Are municipal bonds going the way of subprime loans?  Will the threat of municipal bankruptcies adversely impact real estate values?  Should real estate investors be concerned?  Recent articles suggest the answer to these questions is a qualified “Yes.”  But while it may be too early to tell for certain, the forecasting dynamics are like predicting earthquakes — the proof of your theory may be a disaster of unprecedented magnitude.

The WSJ reported on 2/18 that cities around the country were evaluting the potential benefits of filing bankruptcy under Chapter 9, a seldom-used section of the Bankruptcy Code that provides limited ability for municipalities to file for bankruptcy protection.  There have been only 600 Chapter 9 filings since the provision was enacted in 1934.  One of the largest in recent history was Orange County, CA in 1994, but the current situation in Vallejo, California is grabbing the headlines.  There, the City has moved to used Chapter 9 to get out from under its union contracts with municipal employees, including police and fire personnel, and the issue is under appeal.  The WSJ reported that the City of Harrisberg, PA, with a population of only 47,000 — is facing $288 Million in debt and a $2 M payment due March 1st.  The San Jose Mercury News reported on 2/19 that the City of San Jose is facing a $100 M deficit, and a 15% cut in payroll across 6,521 employees would be necessary to avoid 550 layoffs.  San Jose is considering asking for a 1/4-cent hike in Sales Tax, a proposal with lukewarm support, but it would only raise around $30 M.

Underlying these stories is another looming crisis — the potential of an unprecedented disaster in the muncipal bond market.  Long considered a “zero-loss underwriting” market, the municipal bond insurance industry is looking closely at the situation.  In the near term, the threat appears moderated by technical factors under Chapter 9 rules, which allows special revenue bondholders to continue to receive payments, unlike the automatic stay provisions of Chapter 11.  But bond insurers are starting to set aside reserves, and some issuers are seeing their ratings drop.  If nothing else, it will make it more difficult — and expensive — for cash-strapped municipalities to raise funds.

What impact will this have on real estate values?  Already severely depressed by the current and looming inventory of foreclosed properties, real estate values have plunged, and even the most optimistic predictions acknowledge the recovery path is long and shallow.  But virtually every “Top-10-Best City” list for areas to live, invest, raise families, etc., is based on statistics that are heavily influenced by the level and quality of municipal services:  police and fire protection; crime rates, public parks and libraries; education and cultural activities; public transportation; bustling downtowns; and other similar criteria.

Here is where the picture gets darker.  Several articles cite a recent rise in crime in Vallejo as evidence of the hidden cost of filing bankruptcy, and the City has called for assistance from the Highway Patrol and surrounding communities.  But the State and local entities are themselves strapped for cash and resources.  San Jose has already made drastic staffing cuts in its Redevelopment Agency staff, and it’s clear that park and street maintenance efforts are on life support.  In short, every muncipal government in the United States is facing a budget issue as a result of the downturn in the economy, and their need to cut back services will further diminish the quality of life of their residents — and adversely impact the quality-of-life rating criteria typically used to rank them.  There aren’t many Mayors who don’t appreciate the irony — cutting back muncipal services, although essential to save money — will adversely affect quality of life and deter investment.  But filing bankruptcy could have even more drastic impacts — both tangible and psychological — which why no one wants to be the first.

There was a time, not too long ago, when the typical homeowner scoffed at the plight of the subprime loan holder, often blaming them for foolishly taking out a loan too rich for their income.  Very few homeowners, especially in California, ever considered the possiblity that their home value would decrease, and most people used to view bankruptcy or foreclosure as an extreme, last-ditch measure.  Even fewer had ever heard of a loan mod, and fewer still knew what a “short sale” was.  In a similar manner, local government officials do not want to be on the bleeding edge of trends, which is why they currently are doing all they can to resist using Chapter 9, just as so many homeowners once resisted the temptation to walk away from upside-down properties.  But if Vallejo’s “experiment” is upheld, and cities are unable to find new sources of revenue, the psychological barriers may be overcome by sheer necessity.  Bond insurers, investors, and Mayors are all watching closely.

Every successful real estate investor works with a team of professionals.  For those who are getting started, you should include a lawyer on your team, but start early.  If you wait until a situation becomes a crisis, the process can be confusing and could get very expensive.  Selecting the right lawyer can take some time and effort, but it will be worth it.

Even after going through a process of getting referrals from friends and colleagues, doing research on the Internet, and perhaps conducting a couple of interviews, you still need to learn how to make the best use of this valuable resource as a member of your team.  Many advisors promote the use of the “10 Question” approach – asking a series of questions before you hire a professional, such as a doctor, lawyer, financial planner, or other specialist.  These are often the same questions:  What is your experience? How long have you been doing this?  Have you handled cases like mine?  What is your success rate?  What do you charge?  How much will it cost?  What will be your approach?  Who will be handling the file?  What are my chances of winning?

These are all good questions, but I recommend a different approach – asking yourself a series of questions before you hire a lawyer.  Let’s face it – if you’re in trouble, you are not in the best position to bargain.  Imagine asking your cardiologist about his fees as they’re wheeling you into the emergency room.  In the real world, it is not always practical or advisable to negotiate with the ambulance driver or the roto-rooter man.

In order to make the best use of a lawyer on your team, you should ask yourself the following questions.  At all times, you will (or should) know more about your circumstances than your lawyer.  If you don’t know how you got into a dispute, or what you hope to achieve, how can you expect any professional to assist you? By asking yourself the following questions, you will find that you will be able to maximize the return on your investment in professional legal advice, and make the best use of the lawyer on your team.

1.  ARE YOU SEEKING KNOWLEDGE, JUSTICE OR REVENGE?

In other words, are you planning ahead or reacting to a legal problem?  If you are just getting started in a business or real estate transaction, a lawyer should be able to help you spot potential problems and provide useful guidance.  On the other hand, if you have been sued or recently experienced a breakdown in a business transaction, you need a lawyer who can help you review your options, and if necessary, take legal action on your behalf.  Unfortunately, most people wait until they need a lawyer instead of seeking advice before the need arises.  Consulting with a lawyer before circumstances force you to hire one can prove to be one of your most valuable “investments.”

2.  HOW DID YOU GET HERE?

If circumstances suggest you need to hire a lawyer, the first question you should ask yourself is “How did this happen?  How did it get to this point?”  Carefully and objectively review the chronology of events leading up to the dispute, and be prepared to explain to the lawyer what steps you have taken, if any, to resolve the matter.  Generally, disputes don’t happen suddenly.  Documenting the events will help your lawyer better understand the background and could save you significant amount of legal costs.

3.  IS THIS A BUSINESS ISSUE OR A LEGAL ISSUE?

A majority of disputes arising from real estate transactions involve primarily business issues rather than legal issues.  All dispute resolutions ultimately involve decisions that encompass elements of legal rights, fairness and equity.  A lawyer cannot make business decisions for you, but they can explain different legal strategies and consequences affecting your strategic planning and the “bottom line.”  The more the lawyer understands your business model, the better the chances the legal advice will be tailored to your situation.  Ultimately, you must make a decision, or it will be made for you.

4.  HOW MUCH IS AT STAKE?

This is usually among the first three questions a lawyer will ask you.  The answer helps the lawyer to understand the nature of the dispute and assess the amount of resources that might be required.  Every client should understand the importance of doing a cost-benefit analysis before going forward with expensive legal strategies.  Under the American judicial system, recovering your legal costs and attorneys’ fees is the exception to the rule.  If you feel you have been wrongfully sued, or are seeking your “pound of flesh” from a former business partner, seeking justice or revenge can be very, very expensive.  Legal disputes can end up costing hundreds of thousands of dollars and could result in a person losing their career, their marriage, and sometimes their sanity.  A good lawyer who is looking out for your best interests will help you to carefully evaluate all consequences of a proposed legal action.  Be realistic when evaluating the relative costs versus the benefits of your legal strategy.

5.  CAN YOU MAKE BETTER USE OF YOUR TIME AND MONEY?

Litigation can take up a lot of time and cost you lots of money.  You should make your decision on the basis of what is best for you in the long term.  What outcome is most compatible with your long-range plans?  If you have suffered a loss of money in a transaction, consider the “hidden” cost of trying to recover the funds, such as the amount of time you will have to spend searching for documents, attending depositions, and preparing for trial, not to mention attending a lengthy trial in some cases.  You should consider how you could use this time to better advantage – perhaps making more money than you lost!  You should evaluate what you can learn from the experience, and put that knowledge to good use.  Do the math – and consider the return on investment.

6.  HAVE YOU DONE YOUR HOMEWORK?

Before you hire a lawyer, do your homework.  You know more than anyone about your case and the circumstances.  Thanks to the Internet and many excellent publications like Nolo Press, you can educate yourself about some of the relevant law that may affect your situation.  It is rarely a good idea to represent yourself, but learning more about the law will help you ask the right questions when you meet with your lawyer.  Since most lawyers charge by the hour, doing your homework will save you money.  A better understanding of the legal process will also help you make better decisions about your case.  Doing your homework can yield a valuable, tax-free free return on your investment.

7.  WHAT WOULD YOU SETTLE FOR?

One of the first questions a lawyer should ask their client is what they would be willing to accept to settle the case.  Clients are often skeptical – why think about settlement when they have a good case?  The reason is simple – there is no such thing as a guaranteed outcome.  More importantly, our legal procedures make it mandatory for parties involved in litigation to make a good faith effort to resolve the dispute through “alternate dispute resolution” procedures, such as mediation and arbitration, before going to trial.  There is absolutely no way to know for certain how a Judge or Jury will decide your case after a trial, and the post-trial procedures for challenges and appeals can go on for years (yes, years).   If you want to have any control over the future of your case, you need to consider settlement.  In fact, most cases can be settled before any litigation is commenced.  Over 90% of all cases filed in Court are settled before going to trial, and many more are settled within hours of commencing the actual trial.  Bottom line:  the sooner you can settle a dispute, the less it will cost in terms of time and legal fees.

8.  HOW COULD THIS SITUATION BEEN AVOIDED?

At some point, usually after you receive an invoice from the law firm you hired, you will ask yourself how the dispute could have been avoided in the first place?  Obviously, it would be better to know the answer before you get into difficulties, but hindsight tends to teach us the value of foresight.  Consulting with an attorney before you commence a business or real estate transaction could be the most valuable use of your time and money.  Because lawyers see lots of problems after they’ve occurred, they can usually provide some good guidelines on how to avoid them in the first place.  CAVEAT:  You cannot prevent litigation, but you can take steps to reduce the probability that it will occur.  The sooner you ask the question, the more benefit you will gain.

9.  WHAT IS THE BEST WAY TO PROTECT MY ASSETS?

There are many, many books and seminars available on the topic of “asset protection.”  Most of these are sold on the premise that you could “lose everything” in a lawsuit.  Novice real estate investors are frightened into spending thousands of dollars for all sorts of “asset protection” schemes that, in the long run, are often useless and unnecessary.  Selecting the correct entity for your business model, whether it is a C-corporation, an LLC, a limited partnership, has important consequences for accounting and tax issues, and in some cases may serve to provide you with an added degree of privacy.  But the two most important steps you can take to protect your personal assets are (1) good management practices, and (2) insurance.  The combination of these two factors work together to resolve almost all types of legal challenges, and as noted above, most cases settle before any judgments are handed down.  Statistically, the probability of anyone “losing everything” as a result of a lawsuit is extremely small, yet some people invest more money in asset protection schemes than they invest in real estate!

10. WHEN IS THE BEST TIME TO TALK TO A LAWYER?

Now. Really – now! If you’ve already made a decision to get involved in a business or real estate transaction, or want to get started investing in real estate, you need to have a lawyer on your “team” of professionals to consult as you go forward.  For the cost of an initial consultation, you could learn a lot about where your plan may need further review, what risks you may not have considered, and key questions to ask your investment partners before you proceed any further.  It may be the wisest investment of your time and money that you’ll ever make!

Many people would like to invest in real estate.  Housing prices have plummeted; rates are at historic lows.  You can actually buy cash-flow investment property in California!  It’s a great time to buy real estate.  But how do you get started?

There are several ways to invest in real estate.  You can buy investment rental property, or purchase in an interest in an investment company.  You can buy single family homes, apartment buildings, REOs, fixer-uppers, or even raw land.  Or, you can purchase tax liens, options, or notes.  Thanks to the credit crunch, you can also invest by loaning money secured by real property.  There are several strategies, such as:  “buy and hold,” “leveraging,” “flipping,” “wholesaling.” for maximizing profit:  flipping, “buy and hold,” leveraging, wholesale contracts.    For the new investor, it’s like learning a new language.  There are literally dozens of books and articles in the library, the bookstore, and on the Internet - it can seem very overwhelming!

A word (or two) about risk.  All real estate investing involves risk.  There is no such thing as a “risk-free” investment.  You can learn to manage risk, and take steps to reduce risk - you cannot eliminate it.  Each individual has their own personal risk tolerance level.  While getting started, consider what would happen if you lost your entire investment.  As you gain experience and confidence, your tolerance for risk will probably increase, along with your ability to reduce the risks inherent in any investment.  An important element of risk management is to avoid problems, whether they are of an economic or legal nature.

There is not enough room here to explain everything you need to know about real estate investing, but a few pointers will help you get started.  I strongly recommend new investors should attend real estate investment seminars, talk to other investors, and read books and articles on real estate investing.  Learn the language.  Consider a low-risk, short-term investment and try it.  You will learn more “by doing” than anything else.

First Step:  Make a Plan.  The most important step is to consider both your personal and your financial goals, and develop a Plan.  A good Plan will focus on your goals.  Goals must be realistic.  Your plan should be flexible, and contain an exit strategy.  Be sure to have a Plan before you write your first check!

Your financial goals should support your personal goals, not the other way around!  Determine where you want to be in a few years down the road:  in a new home; retired; or not worrying about the kids’ college tuition.  Your financial goal should be to earn enough to help you reach your personal goals, plus a little extra for emergencies.  Remember, good investment plans take time - there is no single perfect investment, despite what some promotional ads try to make you believe!

Second Step:  Do your Research.  You don’t need to be a genius to make money in real estate investing, but you need to be smart.  And you can get smarter.  Again, I recommend that you attend real estate investment seminars (like SJREI) and talk to other investors.  Warning: Be wary of motivational seminars that try to sell you investment products, books, software programs, and CDs.  Listen.  Learn.   But don’t buy everything they sell -or say!   Invest in real estate - not gimmicks!

Remember, there are many different types of ways to invest in real estate.  Focus on those that you understand and are comfortable with.  When you are getting started, avoid complicated schemes, and stick to simple.  Achieving a level of comfort and success with one type of investment activity or another requires practice and patience.  Smart people learn from their mistakes.  Really smart people learn from other people’s mistakes!  (Hint:  everyone makes mistakes.  Try to make small ones, not big ones!)

As you learn more and gain confidence, you may choose to modify your Plan.  Make adjustments to keep your Plan realistic and achievable.  Establish a realistic timeline for your financial goals.  Modify your Plan to help ensure that your Plan will remain current and relevant.  For example, you might choose to modify your plan to invest out of state, or to team up with other investors.  The key to survival is adapting to a changing environment, and a smart investor must be prepared to adjust their investment strategy in response to changing economic conditions.  Remember: It is important that your Plan include an exit strategy.   In addition to doing Research on your strategy and a more specific investment proposal, you should develop a reliable “team” of professionals you can rely upon for timely, relevant advice.  Most successful investors have a team of tax specialists, real estate agents, attorneys and other professionals they work with on a regular basis.  They are often well-worth the cost of their services.  You can use the knowledge you gain from your professional advisors over and over.  The rate of return on your investment in professional advice is priceless!

Other steps to take:  Research the market and local conditions.  Fact-check information you get at seminars.  Remember: If it sounds too good to be true, it probably is!  Don’t rely on obsolete  information.  A lot has changed in the past two years - check the dates.  Learn as much as you can about the local market, demographics, and conditions.  Get local information:  use the Internet, but don’t rely on what you see online.  Find local newspapers, churches, and realtors, and talk to someone “on the ground.”

Finally, as part of your research, don’t forget to make sure the investment is consistent with your financial and personal goals.  If not, STOP.  Ask yourself:  “Will this investment get me closer to my financial goals?”  If the answer is “No,” step back slowly from the checkbook!  If you don’t have enough information to answer the question, you need to do more Research, modify your Plan, or find a new investment.

Third step:  Action.  Invest, don’t spend, your money.  If your ultimate plan is to make money investing in real estate, invest in real estate - not in sales pitches.  Remember, there is no such thing as the “perfect” investment. When getting started, it is okay to proceed slowly and deliberately, but you need to proceed.  Take a deep breath, get going, and keep an eye on your exit strategy!

Getting started is important.  Getting started on the right foot is even more important!

“You’re going to lose everything you own,” the speaker solemnly warned the audience at a recent real estate investment program.  “We live in a very litigious society,” he continued; “you need asset protection.”

Real estate investors, as a group, will flock to hear speakers talk about the need for what is commonly known as “asset protection.”  They will spend hundreds, if not thousands of dollars setting up elaborate business entities (the LLC - “Limited Liability Company” - being the most popular), in an effort to avoid “losing everything.”  Ironically, many new investors spend more money on “asset protection” than they do on real estate.  Sometimes they end up with all sorts of asset protection entities, but no assets to protect.

There is a more rational and practical approach to asset protection.  Setting up the correct business entity to allow you to achieve your real estate investing objectives is both important and necessary.  The correct entity will allow you to take full legal advantage of tax benefits and provide a structure for running the business.  Properly established and registered, the entity will allow the investor to work with investment partners, obtain financing, and provide a basis for determining the relative percentages of ownership and allow for succession and continuity for a successful operation over a period of time.  And yes, the entity will provide a measure of “asset protection” for the benefit of the principals, if the entity is properly established and capitalized, and has complied with the appropriate level of corporate formalities.

However, no form of entity is a substitute for good risk management.  The fundamental components of a good risk management program are (1) good management practices, (2) adequate insurance coverage, and (3) regular review and oversight.  For real estate investing, good management practices include using the services of a reputable, licensed, professional property management company.  The relatively small cost (usually 6 - 8%) will be more than justified by the savings from avoiding disasters.  Good management includes proper screening of tenants; regular and thorough inspection of the investment property, arranging for prompt and competent repairs, and if necessary, timely initiation of eviction proceedings.

In addition to standard form “all risk” fire insurance policies, adequate insurance coverage should include, where appropriate, flood, earthquake and other forms of disaster coverage.  I recommend that tenants be required to carry renters insurance, which can cost as little as $12 per month, but will cover the tenant’s personal belongings, relocation costs (if necessary), and injuries sustained by their guests.

Last, but not least, good risk management practices includes regular review and oversight.   “File and Forget” is not a smart way to manage anything.  Prudent owners make sure they manage their property managers, and take steps to ensure that their expectations are met.  Do not just sit back and hope the checks roll in every month.  Be proactive. Pay attention.  Ask questions.

But what about “asset protection.”  What if something “bad” happens, the tenant sues, and the investment property is in your name and not buried under an onion’s worth of layers of special entities?  What can happen?  Indeed, what DOES happen?

First and foremost, the type of liability that owners need to be concerned about involve claims resulting from personal injury, either to the tenant or their guest.  Injuries can range from a sprained ankle caused by a crack in the walkway to serious brain injury (or death) resulting from a collapsed balcony or similar structural failure.  There are also potential claims based on acts of discrimination, for example, but in terms of monetary damages, the “big ticket” issues usually arise from personal injury cases.

In such cases, the first and best line of defense is good property management, as discussed above.  In terms of avoiding catastorphic loss, investing in good prevention can yield a very high rate of return!  The next line of defense is your insurance policy (or policies), which should include comprehensive general liability coverage.  In the event of a claim, the insurance company will provide legal counsel and will pay for investigation and other costs arising from the incident.  If early settlement does not resolve the issue, and the matter proceeds to litigation, your insurance company is most likely under an obligation to provide a defense in most cases.  There are general exceptions, such as for willful or deliberate acts, and specific exceptions, such as where the policy does not cover certain types of loss unless a special “rider” has been obtained; i.e. flood, earthquake, etc.

Statistically speaking, it would be extremely rare if you found yourself facing a full-blown lawsuit with a prospect of a large jury verdict that might exceed the limits of your insurance coverage — the type of catastrophic “lose everything” outcome that promoters of “asset protection” programs use to sell their services.

Let’s look at the reality — not the hype.  It is fairly well established that close to 90% of all lawsuits that are filed will settle before going to trial.   So, if your insurance company has not been successful in resolving the claim and the plaintiff (i.e., your tenant) proceeds to file a lawsuit, the probability of the matter going to trial before a jury is 1 in 10.  Arbitration, mediation and other forms of formal dispute resolution are mandated by most State rules governing litigation.   In California, the parties are required to participate in a Mandatory Settlement Conference the week before the start of trial.  Statistics vary, but in one County, the Court noted that one-third of all remaining cases settle at the Settlement Conference, usually held on the Wednesday before the start of trial; another one-third settle on the Friday before trial, and a percentage settle even after the jury has been seated.  Again — as a statistical fact — very, very few cases make it all the way to the end of trial.  And even after the Jury renders a verdict, there are appeal procedures, that work to modify the outcome.  Many headline-grabbing jury awards are often reduced — drastically — by these types of procedures.

Real estate investors should consider the actual threat of “losing everything” in considering how best to protect their investment and their personal assets.  Sadly, many new investors spend more time focused on so-called “asset protection” measures than they spend doing their due diligence in relation to the investment itself.  Investors pay money to set up elaborate LLC entities only to find themselves locked into a bad investment with other partners they did not take time to know.  If one added up all the personal injury jury verdicts that exceeded insurance policy limits over a 10-year period in the United States, I wonder if the total amount would come close to matching the losses caused by Bernie Madoff and his scheme.

This is not to say that forming a LLC or a C-Corporation is not a good idea.  Properly done, the appropriate business entity provides the means to manage your investment assets, entitles you to certain tax benefits, and manage your investment partners.  But a business entity should never, ever be a substitute for good management practices.

Why should you seek legal assistance as part of your due diligence when considering an investment opportunity?  For starters, it might be a lot less expensive than seeking legal assistance after something goes wrong.  To be perfectly honest, I would really prefer not to hear a client tell me “I wish I’d talked to you sooner.”  Actually, there are several ways an attorney can be a valuable member of your real estate investment team.  Here are a few points to consider when making the decision how to maximize the return on your legal dollar.

For starters, you need to focus on your goals.  Most successful real estate investors have a clear focus on their financial objectives.  If you have a plan and are focused on clearly defined and realistic objectives, you’ll be able to communicate these objectives to your investment team.  By staying focused, you can avoid distractions and concentrate on your goals.  How can you expect your advisors to help you get where you’re going if you don’t know where you want to end up?

The next step is to make sure you consult with an attorney familiar with real estate issues.  Not all attorneys are equally knowledgeable in all areas of the law.  You wouldn’t hire a plumber to do your electrical work, or consult with a foot doctor for a head injury.  For the same reason, a brilliant patent lawyer may not be the best choice for evaluating a real estate investment opportunity.   If you are not sure — ask.  It will save both you and the attorney time — and money.

Next, heed the age-old maxim:  “You get what you pay for.”  Don’t start the conversation “Do you give free advice?”  The right attorney is going to provide you with valuable advice that will be worth the cost.  The attorney - client relationship is not only privileged, and over a period of time your attorney can become a very valuable and trusted member of your investment team.  Work on developing a long-term professional relationship with your attorney, and you will realize a good return on your investment.

Spend wisely.  Let the attorney know your budget.  Most attorneys will work with you, so long as you have realistic expectations and take a reasonable approach.  At the same time, recognize that the true measure of value of professional advice is avoiding the loss of your investment.  If you are investing $50,000 in a project that promises to yield a 10% return, you need to measure your legal costs against the risk of losing the entire $50,000, not as a percentage of your profit.  Remember, you will hopefully be able to apply good legal advice over and over — thus maximizing your return on your legal investment.

Avoid litigation.  One of the reasons to do your due diligence is to avoid situations that will result in litigation.  Unfortunately, there are many:  poorly drafted investment contracts; easement disputes; zoning violations; and overzealous promises, to name a few.  No one benefits from litigation except trial attorneys.  Aside from the costs, there are the inevitable delays, fractured relationships, and lost opportunities.  Again:  Avoid litigation.

Follow the advice.  You paid for it — so use it!  Of course, it’s your choice.  But you should at least give the legal advice some consideration before you take action.  Many times, an attorney cannot unequivocally state that a particular real estate investment complies 100% with all applicable state and federal laws, tax codes, SEC regulations, etc.  Each investor should recognize that there is no such thing as 100% certainty, and adjust their risk tolerance accordingly.

Ultimately, the decision whether to proceed with an investment is up to the individual investor.  Seeking advice from financial planners, tax advisors, real estate professionals and attorneys, as well as from experienced investors, is all part your due diligence.  Getting legal advice before you invest is often a smart investment strategy.

A bad situation is about to get much worse.  Two bills pending before the California Legislature, AB 764 and SB 94, will apply criminal penalties and fines to real estate brokers and attorneys who charge advance fees or take retainer fees to handle loan modifications.  The primary basis for this approach appears to be the continuing assumption that homeowners can get these services for free from the lenders themselves, or from HUD authorized nonprofit loan counselors.  Any broker who wishes to charge for these services must first obtain approval from the Real Estate Commissioner and comply with the new provisions of the law.   Violation of these provisions by an attorney would constitute grounds for disciplinary action.  Unfortuately, this legislation — like many other recent regulatory actions — attacks the wrong problem.

On the surface, this consumer-protection legislation appears to address a serious problem:  the rash of scam artists seeking to profit from the thousands of homeowners facing hardship and possible foreclosure.  It is too early to predict whether these bills will pass, but the trend is clear.  Authorities are clamping down on the widespread abuses and scams that have plagued distressed homeowners for the past couple of years.  One company recently shut down by the FTC in Southern California had 400 employees, seven attorneys, and claimed a 98% success rate at “modifying” loans.  In one of these, the lender increased the mortgage payment by over $300 per month — even though the homeowner was current on their payments!  The “loan mod” company charged the homeowner $3,600 for this “modification.”  This was not an isolated case — approximately 60% of all “loan mods” approved by lenders in the first three Quarters of 2008 resulted in either no change or an increase in the borrower’s mortgage payments!  To no one’s surprise, a majority of these “modifications” failed and the properties went back into foreclosure, prompting renewed efforts by the Federal government to offer incentives to lenders to actually lower monthly payments.  (These Guidelines were released on March 4, 2009).

Nonetheless, thousands of homeowners, facing foreclosure and fearful of losing their homes, were scammed into paying money to unscrupulous individuals and companies who promised to “stop foreclosure” and “save your home.”  Responding to the problem, the California Department of Real Estate (DRE) issued a “Consumer Alert” and established a program which would allow real estate brokers to submit their Advanced Fee Agreements for review and the opportunity to be listed on the DRE web site if the DRE issued a “no objection” letter.  The DRE now lists hundreds of brokers on their web site who have been “approved” to charge advanced fees.  The DRE also list over 240 individuals and companies against whom the DRE has filed a “Desist & Refrain” Order and/or Accusation for loan modification activities.

On June 1, 2009, the California Attorney General issued a press release directing anyone who acted as a “foreclosure consultant” to register with his office and post a $100,000 bond by July 1, 2009.  The press release also lists several enforcement actions taken by the AG in relation to prosecuting loan modification scam artists.

Earlier, in February, 2009, the California State Bar had released an “Ethics Alert” that contained a fairly comprehensive discussion of the background leading to the current foreclosure crisis, and warned that attorneys who offered their names to non-attorney companies in order to allow those companies to collect advance fees were in violation of the Rules of Professional Conduct, which prohibit licensed attorneys from assisting non-attorneys in the practice of law, and prohibit attorneys from splitting fees with non-attorneys.  Also, the Ethics Alert reminded attorneys that it was a violation to file lawsuits to delay a foreclosure sale without good cause.

These and similar measures are designed to protect consumers and homeowners, ostensibly from the potential scams of companies seeking to profit from the chaos in the housing crisis.  However, as distasteful and outrageous as these practices may be, they are not the real problem.  A blanket attack on real estate agents and attorneys will invariably sweep up many professionals who, by virtue of their expertise and training, are in the best position to actually provide much-needed assistance for these distressed homeowners.  At the same time, this regulatory approach does nothing to make the task easier for the homeowner to handle the task themselves — the legislation directs them to go to a local HUD office or to their website at  www.HUD.gov to get a list of approved nonprofit housing counseling agencies.

The real problem is two-fold.  First, the process whereby these loans were securitized, fractionalized, sold, and resold means that in any given instance, the “lender” is merely a loan servicer for an investor two, three or four times removed from the original institution that originally approved the loan.  Each investor has specific restrictions and requirements beyond which the “lender” may not modify the terms of the loan.  There is no ability to negotiate directly with the investor, and the process for reviewing each application in light of these requirements takes anywhere from a month to 90 days or more.  The second aspect of the real problem is there is no real incentive to provide meaningful relief in the form of principal reduction, or otherwise offer modifications that will make a difference.  “Loan Mods” that simply shift the debt load to the back end of the loan, or offer insignificant adjustments (i.e., a 27-cent monthly reduction), as an alternative to foreclosure, really do not accomplish anything.  Forcing a distressed homeowner who has suffered a sudden loss in wages or other genuine hardship to endure three to four months of back-and-forth with an unnamed and undisclosed “investor” just to receive an unacceptable or meaningless proposal is bad enough.  Limiting — if not eliminating — their range of options to seek competent assistance merely adds insult to injury.  Making it virtually impossible for competent professionals to charge for legitimate services will only force them to refuse to participate, and do little to address the real problems.

There is no question but that there have been outrageous abuses by scam artists seeking to profit from the crisis.  Existing regulations govern the conduct of licensed real estate and legal professionals, and if properly applied and enforced, would address most of these types of problems.  What is needed even more is meaningful and effective regulations to allow lenders the ability to modify existing loans without the hidden restrictions imposed by silent investors lurking in the background.   Focus on the real problem — don’t attack the lifeguards and ignore the sharks!

Will the Real Federal Mortgage Relief program please stand up?

Two stories in today’s financial media tell two different stories:  “Banks Ramp Up Foreclosures,” and “Up to $9.9 Billion to Modify Mortgages.”  (WSJ).  The first article details how many lenders have simply abandoned their voluntary moratorium on foreclosures and have gone ahead where borrower were delinquent.  The second details how the Administration has reached agreements with six lenders, including Chase Home Finance (J.P. Morgan Chase & Co.); Wells Fargo & Co.; GMAC Mortgage Inc.; CitiMortgage (Citi Group); Select Portfolio Servicing; and Saxon Mortgage Services, Inc., to provide up to $9.9 Billion in

mortgage modification assistance in line with the Guidelines released on March 4, 2009.  As noted in the article, many of these lenders have been taking applications and hopefully will now be able to process them.  According to the Guidelines, any loan modification agreement reached under the new terms must go through a 90-day trial period before the lender will be entitled to the incentive funding being made available.  The article noted that the Administration hopes to work out similar agreements with other lenders.  Noticeably absent from this first list of lenders is Countrywide.

So, where does this leave the situation?  If some banks are ramping up foreclosure sales at the same time as others are getting ready to receive large amounts of federal funding to modify or even refinance their loans, it won’t surprise me to see homeowners receiving two very different notices in the mail, given the propensity for the lending institutions to have a right hand and a left hand that do not know what the other is doing.  In my recent efforts to assist some homeowners with loan modifications, I have not heard much to give me much confidence that the process will be under control anytime soon.

As I have stated before, the most important step for a homeowner to take is to contact their lender if they feel they need to be considered for a loan modification or refinance.  Eligibility criteria is available at www.financialstability.gov, but I continue to urge any homeowner who is struggling to make ends meet to see if their lender will process an application, even if the lender will not be eligible for incentives under the Administration’s program.  Be prepared to submit a letter explaining your hardship, and documentation of your income and expenses, including W-2s, tax returns, pay stubs, bank statements, etc.

A quick word about the many so-called “loan mod specialists” claiming they will save you from foreclosure — for a fee.  The California Department of Real Estate and the California State Bar have issued ethics alerts concerning the ground rules for brokers and lawyers to charge fees for assisting homeowners.  Many services that use robot calling devices claim to be working for law firms or claim an association with an attorney in order to justify charging fees in advance.  Many of these companies are operating illegally and in violation of the Rules of Professional Conduct that govern the practice of law in California.  For a detailed but concise statement of the applicable rules, see the State Bar’s release at http://calbar.ca.gov/calbar/pdfs/ethics/Ethics-Alert-Foreclosure.pdf.  As a homeowner, you are free to contact your lender on your own.  If you desire professional assistance, contact a licensed Real Estate Broker that has been cleared and listed by the State DRE, or contact a licensed attorney directly.

There are a number of lessons to be learned from a just-published decision by the Fifth Appellate District of the State of California, which held that a City’s demand for increased in-lieu fees from a housing developer was not “reasonably justified.”  When the developer initially obtained approvals to build 214 housing units, the City of Patterson (Stanislaus County) imposed a fee of $734 per house, to be paid “in lieu” of requiring the developer to build “affordable housing” in the subdivision.  The Development Agreement between the developer and the City specified that the fee would be due when the developer pulled building permits, and noted that the City was working on an updated analysis that would result in an increase to this fee.  When the developer went to pull the building permits, the City announced it had raised the fee to $20,946 per house.  The developer sued the City, lost at the trial court, and then appealed.  The Court of Appeal ordered the City to vacate the fee and remanded the case back to the trial court to determine an appropriate remedy.  Building Industry Assn. of Central California v. City of Patterson.

Looking beyond the inherent absurdity of the extraordinary increase in fees, there are several less obvious but significant lessons here.  First, for real estate investors, the case illustrates the level of uncertainty that lies beneath the routine process of securing entitlements and going through the development process.  The developer initially obtained City approvals and entered into the Development Agreement in January, 2003.  The increased fee was imposed three years later.  The trial court ruled in favor of the City on December 20, 2007.  The Court of Appeal reversed on January 30, 2009 (modified Opinion issued March 2, 2009).  Six years elapsed between the original “approval” and the Court ruling in favor of the developer, and the case still has to go back to the trial court for determination of a “remedy.”

Developers often argue that by building more houses, the costs are spread out so as to reduce the individual price of each home.  In other words, allowing greater density will increase affordability.  The Court noted that the average cost of housing in Patterson was rising from around “$157,000 in 2001, to $247,380 in 2004.  According to the City, this created an “affordability gap” that was used to justify the imposition of the $20,946 “in lieu” fee.  By the time the Trial Court heard the case, the average price of a home in Patterson had increased to around $350,000.  The City of Patterson has a population of around 20,875 and a median annual income of slightly less than $60,000.   In developing its Fee Justification Study, the City had determined that it needed 642 new “affordable” housing units, and based the “in lieu” fee on what it calculated to be the “affordability gap” for moderate, low and very low income families, based on housing prices at the time.  The Study concluded there was a “gap” of $73.5 Million, and estimated there were 3,507 “unentitled” lots in the City, or $20,946 per lot.

The Court ruled that the City’s determination of the fee was based on the estimate of the City’s need for 642 affordable housing units, and had no connection to the need for affordable housing generated by the developer’s market rate project.  Therefore, the fee was not “reasonably justified” as required under the law.  It is interesting to note that the average price for a house in Patterson has dropped to $168,166, and there are approximately 1,278 foreclosures out of slightly more than 5,000 dwelling units in that City.  In other words, the average price of a house in Patterson has dropped almost back to the levels that were in existence in 2001, when the City only imposed an “in lieu” fee of around $340 per lot, the the trend is clearly downward.

The Court case does not provide any detail as to whether the imposition of the extraordinary fee resulted in any delays in building, but the legal proceedings, which extended over a six-year period, certainly cost the developer and the City a fair amount in terms of resources, time, and legal fees.  Moreover, bringing the houses to market in 2007, when the average market price was over $350,000 — would yield a much different ROI than in 2009.  Assuming that the in-lieu fee would have been tacked onto the price tag means that the cost of an average house would have been increased by an amount equivalent to the amount of a down payment required to purchase the market rate home.  Instead of giving the City the funds, the developer could have contributed the down payment for each of the 214 housing units, and effectively provided “affordable housing” for over a third of the City’s estimated shortfall.  Instead, the imposition of the extraordinary fee only served to generate litigation, not housing.

As so often happens, an otherwise well-intentioned but ill-advised policy decision has resulted in what can only be expected to be a financial disaster for the budget and fiscal stability of another California municipality.  No one faults the City for seeking ways to create more affordable housing, but faulty execution of the policy failed to achieve the goal.  Investors probably lost a considerable amount due to delays, and the City of Patterson is faced with an adverse ruling, rising crime rate, and one-in-four of its houses in foreclosure.  Of course, the imposition of the unjustified housing fee was not the cause of the current recession, but one wonders if a more enlightened approach to solving the affordable housing dilemma might have cushioned the blow.

Upside down on your home loan?  Real estate investment property vacant?  Don’t know what advice to follow?  Should you walk away or let it go to foreclosure? File bankruptcy?  Hire a loan mod specialist?

Homeowners and real estate investors are scrambling to cope as the economic crisis hits home — literally.  Even in California, property owners are waking up to the harsh reality that their homes and real estate investments are worth less than what they owe on their mortgages.  Add the misery of a layoff or news that an investment has gone sour, or the fact that your 401(k) has suffered a 30% drop in value, and you cannot make the payments.  What can you do?

Three steps to get out of the muck

First, CALM DOWN, don’t panic.  The threat of losing one’s home is certainly grounds for concern, but if you panic, you are more inclined to do do the wrong things.  People who panic tend to listen to bad advice, especially when it comes in the form of a promotion making ridiculous promises.  Most of this advice comes from people who are trying to make money, not people who are trying to help you.

Second, GET BUSY!  The process of working through a loan modification takes time, and requires a lot of hard work on your part.  You will need to demonstrate that you will be able to make the payments if and when the real estate loan modification is approved.  This will require you to make some tough financial decisions, get your financial records and documents in order, and probably make some adjustments to your plans.  Don’t blame yourself — or others.  It only serves to waste time and energy that you will need to develop a solution.  Instead, make a Plan.  Ask yourself, “What do I want to do?”  “Where do I want to be?”  Chances are, if you are facing the prospects of a layoff, or have been unable to make mortgage payments, or are facing the prospect of foreclosure, you’ve been caught up in the chaos of the moment, and haven’t taken time to focus on the future.  Working through a loan modification process only makes sense if you have a clear idea where you want to end up.  In the end, it may make sense to short sale a property, or let it go into foreclosure, but only if it helps you to get where you want to end up.

Third, take ACTION.  Get help now!  Consult with a professional and explore your options.  I recently received a call from a distraught individual reporting she had been evicted that morning by the Sheriff from the home she had owned for 20 years.  Not an ideal time to start getting legal help!

Before you sign up with someone advertising loan modification services, find out exactly what they will do for you. Look for a real estate attorney or a specially registered real estate broker.  Pursuant California law, in many instances real estate brokers cannot charge you a fee in advance unless they have been approved by the Department of Real Estate (DRE).  Attorneys licensed to practice in California are exempt from this requirement, but make sure they are experienced in real estate law. For more information, see the Consumer Alert by the DRE: http://budurl.com/DREAlert

Fourth, reread step three and take ACTION.  Too many individuals become paralyzed by worry.  Your circumstances will not improve without action.  So, take a deep breath and pick up the phone. Contact a professional experienced in loan mods who will get started right away.  The sooner, the better.  It may cost you some money, but with the right help, you will be able to avoid even more costly mistakes.

or, How to Avoid Legal Problems in Real Estate Investments

(c) 2009 by Jeffrey B. Hare, Attorney at Law

The only sure way to avoid legal problems associated with real estate investments is do nothing.  However, if you want to get involved in real estate investing, you need to follow Rule Number One:  do your Due Diligence.   Although many investors and real estate professionals are familiar with the term “due diligence,” they don’t always follow through.  Many real estate agents limit their “due diligence” to a series of checklists concerning the property, such as confirming the zoning, evaluating the condition of the buildings, and looking for evidence of hazardous chemicals, earthquake faults, or underground tanks.  These are important considerations, but for the real estate investor, “due diligence” involves a lot more.

To keep this simple and easy to follow, I have summarized the key points into a program that I call the “Five P’s of Prudent Real Estate Investing.” The Five P’s are:  Plan, Property, People, Payment, and Patience.  If you take the time to understand what each of these five stages involves, you will have taken a major step towards avoiding most of the legal and financial problems that can overwhelm the real estate investor.  Let’s get started.

PLAN

There are two aspects of the planning stage:  Personal and Financial.  You should carefully evaluate your Personal Goal — what do you want to be doing in a few years?   Stop.  This is a critical step in the process. What do you envision yourself doing in, let’s say 8 - 10 years from now? If you don’t know where you’re headed, you won’t know how to get there.  Form a mental picture of what you see yourself doing in a few years, and hold that vision while you proceed with this article.  Then come back and re-evaluate your vision.  Ask yourself, “Is it realistic?”

One additional note about the importance of having a clearly defined and realistic personal goal is that it will help you quickly and efficiently identify and eliminate distractions that will NOT get you to where you want to be.  Thanks to the Internet, you will be quickly overwhelmed with opportunities, options, and deals, each one promising to be “The Deal You Can’t Miss!”  If you know where you’re headed, you will be able to quickly evaluate and eliminate many of these distractions and focus your energy and resources on those deals that will help you reach your goal.

The second aspect of the Plan stage is looking at your Financial Goal. Part of the process of evaluating your Personal Goal is figuring out how to make sure you can afford to do what you want to do:  cover the cost of your lifestyle, provide financial security for your family, earn enough to live comfortably.  You need to plan for contingencies, medical conditions, and of course, changes in the economy (if the recent downturn wasn’t enough of a lesson!).  You should consult with a qualified, professional financial planner.   Each and every person’s situation is different, but your Financial Goal should be designed to support your Personal Goal.

STOP: Keep in mind that you should periodically reevaluate your personal and financial goals.  They are targets, not prison sentences.  You can modify them to suit your circumstances.  But you should keep them both in focus, and know if you are on track to reach them.  If you stray from your path, make the necessary course corrections or reconsider your Plan.

PROPERTY

As I mentioned earlier, most real estate agents focus their due diligence on the property, which is important.  The investor should also evaluate the property as well.  There are three key aspects to consider.  They are Purpose, Location, and Condition.

Let’s start with “Purpose.” Is the property you want to invest in suitable for the intended purpose?  Does it comply with existing zoning regulations?  Does it meet building and fire code requirements for the intended occupancy?  Is the lot large enough to allow for sufficient parking, ingress and egress, signage, and even expansion?  Does it have adequate sewer, water and access to utilities?  Just because a property is available at a good price does not mean it is suitable for your investment purposes!

Next, let’s consider the all important “Location, Location, Location.” Here, you should consider both the environmental and economic factors.  While it is important to consider such factors as the proximity to transportation routes, good schools, convenient shopping, and other amenities, do not overlook the importance of other significant factors.  For example, is the property subject to natural hazards, such as flooding, wildfires, tornados,  or other extreme weather?  Equally important (for the success or failure of your investment objectives) are factors such as the diversity of the local job market, stable housing prices, and rental rates.  Does the area have a history of relatively low unemployment based on a diverse economy, or is it overly focused on a single industry that could suddenly collapse? (think Detroit).  Is there an overabundance of housing driven by development rather than housing demand? (think Stockton).  As the saying goes in the Music Man, you “gotta know the territory.”

The third aspect of the Property consideration is, of course, the Condition.  Here, you should focus on the cost to bring the structure to “rent ready” condition, whether the improvements will be paid by the owner or the tenant.  One word of caution:  many older residential and some commercial properties may be eligible for listing on local, state or national historic registers, and may be subject to strict regulations governing modifications of historic buildings.  Modifications can be exceedingly expensive, and local officials may require that the structure be restored rather than remodeled.  Last, but not least, do not rely on disclosures.  Always insist on conducting your own inspection as a contingency under any purchase and sale agreement.  Watch out for mold, asbestos, vermin, termites, dry rot, and other evidence of deterioration that can be very expensive to repair.  Don’t forget to look for nearby drainage channels, sewer or septic hookups, possible easements, overhead high voltage wires, and possible neighborhood nuisances (under a flight path? backs up to a shopping center or night club?).

STOP: Reality check — this is real estate investment property, not your dream home.  It doesn’t have to be perfect.  If it was perfect, you wouldn’t be getting such a deal, right?  Also, at the right rental rate, your tenants will be happy to have a safe, secure and clean place to live — they probably don’t expect or want to pay for a Palace!  Be practical — but keep your eyes open and be prepared to deal with these issues.

PEOPLE

As an investor, your intention is somewhat different than that of a property owner.  You probably own your own home (or are making payments towards that goal).  In making decisions about your home,  you most likely consult with your Spouse or significant other.  However, when you act as an investor, you need to consider putting together your team.  That’s correct — teamS.  One team will consist of yourself and your Investment Advisors or consultants. The other team will consist of yourself and your Investment Partners.

First, if you are just starting out as a new investor, you should assemble a team of individuals with the professional expertise to provide you with competent advice on different aspects involved in real estate investments.  I previously mentioned you should consult with a Financial Planner, someone who can provide an objective and professional perspective on your financial situation and goal, and advise you on how best to structure your financial plan.  You should also use the services of a Certified Public Accountant, commonly referred to as a CPA.  This individual can provide important advice as to the impacts of capital gains taxes, depreciation, deductible expenses, and other financially critical matters that will affect your decisions.  You will need Brokers, both for real estate transactions and to help you get financing for the acquisition phase, and whenever you seek to sell investment property.  The right Broker can be worth many times their commission if they help you get a better understanding of local economic conditions, know the neighborhoods, and even help you get financing.  You will also need a Property Manager, a very critical element in the success of your investment structure.  Property Managers help you find and screen tenants, help maintain your property, and keep the value of your investment intact.  Last, but not least, you need an Attorney.  Keep in mind that your family attorney may be great with wills and trusts, but may not have a background or training in land use or real estate issues.  Also, they may or may not be licensed to practice law in the same state where your investment property is located.   Together, the primary function of this Team of Advisors is to provide assistance to you in helping you achieve your investment goals, not theirs!  As you become more experienced in real estate investment issues, you will quickly become more selective in both who you have on your team, as well as to how you will use their services.

Second, you need to consider assembling a team of Investment Partners.  Many investors lack sufficient capital funds when they are starting out, and need to line up equity partners, lenders, and other investors in order to make their deals work.  This is probably where your Attorney can prove to be the most valuable — helping you determine how best to organize these individuals so that in the end, you achieve your goals.  For example, you will need to determine the correct form of entity to use when different people are involved:  will it be a partnership, corporation, Limited Liability Company (LLC), or a Tenancy in Common (TIC) arrangement?  Who will control the decision-making process?  How will expenses and profits be allocated?  What happens if one of the partners refuses to contribute their fair share of an emergency repair?  Is your system set up so you can add additional investment partners in the future?  Is the investment structures so that it can take advantage of tax deferral strategies, such as a “1031 Exchange?”  (Note:  if it is held in an LLC, it may not be possible for an individual member to use this common but effective tax-deferral method).

Last, but certainly not least, you must include your Spouse, if you are married.  Perhaps nothing is as catastrophic to an investment plan if the Spouse is left out of the loop, or not involved when they should be.  More important than providing legally-required signatures and consent, your Spouse often serves as your closest and most trusted investment advisor, someone who knows your goals better than anyone, and can provide a critical “reality check” when you might otherwise get carried away in the passion of “the deal.”

PAYMENT

At some point in every investment decision, there is a bottom line.  You will have to make payments (mortgage, insurance, taxes, fees), and in order to do so, you need to receive payments (rent, sale price).  The total amount of the first type must be covered by the second, or your investment goals will not be realized.

To purchase real estate for investment purposes, you need to get financing that is different than thetype of financing that you need for “owner-occupied” property.  For the new investor, especially someone who just purchased their first home, it often comes as a surprise that financing for investment property may include very different terms and conditions than what they expected.  At the same time, you may have resources that were not available to you when purchasing your home.  For example, you may be able to use a Home Equity Line of Credit (or HELOC), or a loan from a relative, or even funds from a Self-directed IRA (”SDIRA”).  A qualified Mortgage Broker can provide you with options and opportunities.  However, in general, you should expect to have to come up with between 30 - 40% down payment, plus pay a slightly higher interest rate on any loan you may be able to secure.

A quick note about using SDIRA funds to purchase investment property:  It is perfectly legal to use your IRA funds to purchase investment property; in fact, it is uniquely suited to such transactions since regulations prohibit you from using SDIRA funds for any property that you would use (such as your home, your office building, or your vacation property).  However, in order for you to successfully use a SDIRA for investment purposes, you need to take steps to set up the account, roll over your exisiting 401(k) or other eligible Pension Plan fund, and work with a Plan Custodian, like Pensco Trust, that will allow you to use SDIRA funds held by them to invest in real estate.

To make the payments, you will need INCOME.  Of course, the ideal situation is an investment property that produces both positive cash flow (rental income is greater than mortgage payments, interest, insurance, property taxes, maintenance, emergency repairs, vacancies, and property management fees), and appreciates in value so that the net proceeds from the eventual sale of the property are more than any existing encumbrances on the property.  To ensure the highest probability that you will receive steady and sufficient rent, you will need to consider all of the factors (and more) mentioned under the Property section, above.  Just because you can get a great price on a property in the central valley of California or in a downtown area of Detroit does not mean you will be able to find qualified tenants willing to pay sufficient rent.  Again, you “gotta know the territory.”  And, you have to plan for contingencies … you will experience unexpected maintenance costs, emergency repairs, and periods of vacancy.  Plan accordingly.

PATIENCE

As the old prayer goes, “Lord grant me patience, but grant it NOW!”  The importance of Patience, the 5th “P” in this article, is underscored by the need to dispel the myth of the “get rich quick” scheme.  Many individuals were, and some still are, successful doing “flips,” where they acquire title to property, do some quick repairs, then turn around and sell the property for a substantial profit.  Is this possible?  The answer is yes, but more and more it is exceedingly difficult.  One reason is that with the credit crunch, not many individuals are able to get financing, so the “flippers” are finding themselves holding onto property much longer than they planned.  Since they often used “hard money” loans or other types of “borrowed” funds, they often find themselves owning more and more of the anticipated profits from the planned “flip,” and often must drastically reduce the selling price or start renting it out.  The true “value” of a real estate investment is built over time, both from incremental rental increases and from appreciation in value over time.  The smart strategy is to be patient, build a solid investment portfolio, and let it grow in value over time.

Conclusion

The foregoing Five “P”s are intended as a short-hand checklist of the key elements to be considered as part of your overall investment strategy and to help you do your “Due Diligence.”  Of course, you cannot eliminate risk, and you cannot guarantee that you will never have legal issues.  But you reduce the probability of legal problems by taking the foregoing steps.