 11% increase compared with the same period in 2010, according to Lawrence Yun, chief economist for the National Association of Realtors.

Glenn Plantone, a Vegas-based broker and investor who deals mostly in foreclosed properties these days, said he's seen an infl ux of foreign buyers, especially from Canada and China. Last year, he brokered 25 sales but this year he's already up to 65.

"I'll triple my business this year," he said.

According to CoreLogic data, 63.3% of homeowners there are underwater on their mortgages. As a group, Las Vegas mortgage borrowers owe about 20% more on their mortgages than the value of their homes. Many will lose their homes to foreclosure.

But for all of those who lose their homes, there are others who see it as an opportunity. More than 50% of all sales in town are foreclosures, said Plantone.

Recently, he had a client who made bids on 40 diff erent bank-owned properties. He was outbid each time. The investor wound up buying four new 1,400 square-foot homes in North Las Vegas for $140,000 each instead. He rents them out for $1,495 a month apiece, which give him immediate returns on his investment.

Once the housing market recovers he could sell the properties for a healthy return, too. It's hard to beat those kinds of odds."