 
Where's MY Bailout?

Or

How to Make a Fortune in Real Estate with No Money Down

Greg Weisiger

Copyright 2012 by Greg Weisiger

Smashwords Edition

Preface

As I watched Rick Santelli rant about bailouts and calling for a new Tea Party on CNBC on February 19, 2009, I decided I deserved a bailout a lot more than any giant bank that was on shaky ground because greed had driven its lending practices. I decided to begin my own quest to find a personal bailout for my family. The following three years have proved to be both an exciting adventure and an educational experience as I dove into the turbulent waters of the great real estate collapse and purchased two foreclosure properties at auction.

Hundreds of real estate books have been written before and after the crash. I researched a number of postcrash publications while writing this book. The general guidance offered by those books is to find bargains and be patient as the crisis slowly abates and home values hit bottom. Cash flow is king in those books, and they generally advise renting to generate moderate income on properties that can be purchased at a fraction of the prices demanded in 2005 through 2007. Many self-ordained real estate experts hold workshops and advertise on television and radio. In almost all cases these "experts" are selling expensive classes and newsletters designed more to make them rich at your expense.

This book is full of practical advice gleaned from my attempts to purchase a beach getaway and my purchase of investment properties in Fayetteville, North Carolina and Myrtle Beach, South Carolina from online foreclosure auctions. I've done the research, and I've learned how to bid and win, and when to just walk away. I continue to look for more properties and will purchase at least two more before this once-in-a-lifetime opportunity is gone. As we enter the fourth year of the real estate crisis in the spring of 2012, investing giants Warren Buffet and Sam Zell said this is the absolute best time to buy single family real estate. However, they were not buying because houses scattered around the country are simply too hard and expensive to manage. Their loss is your gain!

More than just a how-to guide for real estate investing, this book includes anecdotes from my life that taught me valuable lessons that allowed me to succeed in this new real estate frontier. I share some of my early auction experiences and bargain purchases so you can benefit from them. I hope you enjoy the stories and use my experiences and advice about real estate as an investment to create for YOUR bailout!

Table of Contents
Preface

1. Rick Santelli and the Rant Heard 'Round the World

This chapter discusses Rick Santelli's report on government programs to bail out insolvent banks and underwater homeowners. It sparked my idea that I would create my own bailout by finding a way to prosper in the midst of the real estate debacle.

2. Some Tea With That Party?

From Santelli's rant a new political movement was born in America. While refreshing, the Tea Party may not be the panacea to fix what ails the economy. Even in crisis, there is room for compromise.

3. This Is Not My Beautiful House (How Did We Get Here?)

This chapter examines the root causes of the financial-mortgage crisis that has left so many homeowners in dire straits.

4. Where's MY Bailout?

Inspired by Santelli's rant, I tried working with my own bank to discount my mortgage or lower my interest rate. I discovered my bank was not willing to negotiate at all. I was forced to create my own bailout.

5. In Search of MY Bailout

In this chapter I discuss my early experiences trying to buy property through online auctions, including the frustration of having my winning bid set aside because the government decided it was too low.

6. What Have I Gotten Into?

Buying property at auction. I cracked the nut so you don't have to.

7. This Flippin' House!

Flipping a house may look simple enough on TV, but in reality there can be hidden problems everywhere. To be successful, you have to be prepared to handle them.

8. Man, He's Had a Rough Life!

You can't judge a book or a person or a property at a glance. Learn how to check the condition of property and what other factors you should consider before bidding.

9. To Rent or Sell—That's the Question

Once your property is ready, how do you know whether to rent it or put it on the market? I can help you with that.

10. Death Sentence

Charitable giving is alive and well with nonprofits across the nation selling donated cars and boats to fund their operations.

11. The Livaboards

In desperate financial times, you may need to get creative about housing. Don't accept defeat—be imaginative and pursue every avenue.

12. Just Walk Away, Renée

With their houses so far underwater that continuing to make mortgage payments is the equivalent of tossing bundles of cash onto a bonfire, homeowners are faced with making a business decision to walk away from their mortgage obligation.

13. Work It Out

Despite billions of dollars earmarked for mortgage relief programs, very few dollars have actually been spent and relatively few homeowners helped. A number of companies have stepped in to help bridge the gap between federal program and lending institution bureaucracies and desperate homeowners.

14. I'm Going to Die!

When you're young and haven't suffered enough calamities to be cautious, you'll leap into risky investments that could pay off fabulously or leave you broke. Know your financial and emotional limits for risk before you begin bidding on property.

15. Are They Sirius? (Do Regulators Not Listen to Ads on the Radio?)

Scam artists are thriving and have found a new platform through which to sell their wares—satellite radio. Straight out of Dilbert comics, these new age charlatans have embraced almost every scam the fictional business consultant Dogbert has devised.

16. Sue the Banks! How to Freeze Home Lending

After bailing out banks with almost one trillion taxpayer dollars, the federal government is actually suing the banks for selling bad loans to Freddie Mac and Fannie Mae!

17. I've Seen the Future at Walmart

Ensuring that every citizen has an opportunity to receive an education is the only way to assure a good future for our country and its citizens.

18. Let My Houses Go!

As banks feel the pinch, more properties will be released for auction, and you need to be ready to buy.

19. Is NOW a Good Time to Buy?

Yes, now is your once-in-a-lifetime opportunity to buy property at bargain-basement prices.

20. How to Make a Fortune in Real Estate with No Money Down

Drawing on my extensive research and experience with online auctions, I show you step by step how to locate a property online, investigate its condition, and place a winning bid.

Resources

1. Rick Santelli and the Rant Heard 'Round the World

The morning of February 19, 2009 I tuned into CNBC to see what damage the world markets had done to my portfolio the night before. The stock market as measured by the Dow Jones industrial average was in one of the worst bear markets since the Great Depression. My holdings and those of average investors were down some 40 percent from record market highs just a few months earlier.

I watched as the morning show cut to a segment with Rick Santelli, who was on the floor of the Chicago Board of Trade. The discussion centered on the federal government's recently announced mortgage-assistance programs and other efforts to assist underwater homeowners avoid foreclosure. In the months leading up to that day, banks had received bailouts, Lehman Brothers had gone bankrupt, Countrywide Financial had been forced into a shotgun wedding with Bank of America, and the government had funneled billions into AIG—all ostensibly to save the financial industry from collapse. Americans were left numb by the daily news of disaster and impending financial ruin as markets worldwide continued their steep declines.

Rick began his segment suggesting that the government was promoting bad behavior by pursuing mortgage loan modification programs. Santelli said, "Why don't you put up a Web site to have people vote on the Internet as a referendum to see if we really want to subsidize the losers' mortgages. Or would you like to at least buy cars and buy houses in foreclosure, and give them to people that might have a chance to actually prosper down the road—rewarding the people who carry the water instead of drink the water?" Cheers went up from traders on the floor after that remark. Santelli went on to say that they were thinking of having a Chicago tea party in July. Many credit this segment as the beginning of the Tea Party movement.

As I watched, I sensed a groundswell reaction would soon spread through the country. In one simple statement Santelli had summed up the frustrations of millions of Americans who had not overextended themselves in the real estate mania prior to the meltdown or adorned their houses with expensive trinkets financed with maxed-out credit cards. That segment left me wondering Where's MY bailout?

Ironically, the very program that inspired the Santelli rant, the HAMP (Home _Affordable Modification Program),_ was an abject failure because very few Americans met the qualification of its very restrictive criteria. HAMP was launched in early 2009 to assist homeowners who were unable to afford their mortgage payments. The program was designed to lower eligible borrowers' monthly payments to 31 percent of income. Initially it was estimated that the program would assist three to four million homeowners, but by mid 2011 less than 700,000 homeowners had received permanent modifications. The Obama Administration revamped the program in the fall of 2011, broadening the pool of eligible participants. The Home Affordable Refinance Program (HARP) and HARP II allows homeowners with Fannie or Freddie loans or government-guaranteed loans who have an excellent payment record to qualify for a new government-guaranteed mortgage. Further, even a homeowner who is underwater with his loan can still qualify. Banks would not be required to report such loans as risky. Within days of the announcement, lending institutions set up Web sites to sell refinancing products under the program.

During the Great Depression there were few consumer-protection regulations like we have today. Many residential and farm loans were "callable" by banks at any time; this meant that mortgage holders would be required to pay off the entire loan if the bank wanted its money. Many of the dislocated families chronicled in John Steinbeck's The Grapes of Wrath lost their homes because banks called their loans, not because they weren't making payments.

The adjustable rate, balloon mortgages and deferred interest loans of today have the same effect as the callable loans of the 30s—large payments are due at inopportune times, forcing borrowers into foreclosure. Refinancing at lower rates is not an option because the value of the home has decreased to a point where the bank will not grant a new loan.

For responsible borrowers who had continued to make payments on loans for homes that were now worth less than the mortgage, HARP was a chance to refinance with lower interest rates. In some cases, borrowers could even have principal reduced if the loan had become unaffordable because of reduced income or other circumstances.
2. Some Tea With That Party?

We know that between February 19, 2009 and November 3, 2010 a new political party emerged and began peacefully overthrowing the two parties currently in power. While the Middle East and Latin America tend toward violent coups to achieve government change, the United States changes direction with relative ease. The Tea Party revolution has been ushered in with little more than name calling by the opposition.

It appears a number of groups were born out of that February rant. Judson Phillips, a Nashville lawyer, was inspired that morning to start a Web site to promote his conservative ideas, financed by paid advertising on his site.

There are two other prominent Tea Party organizations—the Tea Party Patriots and Tea Party Express. The latter is the most influential and political, and has raised and spent almost $8 million in the 2010 election. The Tea Party Express Web site (www.teapartyexpress.org) lists the group's six principles: no more bailouts, reduce the size and intrusiveness of government, stop raising our taxes, repeal Obamacare, cease out-of-control spending, and bring back American prosperity. According to the Web site, the Santelli rant was the impetus for the movement.

The Tea Party Patriot Web site appears to be a more fluid editorial reporting site. On the day I visited, the front page of the site had an article titled Occupy Wall Street? They're no Tea Partiers

For two years now, tea partiers have stood firmly on principle and helped shape the political debate in this country. They believe in time-honored American values, principles, and systems, including the freedom to innovate and employ people to implement and distribute one's ideas to the public. They believe freedom from government allows entrepreneurs to try new things, see what works, and discard what doesn't. They don't believe corporations are inherently evil or that bankers should be beheaded. They do not believe this country should be divided by class but united in a return to the principles that undergird our nation's success. In fact, they want more of what made America great: more constitutional restraint on government so that the people have more freedom to achieve the good things the country offers.

"Occupy Wall Street? They're No Tea Partiers," Tea Party Web site, Oct. 19, 2011, www.teapartypatriots.org."

It is not completely clear what unites Tea Party supporters, but the underlying theme appears to be that our government has gotten too big and too powerful. Many are unhappy with the way the country is going and see the federal debt as an ominous threat to our future. Supporters come from all walks of life and from all geographic and demographic backgrounds.

Pundits from both the Republican and Democratic parties have attempted to paint the group as extremists and racists who are outside the mainstream. Tea Party supporters scoff at this suggestion and distance themselves from the apparently few colorful individuals displaying offensive banners at party events. Those who embrace the movement are much less likely than others to see discrimination as a threat to the nation's future. Most believe all races have an equal opportunity for economic gain in this country.

The "party" is really more of a movement than a political party, and the message is clearly a call for smaller government and fiscal restraint. Some liken party gatherings to a religious revival within a political movement. Whatever the case, without strong central leadership and a broader platform, the Tea Party may be the latest in a long line of doomed attempts at a third political party. Or, it could thrive with the simplest of platforms and embrace a rainbow of supporters from liberal to far right wing.

Republicans believed they were gaining control of the House of Representatives and narrowed the Democratic lead in the Senate in the 2010 election. The reality was voters, fed up with the status quo, elected a new group that is representative of middle-class American's desire for less government, less spending, and more individual liberty.

So committed are the Tea Party freshmen in Congress that they were able to sway the budget and debt ceiling conversation in the summer of 2011. This resulted in the United States debt losing its AAA rating in early August, which threw world markets into turmoil, and drove down interest rates. It was tough medicine.

Washington talking heads came out swinging and called the Tea Party contingent "terrorists" who were holding the country hostage. These are amazing accusations from the very people who were in power as the largest economic bubble in our history was inflating—an uncontrollable, massive debt burden that we may never be able to repay.

Just as a hurricane creates horrific destruction and uncertainty, once the storm abates and the sky clears, people bandage themselves and start to rebuild. As this economic storm ebbs, jobs will return, and people will rebuild their lives and bank accounts. Washington was in the eye of the storm, and we can only hope when Washington is rebuilt, it will be smaller, leaner, and more efficient.

The Tea Party is just such a hurricane. Members blew in with an unswerving resolve to shrink government and cut spending. If compromise is to give up one's principles in order to reach a majority, one may be compromising with someone with no principles. Done once, it would be easier to do it again and again, resulting in someone who is no longer a person of principle. Given enough compromise, we would eventually call that person the worst name of all—a politician.

For our government, the hardest choices are ahead. Washington needs to find some ten trillion dollars either in spending cuts or new taxes during the next decade; it must also find ways to encourage private employers to hire more people and banks to lend more money. The Tea Party with its slash-and-burn attitude is the perfect whipping boy. Tea Party members appear oblivious to polls and seem to care less about reelections. They are unfamiliar with the word compromise.

It is refreshing to see a set of politicians so fervent in their beliefs that they are willing to shut down the government as a means to their end. True to the Tea Party name, it was an uncompromising belief in self-determination that inspired our Founding Fathers to defy England and create this country.

Personally, I believe the Tea Party's extreme stance on their single issue is misplaced. Even in the face of extraordinary deficits, there are occasions that the federal government should incur new debt such as during a natural disaster or war. The Tea Party abhors any talk of new or increased taxes while it ignores the twin 800-pound elephants of Social Security and Medicare in the room. Ultimately, both programs will have to be limited in some manner—perhaps with a means test so that the Warren Buffets of the country would not receive benefits from the two programs. It makes absolutely no sense for people of wealth to benefit from programs originally intended as a safety net for our most vulnerable citizens. For those wealthy citizens, Social Security and Medicare taxes paid during a lifetime of work will end up being only taxes paid to a government that protects their freedom and prosperity.

My great-grandfather was among the first Americans eligible for Social Security benefits. He had only paid into the system for a couple of months and felt he did not deserve the monthly payments. However, as a law-abiding citizen, he accepted the checks, just as millions of financially well-off seniors do today.

Tea Party leaders will need to overcome their absolute refusal to consider tax increases and be comfortable that their actions have reigned in government growth. The cold, hard fact remains that the elephants cannot continue to feed at an unsustainable rate and will need to go on a diet. The richest among us will have to be the first to stop receiving benefits.
3. This Is Not My Beautiful House (How Did We Get Here?)

We can trace the beginnings of the real estate collapse, which actually started in 2006, to the Clinton Administration. Promoting homeownership was at the forefront of the Clinton economic revitalization effort. Regulators began loosening mortgage requirements and lending standards through Fannie Mae and Freddie Mac, and that resulted in a new wave of homeowners. The Bush Administration continued this practice but put it on steroids; virtually all financial regulatory safeguards were dismantled on the theory that the free market would self-regulate and create an efficient, fair trading environment. Under the Bush Administration's laissez-faire approach, free markets flourished unchecked, until the excess and wobbly foundations finally brought down the world economy.

Many experts agree that the pivotal event ushering in the prolonged real estate collapse was a new mortgage instrument called the negative amortization adjustable rate mortgage. This mortgage was targeted typically at first-time buyers or buyers that could not otherwise afford the loan. The mortgage allowed buyers to pay no interest or only a portion of the interest owed each month. The unpaid interest would accrue as an increase in the amount owed on the loan. As long as property values increased at an annual rate that was higher than the interest charged, the borrower would stay ahead of the game. The loans were based on the assumption that home prices would never decrease in value. After all, that had only happened during the Great Depression.

A number of books and television documentaries have detailed the real estate bubble and market collapse. The players were as varied and diverse as the global population itself. While no single person or group was completely responsible, all conspired to create, feed, and finally kill the golden-egg-laying goose.

Starting around the year 2000 and ending with the banking collapse, prospective homebuyers were treated as if they were on used car lots with developers, realtors, and mortgage companies each playing the role of high-pressure, plaid-suited salesman. Everyone had a financial incentive to put buyers in the most expensive property possible. The fact that buyers may not have been able to afford to drive and maintain the expensive new car was irrelevant in a market where house values were increasing at a rate of 2 to 5 percent per month! Any financial problems would be taken care of in a few months of soaring values—or so everyone thought.

The building and buying frenzy continued unabated during the decade. Across the country developers presented financiers with grandiose plans for tract after tract of elegant, well-appointed "McMansions," complete with granite countertops, hardwood floors, vaulted entrance halls, multihead showers, and hot tubs. Three thousand square feet was considered a small house.

Anyone flying into Atlanta, Las Vegas, Phoenix, or any of the other rapid-growth cities could see forests being cleared and new roads sprouting off highways like buds in springtime. New houses would be followed with a parade of hungry buyers looking to tap into the American dream with a house they could fill with cheap imported clothes, electronics, and even food.

Financing the construction machine was an even more ingenious machine that actually started years earlier in the credit card industry. Capital One Financial was a tiny credit card issuer based in Richmond, Virginia. Before the real estate bubble, Capital One flooded mailboxes with offers of low-interest credit cards. As cardholders ran up balances, Capital One needed to raise capital in order to meet federal requirements. Capital One had millions in outstanding loans and millions more eager buyers of their brand of financial crack cocaine.

A creative thinker at Capital One came up with an absolutely brilliant solution: Why not bundle thousands of customers' account balances into debt instruments and sell them as bondlike investments on the open market? Wall Street loved the idea. Even with an average of 6 percent default by cardholders, investors were paid handsomely when active balances paid double-digit interest rates. Capital One took the cash generated from securitized credit-card-balance sales and issued more cards.

Capital One didn't stop there. Unlike straight bonds that are issued for a specific purpose and administered as a single unit, these new securitized instruments were fluid and required monthly maintenance. Capital One hired an army of credit card management experts who made sure customers were billed each month and that they paid at least the minimum monthly payment. A hefty fee was taken directly from the gross profits to pay the Capital One army. Even factoring fees and write-offs, investors were quite happy.

The Capital One business plan translated well to the real estate market except that the stakes were much higher—hundreds of billions as opposed to millions of dollars. Wall Street took the idea one step further. Brokers leveraged the mortgage "bonds" by many times and sold them around the world. Because the debt instruments were backed generally by mortgages held on American homes that were appreciating faster than pimples on a teenager's face, rating agencies gave them AAA ratings. They sold like hotcakes.

Of course, we know now that real estate doesn't appreciate at 10 percent per year forever. When prices began to decline and mortgage defaults began to increase, the house of cards fell apart, taking the world's notion of financial stability with it. The savings of millions of people vanished when the bubble popped.

4. Where's My Bailout?

After the Santelli rant, the economy continued to deteriorate. More bailouts and programs gushed from Washington like water over Niagara Falls. It seemed everyone was getting a bailout. Everyone, that is, except people who actually paid their bills on time, didn't overextend themselves, and lived within their means.

When starting out as a newlywed in 1986, I worked in Public Television, which was not the highest paying line of work. My wife worked part time on and off. We lived in a two-bedroom apartment that we shared with her college roommate. She drove a Ford Escort she had bought after college. I drove a 1972 VW Bug. The cars were paid off, and there was always money left over after rent and expenses.

We believed, like so many others, that homeownership was the best path to the American dream. We bought our first house in 1989. It was a beautiful bungalow on two acres of land just beyond the Richmond, Virginia suburbs. The house had been built by the previous owner and included a great room with vaulted ceiling and loft. The wall opposite the loft was lined with boards taken from an old barn. There was a single, large bedroom on the first floor. Although the total square footage was 1,100 at most, the house seemed much larger because of the open floor plan.

We sold our first house and moved into an apartment in Charlottesville when I took a position at the University of Virginia. We spent the next year looking for the perfect house. We talked to a number of realtors who encouraged us to buy the biggest, most expensive house we could afford. After all, they reasoned, our salaries would increase, and the house would appreciate in value. We ultimately found a 1,500 square foot three-bedroom house at Lake Monticello, just down the road from Mr. Jefferson's place and in a beautiful planned community surrounding a 500-acre lake.

Lake Monticello was designed as a retirement community and marketed generally in the New York area. New Yorkers, retiring on generous pension plans and selling expensive homes, could relocate to Fluvanna, a very inexpensive and low-tax county in Virginia. They could afford to buy a huge house, keep their Lincoln Continentals, and play golf three times a week without cramping their budget.

We lived there for ten years. It was a most interesting and wonderful place to raise kids, with a beach within walking distance, golf course a half mile away, and shopping in the neighborhood. We had a little sailboat and would often take the kids out for a sail on the lake, dodging the transplanted New Yorkers on their speedboats.

When I found a better state job in Richmond, it was time to look for a new house. The housing market had been in a slump in the late 90s but had turned quickly. We had been trying to sell our lake house for three years with no success. In the spring of 2001, Lake Monticello was essentially built out and prices exploded. Our house, which we couldn't sell for $85,000 the previous fall, sold for $100,000 in two weeks when we relisted. We took the profit and bought a 2,500 square-foot house in a Richmond suburb. We could have afforded a larger house in a more prestigious neighborhood, but the monthly payments would have limited our discretionary spending.

The next six years were a ride on the real estate boom. On paper our house almost doubled in value. While others refinanced, taking out funds for new cars or trips to exotic places, we resisted temptation and continued to pay down the mortgage and drive old, free-and-clear cars.

As the economic world was on the brink of collapse in 2008, and the housing crisis was entering news headlines, like most people, we thought insolvent companies would go out of business or reorganize, and families that had overextended themselves would lose their houses, new cars, and the fancy shirts off their backs. We were wrong!

Enter the federal government with what CNBC's Larry Kudlow dubbed "bailout nation." It offered one program after another to keep financial institutions solvent and essentially rewarded the thousands of people who had led incredibly irresponsible financial lives.

Banks and the federal government were offering to forgive some principal in underwater loans and other programs offered lower interest rates to help strapped customers. My loan was with Countrywide, which had found itself in serious trouble and was then taken over by Bank of America, which ran out of money and needed its own bailout from the government.

News reports screamed financial crisis and the possibility of a repeat of the Great Depression unless trillions of dollars were immediately funneled to the banks, automobile manufacturers, and others with a hand out looking for cash. Seeing my Bailey's Building and Loan needed help, I called my mortgage holder, Bank of America, and offered to pay off my mortgage and give them some cash. My loan representative was about to tell me my payoff amount when I stopped her.

"I'll give you eighty-five cents on the dollar cash—American dollars."

She was silent for a moment and then responded, "I'm sorry, sir. We can't do that. You must be at least two months BEHIND on your loan before we can consider reducing your principal."

"But that would have a negative affect my credit score!" I exclaimed.

"Yes, but that is the only way we would start the process," she said.

"Well, I want you to reduce my interest rate!" I countered.

"I can connect you with our refinance department," she said, obviously eager to push me off to another customer rep.

"No! I don't want to refinance and pay fees! I want a new, lower interest rate like you are offering to troubled borrowers!"

"Sir," she began, "as I said before, we can't enroll you in any program unless you are at least two months behind in your payments."

"Okay, so the only way you will work with me is if I can't pay you in the first place?" I asked rhetorically. "Never mind. I hope you go out of business yourself."

I hung up and decided the only way I would get my own bailout is to make it happen myself. The only question was how to find my own bailout! Almost immediately I determined real estate would be the best vehicle for a personal bailout. I started researching real estate owned (REO) properties and foreclosure auctions.

If your bank isn't willing to negotiate, you can create you own bailout with real estate.
5. In Search of MY Bailout

Years before the current real estate bust and before the Internet was available at McDonald's and almost every coffee shop, there was another financial crisis that also involved real estate. It was the savings and loan (S&L) crisis and oil meltdown of 1990. I saw an opportunity and wanted to invest in real estate back then. For Christmas that year I asked for the S&L foreclosure book, which was a listing of all foreclosure properties taken over by the government in the savings and loan bailout. My wife bought me the thousand-page book that had real estate listings from across the country. Unfortunately, most of the properties were in Texas, Oklahoma, and California. Virginia was woefully underrepresented. I didn't purchase a property and eventually lost the book.

Fast-forward twenty years to the next real estate bust, but unlike the last downturn, we have Internet real estate auctions! It's just like shopping on eBay, Amazon, or one of the thousands of other online retailers, and you can literally buy an entire house with the click of a mouse.

I found two popular REO auction sites: Auction.com and Realtybid.com. Auction.com is the Internet arm of the Real Estate Disposition Corporation and has virtually replaced their extensive live-auction events. Realtybid.com is exclusively online and appears to offer bank-owned and other properties.

Having found the auction sites, the first question was what kind of property to buy. My wife and I are at a point in our lives when we are beginning to look forward to life after work and are considering where we will retire. She loves being near the water, and I love being on it. Naturally, the place should be near some body of water—ocean, river, or lake. Also, I reasoned that if people couldn't afford their primary homes, second homes must be bargains during this crisis! If we could purchase a place at the beach, we could rent it until we retire. If the market turned before then, we could sell it for a tidy profit.

Auction listings during the summer and fall of 2009 were generally in Nevada and Florida. Northern Virginia had quite a few. As the economy continued to decline, listings for houses in Georgia, South Carolina, and North Carolina multiplied. I began to see activity in the small community of Oak Island, which is on one of North Carolina's barrier islands, also named Oak Island.

Located near the mouth of the Cape Fear River, Oak Island was first explored by the Spanish in 1521. They declined to settle there because of poor soil and limited fresh water. Europeans settled the area when Fort Johnson was built in 1750. The town that supported the fort, known as Brunswick Town, was a small community of river pilots, traders, and fishermen. In 1792 the North Carolina General Assembly commissioned the town as Smithville, naming it after Benjamin Smith, who would later become governor of North Carolina.

Smithville grew as a fishing village and through its support of the military. Fort Johnson was active in every United States war. Smithville was also popular as a summer resort because of steady, cool sea breezes.

After the Civil War, town fathers wished to create a major southern seaport. In an ingenious marketing scheme, the town changed its name to Southport and initiated a promotional campaign to be chosen as the location. The promotional tactics failed, and Wilmington was selected as the site of the port because of its more protected location. Wilmington remains a major port and vibrant city.

The Southport/Oak Island area is predominantly a quiet vacation destination today. Just a short ferry ride from Southport is Bald Head Island, an exclusive resort destination that does not allow cars. Residents and workers use souped-up golf carts to get around the island.

I found a two-bedroom condo on Oak Island that was one block from the beach and in an established complex. I was the high bidder in an online auction. No one else in the entire world was willing to bid higher on that particular piece of property at that time. I thought it was a done deal. The offer was presented to the owner—Fannie Mae. After two weeks, some pinheaded government bureaucrat, looking at some spreadsheet that included the high bid determined that my bid was not within some unknown percentage of Fannie Mae's desired price. As a result, Fannie Mae declined my bid. As far as I know the property is still unsold and vacant.

The next opportunity was on another two-bedroom unit at the Preserve at Oak Island. This is a four-building complex on the mainland just across the causeway bridge from Oak Island. These units are exceptionally well appointed and are designed to withstand a category four hurricane. However, the rental potential is limited because the homeowners' association (HOA) covenants forbid weekly rentals. The complex developer went bankrupt and failed to build the last building. Another developer purchased the property at a bankruptcy auction and had been marketing the properties at a fraction of their original selling price of $400,000 per unit. Again, I was the high bidder in the Internet auction, which was open to anyone worldwide. Again, our government owned the property and refused my bid. Again, the property remains vacant to this day. I thought my bid of $78,000 was more than reasonable.

Having lost two auctions and put up earnest money deposits while some government bean counter considered my bids, I was somewhat discouraged. On the other hand, I was the high bidder at these auctions so the open market was speaking volumes about the real value of these properties. A few weeks later I found another auction on Auction.com. One of the listings was in Fayetteville, North Carolina. It was a two-bedroom, open-floor plan condo in a complex called Galleria Place. The minimum bid was $20,000. I checked Zillow.com and tax records in Cumberland County; according to all sources, units in Galleria Place should be selling for $60,000 plus. Without visiting the condo, I put in a bid of $21,000.

I would not recommend buying real estate without first inspecting it. Many of these properties have been sitting vacant for months. Vandals and thieves may have defaced the property or stolen anything of value. In fact, online auction sites stress that you should visit the properties and verify their condition before bidding. The auction certification documents include a checkbox to allow the buyer to verify that he/she has inspected the property.

In this case, the condo was in an established, viable complex. Units listed for sale were in good condition, and the Fayetteville police log had recorded very few calls to the complex in the previous year. Because the homeowners' association maintains the exterior of all units, I would only be responsible for any damage inside my unit. The worst-case scenario would be missing appliances, holes in walls, broken toilets, broken air conditioner, and trashed floors. The most it would cost to rehab the small condo would be $15,000. With a selling price of $21,000, I would still make money.

A second bid came in behind me at $22,000. I waited until the last day of the auction and bid $23,000. When the auction closed, I was the high bidder! I knew there was no way the owner would accept my bid, which was roughly thirty-three cents on the dollar, particularly since the minimum bid reserve had not been met in the auction. The auction company sent an e-mail congratulating me on being high bidder and outlining the process for sending in my deposit. Having been through this twice before, I was not looking forward to sending in a certified check only to be rejected again.

Auction.com provides a contact person to assist with the closing process. I explained my concerns to the contact person and asked if there was any chance the owner would accept the bid or should I just withdraw my bid and forget the whole thing? She asked me to hold a moment. She came back on the line and told me I would most likely get the condo; her exact words were: "You'll get it." Curious, I asked how she knew that. She told me a bank owned the condo and that particular bank was letting almost all its properties go no matter the price. So I agreed to send the deposit.

I went downstairs to tell my wife the good news. The conversation went almost exactly like this:

"Honey, we won an auction!"

"Oh? Where is it?"

"It's in Fayetteville."

Thinking we had won another auction at the beach, my wife gave me a questioning look and asked, "Where's Fayetteville?"

"It's about sixty miles north of South of the Border."

Her parents live in Charleston, South Carolina, and we visit frequently, making the drive up and down Interstate 95. Anyone who has driven I-95 between Virginia and Georgia knows about South of the Border because of its hundreds of billboards along the interstate and the sombrero tower at Pedro's place just south of the North Carolina-South Carolina border.

She stared blankly at me and then said, "But that's not near the beach."

"Well, no..."

Clearly miffed at this point, she interjected, "This is YOUR deal. I don't want to have anything to do with it. I don't even want my name on the deed."

That didn't go so well, I thought. The next place better be at the beach.

I won the auction on April 25, 2010. Owners want cash purchasers to close within thirty days; however, a great deal of paperwork is required before closing. The auction company has agreements with closing attorneys throughout the country, and my attorney was located in Atlanta, Georgia. Because of the large volume of foreclosed houses, the closing agents were overwhelmed. I had to stay on top of the process and maintain contact with my agent to make sure all paperwork was delivered and filed on time.

I did some research on the bank that owned my condo because I wondered why it was releasing its properties when our government would rather refuse high bidders. In 2008 at the height of the banking crisis, the Federal Reserve was scrambling to find new homes for failed and insolvent banks. The preferred method was to merge the insolvent institutions into stable banks. In doing this, depositors' accounts would remain intact. Some banks were more insolvent than others. The banks in the worst shape specialized in no-money-down, stated-income, or inflated-appraisal loans and kept the loans in their inventory. The bank that had owned my condo, One West Bank had taken over such a bank—IndyMac. It appears that before agreeing to accept the insolvent bank, One West negotiated with the government to make it whole on the inventory of sour loans. The government agreed, and One West went about unloading its inventory at whatever price it could get and billing Uncle Sam for the difference. Indirectly, I had gotten my bailout! Or had I? Was the condo a bargain or a money-sucking pit?

When looking for a bargain auction property to buy at half price or less, avoid properties owned by the government. Generally, the government will only accept offers that are close to 75 percent of the estimated value. Instead, find a motivated bank such as One West, Citi, or Wells Fargo with properties to unload.

While critical of the way the government has handled the real estate crisis and I have suggested prospective buyers avoid bidding on government homes throughout this book, on May 4, 2012 I won an auction for a condo at Myrtle Beach. Keeping in mind my wife's reaction to the Fayetteville auction almost exactly two years previously, I have limited my bidding to vacation destinations since then.

I routinely monitor auction websites looking for opportunities. In February 2012 a small condo in Little River, SC came up for bid. Keeping to advice outlined later, I contacted a local realtor and gave him the auction checklist. He agreed to be my buyer's agent and gave me the scoop on the Myrtle Beach market and this condo in particular.

Myrtle Beach is suffering from the same overbuilding hangover Atlanta, Las Vegas, Orlando and others are going through. Vacation destinations generally have a floor of support based on the amount of income they can produce from tourist rentals. I note later a conversation I had with a realtor friend on the Outer Banks of North Carolina. She told me rentals were lagging previous years and I speculated that prices could decrease if income support dried up. As the economies of Georgia, South Carolina, and North Carolina continue to show little or no growth, Myrtle Beach vacation rentals will suffer.

Two other specific events increased foreclosures: First, the town fathers of Myrtle Beach decided that real estate was appreciating too fast for local assessors to keep up with. Consequently, they voted to assess real estate values on the latest sale price. When the market peaked in 2007, homeowners were shocked at the increase in tax bills in 2008. Hurricane Katrina sent insurance rates skyward during the 2000's and in 2011 hurricane Irene slammed into the Grand Strand causing significant damage. The storm damage paled when homeowners were hit with higher insurance premiums. Homeowner's fees for the hundreds of complexes in the area doubled in many cases. Between higher taxes, higher fees, and lower rents Myrtle Beach is in the eye of the foreclosure storm.

My Myrtle Beach realtor gave the condo a green light and confided that he had sold the very unit in 2007 for $147,000! I set my price at no more than $22,000, considering other sales in the area. I registered for the auction and committed an early bid. I was online when the auction closed and participated in the bidding during the closing minutes. At Auction.com when a bid is submitted within the last minute of an auction, an additional two minutes is added. I watched in amazement as the bidding battle escalated the price to $42,000 – six thousand more than it was listed on MLS! I gave up and went out to cut the grass.

Several weeks later I was watching an auction in North Carolina and checked on the South Carolina market. With only two days left in the auction, my Little River condo popped up. I immediately registered and submitted the first bid at the opening price of $15,000. On the last day of the auction it was clear I was bidding against only one other buyer. We went back and forth several times, extending the auction each time. I decided $20,000 would be my limit this time. I clicked the button submitting a $20,000 bid. The clock reset to about two minutes and continued the count. No reaction. Less than one minute. My rival would usually bid with thirty seconds left. Nothing. As the clock winds down the timer changes color to green and begins flashing "Going Once" "Going Twice" and finally "Sold!" followed by the disclaimer "pending seller confirmation."

I called my realtor and gave him the good news. There was not a great deal of excitement in my voice as I knew there was no way HUD would let this property go at little more than 50 cents on the dollar. My track record with HUD was not the best. To add insult to injury the contract provided only one percent commission to the buyer's agent! My realtor would be working for only $200. Isn't the government supposed to stimulate the economy? I promised to take my realtor and his wife out to dinner and give him the listing when I eventually put the finished product on the market.

When HUD accepted the contract, my wife was very excited at the prospect of finally having her place at the beach! I too am looking forward to doing some rehab work during the day and shagging on the Grand Strand at night this summer!

HUD wanted to close the deal according to the auction schedule on May 16 only a week after the final contracts had been signed. This is not typical as title searches normally take at least two weeks; however, because a significant amount of closing work had been done for the previous buyer, HUD was able to move this unit quickly! I wanted to start work immediately after closing and scheduled time off from work and lined up contractors for the week.

As I drove to Myrtle Beach early Wednesday morning, my realtor called with the bad news that all the paperwork had not been completed and he could not reach the HUD closing agent. I was two hours away in a truck loaded down with supplies.

"Take care of it!" I said and hung up.

When I reached the South Carolina border my agent called with good news. The paperwork had been signed and sent to one of the HUD contracted "traveling closing attorneys" in South Carolina. The closing attorney would travel to us, sign the papers and fax them to the HUD closing agent. We met at my agent's office at 2 pm. The travelling attorney had closed a property that morning and had one more after mine. She had received the paperwork only an hour before. We signed the papers, paid the balance and were handed the keys at 2:30! I must admit, after some frustration with HUD from my failed purchases, I was quite impressed at the efficiency and teamwork that went into this closing. On another bright note, the HUD agent agreed to split the sales commission with my realtor. His payday for helping me close the deal was $700!

Don't allow the frustration of having your winning bid set aside by the government keep you from your bailout.
6. What Have I Gotten Into?

Auction sales can offer great bargains to cost-conscious buyers, but if you're not careful, you could be stuck with a lemon or pay too much for the property. After all, when you win an auction, you are willing to pay more for the item than anyone else in the room—or the world in the case of Internet auctions. Sellers benefit because items sell quickly. If you are a cash buyer in a real estate auction, closing is typically expected within thirty days—that's lightning fast for a real estate closing.

At a typical auction you pay for your purchases right away and have hours or a few days to remove your new treasures from the auction site. Rarely do successful bidders back out of a purchase. Real estate auctions are very different. First, if your bid is below the minimum amount the buyer will accept (called the reserve price), the seller usually has two weeks to accept or reject your bid. Despite cautionary language and boldfaced warnings on the auction site and winning bid documentation that you will be liable for any and all costs if you back out, the reality is you can back out at any time before closing without losing more than your earnest money deposit, which is usually about $2,500. If the property was not what you expected and truly a money pit, forfeiting $2,500 would be money well spent.

The first auction property I purchased was a timeshare on Hatteras Island, North Carolina, in the town of Rodanthe. If you are not familiar with Rodanthe, rent the movie Nights in Rodanthe to get a sense of Hollywood's version of life on the Outer Banks of North Carolina. However, as you watch the movie, note that a hurricane would normally wash away cars parked under a beachfront house and you do not take a ferry to get to Rodanthe from Raleigh.

It was 1995, and I had seen a notice in the Washington Post about a huge bankruptcy auction of two timeshare developments—one in Nags Head and the other in Rodanthe. A week before the auction, my family visited some friends on Hatteras Island. On the way home we stopped by the property in Rodanthe. The complex, called Hatteras High, was a three-story, eighteen-unit oceanfront building. The building was in good shape for its age and included a pool and exercise trail. The condos themselves were two-bedroom, two-bathroom units with a living room-dining room-kitchen combination.

My wife and I had been discussing long-range vacation plans for our growing family. We had two preschoolers and were looking for an inexpensive way to enjoy our yearly one-week vacation. We were leaning toward a Coleman pop-top camper so we could visit campgrounds around Virginia and North Carolina. Seeing the auction ad, I began thinking that timeshare might be a good idea.

The notorious reputation timeshares have as investment properties is common knowledge. There is a booming industry during this recession urging timeshare owners to pay upfront charges for the company to sell unwanted timeshares. People are actually paying companies in an attempt to get rid of timeshares! These scams are as bad as some I outline for you later in this book.

Restrictive homeowner's associations and ever-increasing annual dues often make timeshares a burden. It is true timeshare sales and ownership can be problematic, however, millions of people own and enjoy them. When I told my friends and extended family about the auction and the possibility of purchasing a timeshare, I was met with skepticism on all fronts.

While researching timesharing, or interval ownership as it is known in the business, I discovered a few unwavering rules. First, buy only red weeks, and only red weeks in the most desirable season. For example in North Carolina beach areas, red weeks start in May, but the weeks before school gets out in late June are much less valuable than weeks in July and August. Never purchase blue or white weeks. Don't even accept them as gifts as you can generally rent a comparable place during blue season for less than your maintenance cost. Second, make sure the complex has a stable homeowners' association and has sufficient reserves to avoid large assessments. Third, look at the annual maintenance fee. It should be sufficient to maintain the property but not so large that it will break your bank account. Finally, it is important that the complex have the highest rating with Resorts and Condominiums International (RCI) so you can trade your unit without penalty.

On the day of the auction, I left Charlottesville at five in the morning to arrive at the first auction site in Nags Head at ten o'clock when the auction started. The first auction was for about thirty units at the Golden Strand, a fairly luxurious complex by Outer Banks standards. As the auctioneer announced the rules of the auction I was checking out my competition. One well-dressed man was carrying a clipboard and notebook with a number of official looking papers. I later discovered he was the absentee bidder. I happened to glance at the list of properties for Hatteras High. A price of $500 was listed for each of the red weeks at auction. Considering that high-pressure salespeople had been selling these units for the developer for $15,000 or more, $500 was an absolute bargain.

As a general rule in any auction, let the suckers bid first. With thirty or so units for sale, there should be enough to go around. The rules of the auction were simple: the high bidder could select his choice of properties and as many of them as he wanted at that price. The first round ended at $6,000, and the winning bidder selected one property. The price quickly descended in subsequent rounds to $5,000, $4,000, $3,000, and settled in the $1,000s for the remainder of the red weeks. Blue and white weeks were selling for less than $1,000 down to a few hundred dollars. These prices were far too high for me, and I was ready to head back home. As long as I was only an hour from Rodanthe, I thought I might as well go to the next auction.

When I arrived at Hatteras High, I saw that the place had been spruced up nicely since our visit just two weeks earlier. It sported a new coat of paint and there was a new walkway to the ocean. A huge tent had been erected near the building and in front of the tent was a large bulletin board that displayed all the properties up for auction. I noticed there were approximately 100 units at auction and only about thirty people attending. I also had an advantage over the other attendees because I knew what the lowest price was going to be for the red weeks. I had a feeling I was going to buy a timeshare that day.

The auction began, and, like Nags Head, the first round ended with a bid over $5,000. That person selected one unit. The next bid ended in the $4,000 range and another unit was selected. While this was going on, I left the tent and went to sit on the boardwalk and enjoy the beautiful summer day. The auction continued until the auctioneer called for bids and no one answered. From my perch outside the tent, I waved to the auctioneer holding up five fingers. He screamed with delight, "Five hundred dollars outside the tent!" and urged others to bid. Some idiot bid $600, and the auctioneer threw it back to me. I considered for a moment and nodded my head yes for $700. No one else bid, and I won my auction.

At that point I could have selected as many of the remaining timeshares as I wanted and there were quite a few prime red weeks left. I elected to take just one—a second floor unit in week twenty-five, normally the week of Father's Day and the week before Independence Day. I later found out the absentee bidder was a real estate agent in Rodanthe. She collected about twelve units and put them in her rental brochure; she rented and sold them over the years. The average rent for a prime summer week is usually more than double the annual maintenance fee for each unit. Plus, the actual value of the timeshares was at least ten times her $500 cost. She made yearly profits and cashed in when she sold her units. Who said timeshares aren't good investments?

The timeshare has been our primary vacation destination for the past fifteen years. Both children learned how to swim in the complex pool. My son and I share a love for fishing and spent many hours surf casting and fishing at Oregon Inlet, which is just twelve miles to the north. Occasionally we would vacation elsewhere, and we would rent the condo through our broker friend, paying the maintenance fee and leaving a few hundred dollars to spend at our alternative destination.

I went to Rodanthe in the summer of 2011 to look at a few foreclosed properties because my next property better be at the beach! I stopped by my broker friend's office to ask if she knew of any good deals. Remember, my assumption was that if people couldn't afford their first houses, they certainly couldn't afford a second house! My friend explained something I had not considered. Beach houses are rented to vacationers. Rents generated during the summer often pay the mortgage and maintenance, and perhaps even yield a small profit for owners. The value of beach vacation homes, while much lower than the bubble days of 2007, are still higher than I was willing to pay. The price floor appears to be a function of the amount of rent the property can generate.

While in the office, she mentioned something that gave me hope for a bargain. She told me the economy and high gas prices had killed the 2011 rental market. Indeed, my complex was only about half full the week of prime season. Looking at ads on Craigslist, I see a good number of headlines saying "reduced" or "sale" for rental units. If rental incomes were falling, the underlying support for prices had eroded and should soon fall further.

In July 2011 the developer of a brand new building with twelve two-bedroom luxury oceanfront condos went bankrupt. Those units are now on the market at deep discounts. I e-mailed my friend asking her to put in an offer of $94,000 for one of the units. She responded that they were getting offers that were much higher. I reminded her about our timeshare bargains. Let the suckers have the first ones, and I'll wait for a bargain! The summer of 2012 may be the time to scoop up a low-priced beach house.

As for my new condo in Fayetteville, I went down to visit it before the closing. Purchasers are strictly forbidden from entering the property during the period from the end of the auction to final closing of the property. Because I had not actually seen the property, and I did assert that I had inspected it on the closing papers, I reasoned my visit would simply verify my previous assertion.

Fayetteville is a three-hour drive from my house straight down Interstate 95. I decided to drive down for the day and break into my new place. When I arrived at the complex, the units were generally tidy and well kept. My building was across from the pool and overlooked a pond with fish and beavers. The door had an old-style lock and no deadbolt. The credit card trick worked on the front door, and I was in the unit!

The electricity was on and air conditioner working when I walked in. There were no holes in the walls; the bathrooms had toilets, sinks, and bathtubs. The kitchen had a stove, refrigerator, dishwasher, and microwave. Everything but the microwave appeared to be working.

That was all good, but there appeared to be water damage on the ceiling, the carpet was stained and smelled like an animal, there was some water damage by the air conditioner, and the paint scheme was hideous. Still, the condo appeared to be a bargain at $25,000.

The Myrtle Beach condo was in much the same condition as Fayetteville – it needed new flooring and paint but it was sound structurally and all appliances were in place and operational. Like Fayetteville, the electricity was on.

Persistence, luck, and research resulted in a timeshare purchase that has been an outstanding long-term investment. Timing, research, and more luck resulted in me winning an auction for condos in Fayetteville and Myrtle Beach.

Every day there are real estate bargains ready to be scooped up by persistent individuals who are willing to do the research necessary to filter the good deals from the bad.
7. This Flippin' House! (Reality versus as Seen on TV)

If you have ever been interested in flipping houses, no doubt you've tuned in to one of the reality shows where an entire house is gutted, plans are drawn up, and contractors come in and redo the place in the span of thirty minutes to an hour. It seems amazingly easy from the comfort of your couch. The reality is far different from the TV version.

Although the reality shows will include dramatic music and cutaways to exasperated faces of homeowners, you don't get the real sense of the turmoil that they are going through as they watch their dreams turn to dust and slowly emerge as a beautiful finished product—sometimes over budget and perhaps a bit late, but complete nonetheless.

After my earlier visit to Fayetteville, I had made a list of everything that needed to be replaced and everything that I would like to see replaced while staying within my budget. Having paid $25,000 total, I didn't want to sink more than $5,000 into this property. I also wanted to put it on the market as soon as possible with the goal of selling and closing by the end of September to coincide with my busy season at work.

I had decided to act as general contractor and extra hand for the condo rehab to save money. Many real estate investors outsource repair and maintenance of their properties. By being on site and hiring subcontractors myself, I estimate that I was able to save approximately $3,000. If you purchase a property far from your home, acting as your own general contractor is out of the question. In those circumstances you will need a trusted local manager in place to supervise the operation, so you should consider this additional cost when making a bid or purchase offer.

Looking closely at the water-damaged ceiling, it was apparent that the leak from the unit upstairs was ongoing. I met my new neighbor and told him water was leaking from his apartment and damaging my ceiling. He told me he was renting the place from his cousin, and he would call her immediately. That evening he came down and told me a plumber would come by in the morning and fix the leak. I was also able to partially dismantle my air-conditioning unit and determined the condensation reservoir was leaking, and that was the cause of the water damage on my floor. I cut a small portion of carpet away from the wall immediately adjoining the air-conditioning unit and pulled back the soggy mass of to reveal subflooring that had rotted through. Anyone jumping on the floor would find his feet dropping through the floor and into the crawlspace below. I had to add a significant amount of carpentry to my budget.

I returned home armed with all the information I needed to begin the rehab of this condominium as soon as it closed. Closing was scheduled for the twentieth day of May, just before Memorial Day weekend. I decided this would be the perfect time to get started. I had previously called a painting contractor who was familiar with the complex. He quoted me a price of $1,700 to paint the entire unit. That was a bit out of my price range. I figured a few gallons of ceiling paint, five or six gallons of wall paint, and a couple gallons of trim paint would be all I needed to get the job done. I could advertise for local painters and offer cash for the job at a fraction of the contractor's quote. I advertised on Craigslist for four painters to begin painting on the Friday before Memorial Day weekend. I received numerous responses from my ad, including a contractor who said he had a crew available on Friday and would match my price. I called the contractor that evening and told him he could have the job. He wanted to know where it was, and I told him he had already provided a quote for the job, but I had decided to hire independent painters. He paused for a moment and said, "Oh man, this job is going to cost me twelve hundred dollars!" I just laughed and told him I'd see him Friday morning.

Thursday evening I made a trip to Lowe's in Richmond and bought all the paint and painting supplies we would need for the job. I did not buy any drop cloths because the entire floor would be replaced the following weekend. I arrived late Thursday night and unloaded my supplies in the condo. I had electricity but no water. So bathroom breaks and showers took place in the complex clubhouse across the parking lot from my unit. I had also purchased an air mattress for sleeping. Friday morning the painters arrived thirty minutes late but began work immediately. The contractor brought four of his crew, and they went right to work. He told me that he didn't mind losing the contract job since he did not have any work for his crew that day. Also, he thought it would be nice for them to have some cash to start the holiday weekend. I had selected a neutral tan for the walls and a basic white for the ceiling; the trim would be semigloss white. As the painters were busy with their job, I went about the condo ripping up the old carpet and taking it to the dumpster at the entrance of the complex. By the time we were finished late in the day, my ceiling and walls were gorgeous, and my floor was a bare canvas ready to be finished. As luck would have it, my painting contractor's father-in-law was retired military and did carpentry on the side. I called his father-in-law, and he was able to come out that day and give me a quote.

The water damage to the subfloor was fairly extensive and approximately ten square feet of plywood had to be replaced. Water damage in the utility room from the unit above was so severe the ceiling needed to be replaced. The carpenter quoted a total price of $200 to do the job. I agreed, and he arrived bright and early the next morning with everything he needed to do the job. He worked from 8:00 a.m. to 5:00 p.m. on the floor and the ceiling, and it came out beautifully. As he was cleaning up and loading his truck, I gave him two $100 bills and a $50 tip and thanked him for a job well done.

With any rehab job there will be unexpected problems. My condo was no exception. While the painters were working, I had to make no less than three trips to Lowe's. You may as well bring three $100 bills, hand them to the greeter lady at Lowe's, and tell her to fill up your cart until the money is gone. I had to buy additional paint, painter's tape, molding, brushes, rollers, and various other supplies to get the job done. I also decided to replace all the old plastic faceplates for plugs and light switches with brass ones. As long as I was doing that, I realized that I might as well change all the door hinges as they were showing their age. More trips to Lowe's and more hundred-dollar contributions.

The next big project was replacing the floors. I decided wall-to-wall carpet would be a problem in the great room and decided to purchase a laminate floor. Lowe's was running a great sale on laminate flooring, and $300 later I had enough to cover the living and dining areas of my new condo. I loaded them in the truck and took them down to Fayetteville. Once in Fayetteville I re-measured the two bedrooms, went to a carpet store, and purchased two remnants. Before I left Richmond I ran an ad on Craigslist for flooring installers. I found an inexpensive freelance crew to do the job; they arrived on time with three workers and immediately begin installing the carpet. One worker prepared the floor in the living and dining room area for the laminate flooring. After several hours I had new carpet in both bedrooms and was well on my way to hardwood flooring in the great room. By midafternoon the foreman informed me they would need several more boxes of laminate flooring and a great many quarter rounds for the molding. Yet another trip to Lowe's and another hundred dollar bill spent. Thank goodness my complex is close to shopping and not in the middle of nowhere.

The compensation package I offered to all the laborers was cash at the end of the day and food. Lunch for the floor installers was subs from Jersey Mike's and sodas. By six o'clock that evening I heard one of the workers ask the foreman "¿Donde esta la cena?" I knew enough Spanish to know that phrase meant where's dinner, so I stopped what I was doing and went out to ask what they wanted for dinner. They seemed surprised that I understood their conversation and said they would like anything. I went down to Sonic and grabbed a few chicken meals and some burgers. They appreciated the meal and said they had never tried Sonic before. After dinner they put the final touches on the floor and were on their way by eight o'clock, after putting in a full twelve-hour day.

I had talked with the realtor about the possibility of listing my property. She suggested that I finish the rehab job before listing. Before going down for the flooring trip, I had made an appointment with her to stop by. When she walked in the condo, she was amazed at the progress and said that she would be happy to list it immediately. I signed the papers on the spot and gave her sixty days to sell the condo because the listing price was 10 percent below the lowest priced condo in the complex and my unit was in better shape than most. I felt certain that this would be an easy flip. I knew I was facing the worst real estate market since the Great Depression but did not realize that the finance market was broken as well.

Having done a successful rehab in Fayetteville exactly two years earlier, I used the same strategy for Myrtle Beach. I purchased flooring on sale in Richmond and lined up painters and flooring installers with ads on Craigslist. Closing was scheduled for early Wednesday afternoon in Myrtle Beach. I scheduled laborers on Wednesday afternoon to remove the old carpet, padding and floor tacks. Thursday the painters prepared and painted the walls. There was no water damage on the ceiling and the floor was not rotten so I could save the expense of replacing the floor; however, the air conditioner was blowing warm air. The outside unit appeared to be original equipment for this 28 year old building. I called a service company and was surprised to learn they could send a technician out in a couple of hours. A new system was not necessary – just a new controller and several pounds of Freon. Five hundred dollars later, we had cool air blowing from the vents!

On Friday, laminate and carpet installers worked their magic. I decided to install tile in both bathrooms, entrance hall and kitchen. This was done on the next visit and after finding the perfect tile at the Richmond Re Store. Re Stores are operated by Habitat for Humanity and have locations around the country. They take donations from contractors and companies reducing inventory. Prices are well below retail and proceeds support the ongoing work of Habitat.

Flipping a house may look simple enough on TV, but in reality there can be hidden problems everywhere. To be successful, you have to be prepared to handle them.
8. He's Had a Rough Life

A year after rehabbing the first condo, the memory of living in stark conditions; hauling pee-stained carpet and rotten wood to the dump; removing floor tacks; and sanding, painting, and replacing door hardware has faded. I do have a greater appreciation for people who do this kind of work day in, day out. During one visit, I spent four nights at the condo. This was the final push to get the floors done and the doors back on their hinges. During this period we removed the carpet, replaced the rotten flooring, and installed new carpet and laminate. After four days without a shower—I was using the pool to bathe—I imagine I looked like a bum. I know I felt like one.

On my three-hour drive home I stopped in Wilson, North Carolina, for gas. I slowly got out of the truck, started the pump, and got back in the cab. At a pump down the isle was an old, weather-beaten Chrysler van. An older black man got out and began walking across the parking lot to the convenience store. He was a tall, thin man who looked to be in his mid-sixties. He had graying hair and three or four days' worth of stubble on his face. He was wearing old jeans and a dirty sweatshirt. He held himself forward and half walked and half stumbled as he walked. He had obviously been working and was tired from a long day and life in general. My initial thought was "Man, he's had a rough life."

When the gas finished pumping, I decided to grab a Coke for the road. I slid out of the cab and landed hard on the pavement. As my feet slapped the ground, I felt a sharp pain in my lower back that was accompanied by what I can only describe as a pop in my spine. I immediately leaned forward and grabbed my back. Satisfied the incident wasn't life threatening, I decided to walk across the parking lot and into the store. As I began walking, I could only manage to shuffle my feet and lean forward as I went.

I got my Coke and ambled to the cash register. As I waited in line, I caught my reflection in the mirror behind the cashier. My graying hair was sticking straight up courtesy of the wind through the truck's window, the dusty work, and four days without shampoo. I had several days' worth of gray stubble on my face, and I was wearing dirty jeans and a sweatshirt that emitted a puff of dust when touched, much like Charlie Brown's companion Pig Pen. Looking at the image of that old man, I could only chuckle to myself, "Man, he's had a rough life!" You really can't judge a person simply by watching him walk across a parking lot!

Getting back in the truck, I recalled an incident years earlier when visiting my old college. I attended St. Mary's College of Maryland, which is situated on the St. Mary's River in southern Maryland. The campus is beautiful and boasts an ideal waterfront and harbor. St. Mary's City was the first permanent English settlement in Maryland and a perfect location for English ships to anchor.

I was working at the Virginia Department of Education and was state coordinator for a government program called E-Rate, which provides discounts on telecommunications and Internet access to schools and libraries. In the early days of the program, many schools and libraries were denied funding for various seemingly petty reasons. A Virginia school had been told to return $1.2 million by the program's administrator. I was writing the appeal for the school.

This particular appeal was very difficult to understand and explain. I had been working on it for over a week and had gotten nowhere. I decided I needed to get out of the house and find a new perspective to break the writer's block I was experiencing. I decided to sail to St. Mary's for the weekend and write in a riverfront college atmosphere. I had been sailing for twenty years by 2004 and had handled boats singlehandedly many times. On this trip I wanted some company for the six-hour sail between Kinsale, Virginia, and St. Mary's College. I found a young man who wanted to learn to sail on an Internet publication called Spin Sheet, which is the sailing magazine for the Chesapeake Bay. Spin Sheet had a classified crew/boat listing section to help sailing crews match themselves with boats. My crewmember was advertising on the site.

When I told my wife and children I was meeting a total stranger at my marina for a weekend sail, the joke around the house that I was going to meet an axe murderer who would make fish bait out of my body and steal my boat.

The fact was that Chris, my new crewmember, was an eager young man who was excited to learn about sailing. The winds the day of our sail to were fresh but out of the wrong direction for our destination. Sailboats are able to sail up to about fifty degrees off the wind and essentially sail against the wind by changing the boat's direction again and again. In sailing terms it is known as beating against the wind. Beating is an apt phrase because you typically fight wind and waves that often cause the boat to slam violently against the oncoming water. It can be a tiresome experience. In this case, we made the trip in about seven hours and arrived at St. Mary's hungry, wet, and exhausted.

We went to the college snack bar. It was late October and the fall semester was well underway. We arrived just before it closed and a few students were milling about. I had told Chris I would be working on my appeal, and he would be on his own. I assured him he would find something to do on a college campus on Saturday night. I had already checked and knew that the evening movie was Charlie's Angels Full Throttle.

There was a table with three girls beside us. Without giving it a second thought, I turned around and spoke to the first girl that caught my eye. "Hi. Do you know of any parties tonight?" There was a moment of silence. Her expression went from blank to a look of sheer horror. I'm not invoking poetic license—horror would be the best way to describe her look. Imagine someone face to face with Frankenstein's monster, and you've got her look perfectly. "For YOU?" she asked, half screaming.

I had not made any judgment or opinion from her expression. I was too tired. I motioned to Chris and said, "No, for my young friend here." She looked over my shoulder at Chris and her expression softened in an instant. Her expression visibly went from a scene out of Friday the Thirteenth to one from Sex in the City. She thought for a moment and said, "Well, yes, we are having a party tonight." She and Chris exchanged information, and we were off to the boat.

Reflecting on that incident, I realized what I must have looked like to elicit such a drastic response from this young lady. After the trip, I looked closely in the mirror at home and no longer saw a young thirty something but an older forty something with a fair amount of mileage. If you add seven hours of sun and salt spray, I must have looked like an old pirate to this girl, and we're not talking Jack Sparrow. The only thing missing was a patch over my eye and hook protruding from my shirtsleeve. No wonder I scared the hell out of her.

I went back to the boat and began writing. I took a break and walked back up to the student commons area where the movie was showing. I sat through the first half hour of Charlie's Angels and decided it was one of the worst Hollywood movies ever made. I retired to the boat and returned to the task at hand. I don't know if it was the college atmosphere or the movie, but for the next four hours the words flowed like water.

At about 1:00 a.m. I was putting the finishing touches on the appeal when Chris stumbled on board. "Did you have a good time?" I asked. Chris seemed to be feeling very little pain. "Man, I had a great time! It was like this Roman toga party where the women were serving all the guys. It was a blast!" I can only imagine.

We had an uneventful sail home. Chris took the helm most of the trip and was sold on sailing by the time we put into port. At least he was sold on the port-of-call aspect of sailing! I sent my appeal to the school. Their lawyer deleted some of my more colorful language, and we sent it to the Federal Communications Commission. Three years later, we won the appeal, and the school was able to keep its money.

Not wishing to repeat the scene in Wilson when I drove home from the Myrtle Beach condo rehab, I decided to cash in some hotel reward points and enjoy a real bed, hot shower and complementary breakfast each morning. Any future purchases will include a budget item for a hotel during the project!

You can't judge a book by its cover. That's as true for real estate as it is for people. Don't make assumptions about the condition of a property—do your research before you bid.
9. To Rent or Sell—That Is the Question

Having seen my share of house flipping shows, I believed that I had what would be an easy flip. Other units were on the market in the $60s, the tax assessment was $72,000, and my unit was updated and in excellent condition. Since my total cost was only $30,000, I could easily list far below other units and still make a tidy profit in a matter of weeks! Renting the condo was not even a consideration.

While I was working on my condo I noticed a "Sold" sign displayed in a window of another unit in the building. I called the listing agent and asked her if she would work her magic on my unit. She stopped by one day to inspect my condo. At the time the condo was in the tear-down state and not ready for market. She suggested I finish the project and call her when it was done.

Once the renovations were finished, she returned and indicated the condo would show well; we signed a listing agreement and priced the unit $3,000 below the lowest priced unit in the complex. I drove home thinking of what I would do with the windfall.

I didn't take into consideration several factors that were conspiring to foment the housing bust and torpedo potential sales in my complex. Just as the brand new For Sale sign was placed in my front window, the Under Contract sign at the second condo was replaced by a brand new For Sale sign. My realtor explained that the buyer could not get financing, and the deal fell through. I didn't ask more questions because I was confident that the sale of my unit would not hit the same snag.

A month later my unit was still for sale, and there were no offers in sight, although a number of people had looked at the unit, and the feedback was positive. Meanwhile, another unit reduced its asking price to $1,000 below mine. Since I had such a large margin to deal with, I decided to up the ante and reduce my price $2,000 blow the competition. My unit had a great deal more traffic but no offers.

After the condo had been on the market for three months, I had a bona fide offer! The net to me after commissions and closing was $48,000! I was ready to take my $18,000 profit, pay my taxes, and be satisfied with MY bailout! I had not taken into consideration a little-known policy Fannie Mae had implemented called redlining. This practice meant refusing loans or insurance to cover property in an area deemed a poor financial risk. It was scorned and labeled racist when it became public that banks refused to lend in certain neighborhoods and even pizza delivery franchises refused to deliver to high crime areas or housing projects.

It is now common knowledge that lending institutions have tightened standards for mortgages. Higher credit scores and down payments of up to 20 percent are required, and income-to-loan ratios are scrutinized—quite a stark difference from the go-go days before 2008. If you have a credit score below 600, fagetaboutit! Fannie Mae still guarantees loans at more favorable terms than banks and remains a lender of last resort, but even their standards are much tighter than during the boom days.

My buyer could qualify for a loan only if it were guaranteed by Fannie Mae. He met all the qualifications for Fannie Mae and moved forward with the application. A couple weeks after the loan application process was started, I got a call from my broker. The buyer could not get financing because Fannie Mae would not guarantee the loan. Although the buyer qualified for a Fannie Mae loan guarantee, Fannie Mae would not guarantee loans for units in this particular complex because of a Fannie Mae policy that denies loan guarantees in areas where the ratio of renters to owner-occupants is deemed too high.

While Fannie Mae denies it engages in the practice of redlining, the evidence is unmistakable. Real estate experts recognize the practice and news reports freely acknowledge qualified buyers are denied Fannie Mae loan guarantees.

Strictly from a business standpoint, the practice makes sense because areas that have more renters than owner-occupants have a greater risk of decline and erosion of home value. Considering the huge number of foreclosed houses on the Fannie Mae books and the overhang of underwater and preforeclosures, it would be prudent to put some safeguards in place to prevent additional risk.

The problem, of course is that the policy disproportionately denies loans in minority areas, as minority neighborhoods generally have a higher percentage of renters versus owner-occupants. By denying loans to potential owner-occupants (Fannie Mae generally does not guarantee loans to investors), the policy would result in a self-fulfilling prophecy as the pool of potential buyers shrinks considerably without government loan guarantees. I am frankly amazed the Obama Administration has not addressed this clearly racist policy and overturned it! The department of Housing and Urban Development which is responsible for creating the policy is part of the Executive Branch of government. Does that make president Obama a racist?

With the sale contract dead, I decided to rent the condo. If you decide to rent your property, I highly recommend setting up a limited liability corporation for your property (see details in the chapter How to Make a Fortune in Real Estate with No Money Down at the end of this book). While we would like to believe the liability insurance we take out on our property and clauses in our rental agreements would insulate us from financial risk, the fact is accidents can happen and tenants can sue. Without protection of a corporation or LLC, your millions of dollars in assets will be at risk!

Knowing my rental prospects would not generally qualify for credit, it would be counterproductive to do a credit check. I decided to require a large upfront payment, security deposit, and proof of employment. Finally, I offered a lease-purchase option with a substantial amount of rent going toward the down payment. I reasoned that anyone with a potential ownership stake in the property would maintain it better that those viewing it as a temporary home.

I advertised on Craigslist and had a large number of responses. I selected several of the best candidates to interview and went to the property. I agreed to rent to a young family that had been living with the husband's parents and had long ago worn out their welcome. He had found a new job and was able to put away some savings. They were very happy with their new home. Each month the rent check comes in and the return on my initial investment is very close to 17 percent. When the lease expires in November and the tenant elects to purchase, I still get MY bailout! Meanwhile, two years after purchasing this condo, the Fayetteville economy is in an uptrend and all the foreclosures in my complex have been sold. The remaining listings are in the $55,000 range again.

For more information about redlining, see the Huffington Post Web site.

If your property isn't moving because of redlining and tight lending, all isn't lost. Turn it into a steady revenue stream by renting it. Do your homework to ensure your prospective tenants are reliable.

10. Death Sentence

The Internet is a fantastic place to find a bargain on anything—if you can avoid the scams and predators lurking on the other side of your computer screen. Sites such eBay and Craigslist are round-the-clock shopping meccas for frugal shopaholics. Of course there are many more shopping sites.

One day back in 2005, I was looking online for something for my Grampian 26 sailboat. The Grampian was my second sailboat. It was the boat Chris and I sailed to St. Mary's for his night of debauchery.

My first boat was a Grampian 22 that I resurrected from a boat graveyard in Cape May, New Jersey. I had lived in Cape May and worked at the Coast Guard base in Wildwood. Every day I would pass a marina that reserved a corner of its lot for boats that were long past their prime. Most were really nothing more than kindling wood in the shape of a boat with some nautical paraphernalia thrown in for good measure. Most marinas reserve a plot of land for these ghost ships.

My little boat looked starkly out of place in the graveyard. She was fiberglass and glistened beautifully white in a sea of gray rot. On my way home one day, I stopped to inspect the little beauty. She was an open cockpit, keelboat with classic lines and long fin keel. Her mast was broken and folded neatly in the cabin with rigging still attached. There was a two-foot hole in the bottom complete with the six-foot 2X4 culprit lodged firmly in the hole. The rudder was cracked and bent at a slight angle. Otherwise she was a real beauty. Over the next year I negotiated with the marina and the boat owner.

The boat had been in storage at the marina when a hurricane blew through Cape May and knocked the little boat off her stand. As she fell, the mast snapped on the boat next door, a 2X4 was shoved through the hull, and the rudder was bent. The marina said the owner had not secured the boat properly, and the owner said the marina should have taken more precautions as the storm approached. This dispute had been going on for three years when I showed up. I bought the boat, fixed the hole, bought a new mast, stripped the rudder and applied new layers of fiberglass, and shined the little woodwork she had. When my enlistment in the Coast Guard was up, I packed my sea bag and literally sailed away from base. I lived on the boat for the next three months, sailing up and down the Delaware and Chesapeake Bays with a friend who was trying to avoid creditors. We spent a fair amount of time in Annapolis. He was a cook, and I was a bartender. It was the perfect life for a couple of single twenty somethings.

I sold that boat soon after I started dating my wife.

Years and two children later, I wanted another boat. My wife suggested I shop for one. I went looking for a new boat during the infancy of the Internet. After a year of searching, I found a Grampian 26 for sale. If my first Grampian had been a 26, the summer sailing adventure on the Chesapeake Bay might not have ended after only three months. The Grampian 26 has a relatively large cabin with six-foot headroom, a galley, and a table that converts into a double bed. The forward cabin has a V-berth that easily accommodates someone six-foot-three. This was a far cry from the open cockpit tiny cabin I shared while living on the 22.

The 26 had been an outstanding boat. She was fast and agile. She could take heavy weather in stride and would delight the crew with rails-in-the-water excitement. I sailed her up and down the Chesapeake Bay for several years.

As this chapter began, in the spring of 2005 I was looking online for something for the 26. At that time, Google had positioned itself as the default search engine of the universe. I typed in Grampian 26 sailboat and whatever I was looking for. On the first page there was an ad for a Grampian 30 for sale in Baltimore. I really didn't need another boat, but I clicked on the ad anyway. I was sent to a Web site called Boat Angel, which was a charity site that made its money selling donated boats. Someone had donated a Grampian 30 to this organization. The asking price was $5,000, which was a great price for a thirty-foot boat in good shape. The problem could be that this boat may be closer to the boat graveyard than platform for a bikini-clad crew. I decided I didn't need another boat—I bookmarked the page, however, for future reference.

A few weeks later, I went into my bookmarks and clicked on the ad. The price had been reduced to $2,500. I figured that meant that there must be something wrong with the boat. Located in Baltimore, there would be hundreds of sailors interested in a bargain boat. I already had a boat that needed attention. I didn't need another hole in the water. I passed.

The following week I went back and found the price had been reduced to $1,500. That was too good to be true! I did a little research and found the marina where the boat was docked. I called the marina because if you want an honest assessment of a boat, call the marina and ask for the shop, if they have one. They will tell you anything you want to know about a particular boat. In my case, the marina owner also ran the shop. I asked him if he knew anything about the Grampian 30 at his marina.

"Oh, Yellowbird!" he said. "She's a great boat. Hauled her out last year. Not a blister or bubble on her, and the rigging is in great shape. They made these boats bulletproof."

I asked why no one had picked her up considering the price was only $1,500.

"That low?" he asked. "Must have been the liveaboards."

"Liveaboards?" I asked.

"Yeah. They pretty much trashed the boat. Took off the sails and stripped all the wiring—even the engine. Otherwise, she's in great shape! Everyone who takes a look doesn't want to put the work in."

Most sailors know there is a significant amount of work involved with maintaining a boat. Rebuilding a boat from the keel up is another story. After talking with the marina owner, I had an inside edge. Without ever seeing the boat, I knew the foundation was sound. She needed some work but with minimal effort, I could sail out of Baltimore and back to Virginia—but not at $1,500. I passed again.

A few weeks later I clicked on the site and the price had dropped to $500! This was better than too good to be true! I called the number. A man answered and identified himself as Brian Stewart. I told him I wanted to buy the Grampian he had for sale in Baltimore. Brian seemed reluctant to do business with me. He said he was losing money on this boat and didn't want to waste any more time trying to get rid of it. I told him to fax me a contract, and I would send him the money.

Within fifteen minutes Boat Angel sent me a contract to purchase the boat. Language in the contract raised red flags for me. For example, the boat was being sold as is, where is, with no warranty or guarantee the boat would be clear of liens. Concerned with the language, I called the marina owner and asked if Yellowbird was actually still there. "It's still here, but the SOB that owns her owes me two month's rent!" I asked how much. "Two hundred dollars for May and June," he said. It was June 15.

I called Brian back and told him what I had discovered. Based on that information, I would give him $300 for the boat and pay the marina what he owed. Brian was incensed. "How could you live with yourself and cheat a charity?" I explained that I wasn't cheating a charity but was buying a boat and didn't want to be cheated myself. After some more conversation, Brian calmed down and asked what he owed the marina. "Two hundred dollars for May and June," I said. "WHAT? It's only June fifteenth! I'm not paying for the entire month of June!" Brian was hot again. After more discussion, we settled on $400, and I would pay the marina charges. I got a thirty-foot sailboat with a good foundation for $600, including two weeks' slip fee.

The following week I went up to my marina and took the outboard motor, sails, safety equipment, GPS, and various other things off the 26 and headed to Baltimore to see what I had purchased. When I arrived, I was pleasantly surprised. The rigging was in great shape, although Yellowbird needed new halyards and everything was out of place. She had five wenches, including a six-inch self-tailing stainless wench on deck that alone was worth $400. I had purchased an engine mount and spent the day attaching that. I ran wiring to the running lights and rigged some cabin lights. I made sure my sails would fit the 30, and the running rigging was in place. After all that, I locked up the cabin and went on vacation.

Returning from vacation, I found the title to Yellowbird in the mailbox. In the package was a paperback book titled Death Sentence, written by Brian Stewart. I thought it odd that the person who sold me the boat sent me a copy of his book, considering how he felt about the way I was trying to cheat his charity. According to the back cover, this story of false accusation and redemption had sold over a million copies. However, after reading the first chapter, which was filled with grammatical errors and even misspelled words, it dawned on me that it was possible a portion of the purchase price of my new boat went to the sale of this book and possibly more. Scam? I don't know. Boat Angel and Car Angel appear to be continuing enterprises, and bargains can be had on either site for wary buyers. Since I purchased Yellowbird, Boat Angel has been listing its inventory on eBay, and prices have increased significantly. I have seen videos produced by Mr. Stewart's company on my public access cable channel from time to time. I have also seen Boat Angel billboards on the Outer Banks of North Carolina.

In this era of "deleveraging" and belt tightening, bargains are everywhere. For $600 I bought a boat that could sail across the Atlantic or make a nice weekend getaway for the family. Similar bargains are available to anyone willing to seek them out. Flea markets, whether at old drive-in theaters or online offer cash-strapped people an opportunity to raise some money and frugal shoppers the chance to pick up treasures at pennies on the dollar. With so much excess in America and people desperate to raise cash, I wonder why anyone would ever shop at malls or department stores and pay full retail price.

Charitable giving is alive and well with nonprofits across the nation selling donated cars and boats to fund their operations. No matter how good a property looks or what hopes you had for it, you must know when to stop bidding and walk away—and when to take another look.
11. The Liveaboards

On my initial visit to Yellowbird, she was tied to an almost vacant pier at a marina in Dundalk, Maryland. The marina itself was in fair shape and had a working ship railway and a shop for boat repair. A trawler was on a rail car in the shop and two others were at dock awaiting service. The yachting amenities were marginal at best. The marina had two piers—a rickety one and one in much better condition. The rickety one had about twenty slips that held Yellowbird, two other sailboats, and a partially sunken cabin cruiser whose flying bridge protruded from the water. The cabin cruiser's dock lines were neatly tied to deck cleats that were four feet below the water's surface. I imagined climbing on board, taking command of this hybrid submarine-boat, and making the short trip to Baltimore's Inner Harbor. The other dock had a chain-link fence with a locked gate to protect boats and boat owners from unknown intruders.

Dundalk is about ten miles east of Baltimore and is a decidedly blue-collar town. It is on the water and across the bridge from huge steel mills on Sparrow's Point. The mills' rusting fifteen-story frames are visible reminders of a bygone era for Baltimore in general and Dundalk in particular. Yellowbird's marina was on the causeway between Dundalk and Sparrow's Point. The nearby strip mall had a couple pizza/sub shops, and two rough looking bars. I opted for a takeout sub and had dinner on the boat.

I had bought Yellowbird sight unseen but not without doing some research on her. I based my decision to buy her on pictures from the Web site, the report from the marina owner who appeared not to have an interest in the sale of the boat, and who I judged from our brief conversation to be qualified to assess the condition of the thirty-five-year-old boat. I would not recommend making a major purchase without first either visiting the property or hiring a qualified person to inspect the property. From the pictures and conversation I believed the boat to be sound as far as the hull and rigging but lacking everything else. I got exactly what I expected.

As I was unloading equipment and stowing it aboard Yellowbird, boat owners from the "good" pier asked if I were the new owner. I answered affirmatively and invited them over. Most boaters are proud of their boats and want to give tours to fellow sailors. It helps to have a well-stocked liquor cabinet to serve drinks during and after the tour. I had a trashed boat and bottle of rum that I was more than willing to share.

As it happened, Yellowbird and the liveaboards had been a popular topic of discussion on the nice yachts on the good dock. It seems the liveaboards kept to themselves and did not associate with the other boaters. Considering Yellowbird had no sails and no working motor, she was more a water-bound manufactured home (trailer for those south of the Mason-Dixon line) than a boat. The liveaboards included a man, his VERY pregnant wife, and their twelve-year-old daughter. According to the other sailors, the man had steady work in Baltimore, the daughter went to school, and the woman tended to things at home. The nearest grocery store was a mile away, and the woman would push a shopping cart to and from the marina with the family groceries. Without exception, she would refuse rides or assistance from other sailors. They wanted to know the conditions in which this family lived. I was happy to give them a tour—and learn something myself.

The cabin of a Grampian 30 is fairly spacious. The main salon has a storage area immediately down the ladder to port (left facing front) and galley to starboard (right). There is a table with seating for six that converts to a queen bed and a settee on the starboard side forward of the galley. There are storage lockers under all the seats. Moving forward a small hanging locker is on the starboard side, and there is a head (bathroom) with sink on the port. The forward cabin is a large berth with sleeping room for two plus storage. Standing room is six-feet-three inches. Perfect for me since that's exactly my height.

The liveaboards had cut all DC wiring and replaced it with AC. Someone had done an excellent job of installing a breaker box with a twenty amp breaker in the ice chest and running wiring to quad junction boxes mounted on bulkheads throughout the boat. I imagined an electric griddle and toaster oven used for breakfast and dinner, electric heaters keeping cold Baltimore nights at bay, and lamps illuminating a Barbie playhouse for the daughter. Perhaps a glow from a television could be seen from the good dock.

From conversations with the marina owner and other boaters, I got the impression the woman had no intention of bringing another life into these conditions. I can only imagine the conversation between husband and wife in the weeks leading up to her due date:

"I have lived on this goddamn boat for over six months, and I'll be damned if I'll be brining a baby here to live. You better get off your ass and find us a REAL place to live—and I mean NOW!"

"You know I'm doing the best I can, but there's just no place we can afford in the city. We just need to save some more," he said.

"Save some more? If you didn't buy a case of beer every two weeks and waste all our money on lottery tickets, maybe we could afford a place to stay." She moved toward him, her oversized belly rubbing against his, and she jabbed her finger at his nose. "Friday! You have a place by Friday, or I swear you won't see Saturday morning!"

She sat on the bed staring him down. He turned away, opened the main hatch, stormed through the companionway, and off the boat. She put her head on the pillow and rolled to face the bulkhead. Her thoughts drifted. "How in the hell did I get into this?" she wondered. She let herself recall the night almost nine months before.

It was a beautiful evening in late spring. They had been living on the boat for only a short time, and the novelty of living on a boat was still fresh. She thought the whole idea was romantic, and she loved the way the boat would gently sway when boats passed by, the salty smell of sea air, the nautical sounds of boat horns and bells, and gentle slapping of halyards against the mast in a breeze.

One night she was lying on the bunk listening to ducks courting in the water by the boat. Her husband came aboard after working late. He slipped into bed and nuzzled the back of her neck. She reached around to find him ready to perform. He ran his hands down her thighs, pulling down her panties as he went. She was facing away from him. He urged himself closer, alternatively massaging her butt and back. He thrust himself inside and began moaning in her ear. Just as she was beginning to feel a flame between her thighs, he pulled out, rolled over, and began snoring.

Thinking back on that night, she couldn't even muster a tear. She just thought the experience that night summed up their entire relationship—two minutes for him and a lifetime of disappointment for her.

At some point the family moved away, the boat was donated to Boat Angel, and I got to clean up the mess. As I explored every cranny, I would find the occasional Barbie doll shoe, child's hairbrush, or other reminder that a young girl once called Yellowbird home.

I found two earrings hanging from the electrical connections of the instrument panel. They looked to be a Native American design, with turquoise and silver connected by tiny chains about two inches in length. Just above the earrings, lodged between the depth finder and knot meter, was a business card for a marriage counselor. I left both the earrings and card in place, and to this day they provide testament to the fortitude of this woman who made a thirty-foot sailboat home to her growing family.

As families are put out of houses and are looking at the prospect of homelessness, marina life is a viable alternative. Nonworking boats are cheap if not free, and slip fees are reasonable when compared to rent. The liveaboards were only paying $100 per month for their slip and that included electricity. They were on the bus line to Baltimore and shopping was close. The only recommendation I would make is to live on a cabin cruiser because they have much more living space than a sailboat. If you opt for a cabin cruiser, invest in two robust bilge pumps or you may find yourself living on your upper deck while the fish enjoy your bedroom.

Sixty Minutes did a story last year about families living in cheap motels in Orlando, Florida. The problem was so pervasive that the school district established bus stops in front of the motels. Middle class families had lost their homes and felt the only alternative was moving into a motel and paying by the week. There is another solution.

Almost every state has adverse possession laws on the books. Adverse possession is a process by which abandoned property can be claimed by a new owner simply through possession. In general, the requirements for adversely possessing a house are living in the house without permission, notoriously and continuously, for a minimum period of time that is stipulated by state law—usually four to ten years. Once the conditions have been met, a claim can be made through the courts for a deed to the property.

For every family living in motels, with friends or family, in cars, or on the street, there is an empty house. Around the country there are thousands of empty homes. Banks are so swamped with foreclosures that houses can stay empty for months or years. In some cities, even banks are walking away from homes, refusing to bid on their own properties at trustee sales. After being vacant for some time, homes deteriorate to a point of total worthlessness and are eventually razed by the city.

If your family is faced with eviction, simply find an empty house and move in! Call the electric company and start service. Get the water hooked up. Change the locks on the doors. Send yourself a registered letter at your new address in the event the bank never finds the house in their system. If you are working, set aside an amount of money each month that would normally go for the mortgage payment. Welcome to your new home!

Keep in mind that any day someone with an ownership interest in the property might show up at the front door and ask who you are. You might want to create a leaselike document to make it look like you are paying someone rent for the property. Because you are living in the property, the bank will need to initiate legal action to get you out. Pack your bags and start the search all over again. You might be able to live in the house for months or even years before the bank dusts off the paperwork for the house.

If the government takes possession of a house, there is a program where renters can remain in the home on a month-to-month lease until the home is sold. If discovery is made that the house is not vacant, it will take the government months to determine how much to charge for rent. Once a price has been set, simply pay the rent until the house is sold!

If it is winter, move to the shore or a lake and find a beach house! Remember the Barefoot Bandit? He was a sixteen-year-old runaway who eluded authorities for months while living in vacation homes in the Pacific Northwest. An advantage of living in a vacation home is that they are rarely visited during the off-season and utilities are usually kept on year round!

An upscale neighborhood in Richmond has an abandoned house. It appears to be owned by Bank of America, the worst managed bank in the universe. The house has been vacant for ten years with the only residents vandals and wildlife. When hurricane Irene made her way from Myrtle Beach north in 2011, she stopped by Richmond and toppled a tree in the front yard of this house. Neighbors complained to the Homeowner's association about the ongoing problem. The HOA took civil action but no more. According to a Bank of America spokesperson, they had plans to address the house and secure it. Two months later the house was still open to anyone. Chesterfield county assess the house at $177,000. After ten years of neglect, it should be condemned and torn down. Had someone moved in and claimed ownership of this property when it was abandoned, they would have kept the property in decent shape and would now own a valuable house free and clear.

In desperate times, people do desperate things. Adverse possession or home squatting has been a viable method of claiming unwanted homes and property for years. Moving into vacant homes is in the spirit of adverse possession laws as an alternative to declining communities. It is also an alternative to living on the street or paying outrageous weekly rent for a rundown motel room.

In desperate financial times, you may need to get creative about housing. Don't accept defeat—be imaginative and pursue every avenue.
12. Just Walk Away, Renée

"This phrase is from the lyrics of the song "Walk Away Renée," which was written by Michael Brown and Tony Sansone and recorded by their group, the Left Banke in July 1966."

The housing crisis has prompted hundreds of thousands of homeowners to simply abandon their houses and turn them over to lenders. Economic observers and political pundits decry such action is a breakdown of society and moral abdication by these homeowners. The popular notion is that a mortgage obligation is a debt owed by the person or persons to the landing institution. Historically, this has been the case; however, the latest generation of homeowners views the idea as a quaint, outdated bond.

In my own family we have had heated debates on the subject. While on vacation last summer, the men were arguing the pros and cons of this new phenomenon in the dining room while the ladies were enjoying wine, sunshine, and good conversation on the deck. One of the ladies came in to see what the men were up to and immediately returned to the safety of the deck when she heard our conversation. We could see the ladies glance through the window with a certain disdain as they went back to their chat and wine. We, of course, felt our discourse was eminently more important as we were trying to save the country from collapse. While our conversation was enlightening for us and thoroughly enjoyable for me, the power brokers in Washington were taking the new attitude very seriously. In the end we amicably agreed to disagree, had a wonderful dinner, and took the boat out for an evening cruise.

Personally, I see families as little companies. Families have incomes and expenses, plans for growth, provisions to purchase fixed assets, operating expenses, health care costs, pension plans, staff development, capital gains, capital losses, and profit margins. If one is to believe families are indeed the equivalent of little companies, then it should surprise no one when families actually begin acting like companies.

If a company makes a poor business decision—let's say by purchasing a factory in an area of the country where water suddenly becomes scarce, the company may decide to cut its losses and close the factory. If the company had financed the purchase using the factory as collateral or issuing bonds tied only to the factory, the company would simply walk away and leave creditors holding the bag. On the real estate side, it is common practice for investors to set up limited liability corporations (LLCs) to separate investment properties from the assets of the principals. If investments sour, the company fails, and creditors claim what they can from the carcass, but the company owners are insulated from negative financial impact.

Similarly, local governments sell revenue bonds backed by future billings of the project the bond sales built. Normally, if the public enterprise fails to live up to expectations, the locality makes good on the bonds. We are not living in normal times. Increasingly, localities are walking away from bankrupt public projects and letting the bonds default. Why shouldn't a family do exactly the same thing?

Let's take a moment and analyze what a mortgage is. In its simplest form a mortgage is a loan to an individual or individuals for a property where the lender retains title to the property until the loan and interest are paid. Once the loan is satisfied, title to the property is transferred to the borrowers. The key asset is the property itself with the loan being based on the value of the property. In other words the property is collateral for the loan. If mortgage payments are not made, the lender takes possession of the property and attempts to collect the balance of the loan.

The bank makes the loan based on the property value, the amount of the down payment, and the potential worthiness of the borrower to pay back the loan. Lenders are supposed to assess the risk and qualify borrowers on their reasonable ability to pay back the loan. However, mortgage loans are governed by state law, and laws vary by state. Some states view mortgages as personal obligations while others deem the property is basis for the loan. More states appear to be favoring borrowers over banks in legislation passed since the great bank bailout.

The general civic feeling has historically held that family debt obligations are moral ones, and those that fail to pay their obligations were stigmatized as deadbeats. That may be the case with personal loans or perhaps even credit card debt, but the old mores are fading when it comes to mortgage debt.

In the last decade a multibillion-dollar industry has blossomed—the payday loan and title loan industry. Much maligned because of huge fees and usurious interest rates, the industry flourishes in lower to middle income areas. The principle is simple: the loan company will make a loan to an employed individual based on his next paycheck. When the paycheck arrives, the company extracts its principal, fees, and interest, leaving the customer with whatever is left. A title loan uses the title of an automobile as collateral for the loan. The title-lending company will lend a small fraction of the automobile's value and charge interest on the loan amount. The interest rate would make a loan shark drool, with legally authorized rates sometimes exceeding 3,000 percent. If borrowers fall behind in payments, they will soon find themselves without transportation and a hefty debt.

If the customer loses his job immediately after a payday loan is made, the loan company has little chance of getting paid back. However, the odds of someone losing his job within a week of securing a loan are slim. In the case of a title loan, if the borrower fails to pay, the loan company seizes the car and sells it at fair market value. Anything left after the loan, interest, late fees, collection fees, and general add-ons, goes back to the borrower.

Pawnshops operate in much the same manner as title loan companies except that they normally do not charge outlandish interest rates. If an individual needs cash, he can get a highly discounted loan on something of value. If the loan is not repaid, the pawnbroker simply sells the item and keeps the entire amount. Why shouldn't a house be treated exactly the same?

Before the era of mortgage securitization and liar loans, a typical lender would scrutinize the credentials of perspective home buyers to ensure that they had sufficient income to meet the mortgage, real estate taxes, and insurance obligations associated with owning a house. A substantial down payment of between 10 and 20 percent was typically required. This long-standing tradition ensured a relatively low default rate because home buyers had more skin in the game and were reluctant to walk away. The odds that houses on which a large down payment was made would be underwater were very low. This practice excluded a great many Americans from the dream of homeownership because of the high barriers to entry. That all changed when people could buy a house with no money down; low teaser interest rates, no income verification, and a volume business mentality championed by the Wall Street power brokers that trickled all the way down to your friendly neighborhood realtor completely changed the playing field. It is not surprising the latest generation of homeowners feel little obligation to continue making payments on an asset worth a fraction of what a corrupt or incompetent appraiser said it was once worth.

For twenty years the federal government that had been actively encouraging homeownership turned a blind eye when Wall Street created a Frankenstein monster in the form of securitized mortgage instruments that resulted in the phenomenon of lending without responsibility. Lending without responsibility is where lending storefronts were established to mass-market quick and low-cost loans to the masses. These loans were immediately sold to Wall Street consolidators who packaged them in giant debt instruments and sold them throughout the world. Buyers were betting mortgages would be paid on time and the underlying real estate values would hold steady or increase.

Capital One Financial, the institution that introduced the notion of securitized credit cards, recently purchased the three billion dollar HSBC credit card unit. While the Wall Street mortgage securitized experiment went bust, the Capital One program continues with unabated growth. As long as people continue to pay credit card bills, this little enterprise will remain profitable.

Homeowners have discovered a way to stop making mortgage payments and continue to live in their houses: they stop making mortgage payments and continue to live in their houses. It takes lenders an average of twenty-four months to foreclose and evict mortgagees. In tenant-friendly states, the process can take much longer.

The problem has gotten so bad that banks have resorted to bribery. Rather than go through the eviction process, many banks are offering cash incentives to borrowers if they return house keys and leave the property in reasonable shape. With legions of individuals walking away from mortgages, lenders do not have the resources or the motivation to track down and collect from deadbeat borrowers.

While walking away from a house and turning in the keys can be morally justified as a prudent business decision, hostilely remaining in the house after the bank asks you to leave raises entirely different moral questions. As the foreclosure process slowly winds through a horribly bottlenecked system, the family can celebrate birthdays, Thanksgivings, New Year's Eve parties, and July Fourth celebrations without paying a penny for housing. By the time the sheriff shows up with the eviction notice, the family has saved enough money to put a deposit on a rental house and have plenty left over for several months' rent.

Personally, I see a bright-line difference between remaining in a house after refusing to make payments and moving into a vacant house with the intent of adverse possession. In the former, you know you are using the legal process to hold possession of a property that you do not own and know you will eventually be evicted from. In the latter, you are moving into a vacant house that appears to have been abandoned by its owners. If you live in the house long enough, the state has established a clear process for you to take ownership of the abandoned property. If the property is only temporarily vacant and the rightful owner shows up, you must move out and find another place to live.

Another vehicle for those wishing to walk away from mortgage obligations is the short sale. A short sale is a phenomenon that surfaces during real estate downturns. This recession has seen record numbers of short sales. A short sale can save a family from eviction in many cases. When a house has a mortgage higher than the value of the house, both the homeowner and mortgage holder have an incentive to negotiate a lower mortgage instead of undergoing the expensive, time-consuming foreclosure process.

In a perfect short sale, the bank and homeowner will agree on a selling price and terms of the lower mortgage. Often, the bank will forgive the unpaid debt and promise not to pursue payment from the homeowner after the sale. The home will be listed at the lower price and sold.

The reality, however, is anything but ideal. As home values continue to decline, prospective buyers offer less than asking prices, and bank approval must be secured. Generally, banks are inundated with problem loans and short-sale requests, and cannot make timely decisions. Offers languish for months or even years. In May of 2011 a record number of purchase contracts were cancelled. Experts cited short-sale contracts as the main contributor of the cancellations. Banks simply could not get their acts together.

Buyers looking for short sale opportunities should prepare for a long, frustrating process. Keep on top of the bank and hound them with calls and letters until you get your property.

Sellers face a looming tax deadline. Beginning on January 1, 2013, any monetary losses from a short sale will be treated as ordinary income and taxed! Talk about kicking someone when they are down!

Tax law can be confounding, confusing, and sometimes devoid of logic. Under normal circumstances, if a person borrows money and is unable to repay the money, the lender may forgive all or part of the loan. This is called cancellation of debt, and the money that is forgiven is treated as ordinary income by the IRS. The lender would submit a Form 1099 to the IRS and the borrower. Uncle Sam would expect his cut by the following April. Short sales of primary residences have been exempt from this provision. Unless Congress acts, December 31, 2012 will mark an end to that exception.

Homeowners contemplating short sales must act quickly or suffer dire tax consequences. This is an excellent opportunity for prospective buyers to pick up bargains from motivated sellers. Banks also have an incentive to act as homeowners who fail to sell by the deadline may just stop paying the mortgage, continue to live in the property, and let the bank foreclose.

The Mortgage Debt Relief Act of 2007 established the cancelled debt provision. Keep in mind that this provision applies only to principal residences not investment properties. That may explain why there are relatively few short sales at resort locations. Google IRS Publication 4681 for more information on the subject.

As homeowners see their homes depreciate far below their mortgages, many will decide to just walk away, leaving bargains to be snapped up by savvy buyers.
13. Work It Out

The first weekend in December, 2011 Richmond media outlets reported that a nonprofit company called the National Assistance Corporation of America (NACA) was coming to Richmond in its national Save the Dream tour. According to reports, NACA counselors and national lenders would be at the convention center to provide instant relief to qualified borrowers. I had to go.

I arrived about eleven in the morning on Sunday. The River City Rollergirls were having a roller derby match in the convention center adjacent to the NACA event. I knew Richmond had a female roller derby team but never figured the matches would be in the convention center. I passed by some of the team members and early fans. I restrained myself and didn't ask for autographs.

Continuing around the building, NACA had rented a huge space the size of Virginia Commonwealth University's basketball venue, the Siegel Center. (VCU Rams: First Four to Final Four, 2010.) Outside the door several dozen people milled about. A large registration desk was set up near the door. I walked in without stopping at the desk. I was immediately greeted by a bouncerlike fellow whose nametag proclaimed he was Big. How true. Mr. Big extended a large, welcoming arm and directed me to the orientation area. He handed me a NACA Home Save Workbook and pointed to the chair I should take. I was not about to argue with Mr. Big and sat down.

The orientation had been going on for some time. I was in the third to last row of twenty rows, each with twenty seats. There were about 150 people at this session, and they ranged in age from young couples to retirees. There was a racial mix that generally reflected the Richmond population. Most people were well dressed. The mood was guarded and quiet. Many people had faces worn by worry and financial stress. Our orientation guide had gray hair and a short goatee. He spoke loudly and with authority on the subject of NACA. He was talking to a PowerPoint presentation about NACA, the program they specialize in, and how to qualify.

NACA works under the HAMP guidelines; HAMP, which I discussed in the first chapter, is one of the flagship bailout programs of the Obama Administration and was originally touted as a way to assist struggling homeowners restructure unaffordable mortgages. Qualified borrowers could reduce mortgage payments through reduced interest rates or principal forgiveness. Our guide briefly mentioned that homeowners could qualify if they were current (HARP) but obviously did not know much about this new program. He explained that NACA is a very powerful advocate and would work tirelessly on members' behalf to make sure they could save their home. HAMP is the very program that inspired the Santelli Rant and the Tea Party movement.

While the orientation was in full swing, the PA system overpowered his voice. "Attention! Attention! We have a news flash! We have a solution!" echoed throughout the cavernous center. The voice went on to say that NACA staff and the banks on hand had worked out a solution for a homeowner. The homeowner wanted to share her experience. She started by thanking God and NACA for "doing in two hours what she couldn't do in six months with the bank." She went on to explain that Bank of America had agreed to lower her interest rate from 6.5 percent to 4 percent and agreed to forgive $28,000 in principal. Her new mortgage payment of $656 per month would be 55 percent lower than her previous mortgage payment.

With the fervor and emotion the speakers were expressing, I expected our group to react as if attending a Southern Baptist revival. Instead, there was light applause and a few cheers. It seemed most everyone was preoccupied with his own situation. After the testimonial, our guide went back to the orientation. Basically NACA could help if you are behind in your payments and your home costs were unaffordable. If more than 31 percent of net income is spent on housing, the mortgage is considered unaffordable. He mentioned with a tone of disgust that the government had come up with that number, but NACA thought it should be lower. After going over the program and qualifications, he asked if anyone owned another property? A few people raised their hands. He asked them to follow Mr. Big off to stage right. He then asked if anyone was self-employed or partially self-employed. More people raised their hands. He had them exit stage right as well.

About 100 people remained. Our guide's next instructions were to remove pages fifty-three to sixty-one of the handbook and sign page sixty-one. He did not go over the language in the contract—he just instructed everyone to sign. NACA couldn't help unless everyone signed. After that, everyone was instructed to fill out an IRS tax return transcript request. In less than an hour NACA had signed agreements, Social Security numbers, and other personal information from about 100 people. It is easy to see how people can be conned by unscrupulous individuals, particularly vulnerable people desperate for a way out of a seemingly hopeless situation.

We were ushered from the orientation area down an aisle to a large waiting area. We passed a large bank of telephones situated in the center of the room. There were about 100 phones in five pods of twenty phones each. In the center of the pod were two scanners and laptop computers. NACA employees were feeding documents into the scanners while others manned the computers, apparently e-mailing the scanned documents to another location. We were directed to fill all available seats in the waiting area. We filled about a quarter of the seats.

We sat down, got comfortable, and chatted. We were told that if we needed a bathroom or food break, now was the time. A NACA employee jumped on a chair and told us to listen up. He wanted to go over the next steps. He said we would have an individual counseling session with a NACA solution expert. If we qualified, major lenders were on hand to work out solutions on the spot. At that point he asked us to take out the contract everyone had signed. Anyone that had not signed was encouraged to do so now. He gave us a synopsis of the contract: "Say yes if you agree—I want to become a member of NACA! Yes. I want NACA to represent me with my lender! Yes. I agree to let NACA have access to my credit report! Yes. I realize this service is FREE! YES! YES! YES!" Of course, the contract terms went slightly beyond the four points explained.

As we waited for our turns with the counselors, Barbara, the woman sitting to my left, told me her story. Her husband had died, and she fell behind in her mortgage payments. She called her lender, and, after a great deal of persistence, the lender agreed to a six-month interest rate reduction. After the abatement period, the lender not only raised the interest rate to the previous level, but it demanded the back interest! About that time a tropical storm plowed through Virginia, damaging her home. Her first floor was flooded and mold had started to grow. The insurance company sent her a check for $19,000. The check was made out to both Barbara and her lender. The lender told her to endorse the check and send it to them so it could be cashed. The lender then kept the check! That left Barbara without money to pay the contractors who were repairing her house. Holding back her tears, she stopped talking and tried to regain her composure.

I reached out and held her hand. I told her that I didn't know anything about NACA but from the brief introduction and the fact that they operated with the government's blessing and funding, it appeared these people could help her. She broke down in tears. She said she hoped to God something could be done for her because it was already too late for her sister. The bank had foreclosed on her home and kicked her out.

The couple sitting on the other side of me listened to my conversation with Barbara. They had the same lender as Barbara and were put through the same rate reduction and subsequent payment demand. The lender, Seterus, has a reputation in the industry for playing hardball with customers. Seterus is one of the banks with a NACA contract.

Soon afterward I excused myself and walked over to the NACA media table. The media person had gone to lunch and would not return for a while. I decided to research the company online. According to Internet sources, NACA is an organization with great intentions and plans but very poor execution. The CEO is a self-confessed radical whose in-your-face tactics have alienated him from a number of possible allies. Some of the more outrageous tactics included harassing the children of bank executives at school, distributing fliers in the neighborhood of another executive about an affair the executive was rumored to have had.

As the real estate crisis has continued to persist, banks are overwhelmed and understaffed. Banks lack the expertise and even the organization to deal with this massive continuing problem. To the public and customers in financial trouble, the bank's lack of procedures and stressed staff come across as unforgiving and self-serving.

On the other hand, NACA seems to have oversold itself and taken on too many clients. Members' calls to the NACA helpline typically go unanswered and paperwork is often lost. The NACA Web site routinely experiences glitches. If a loan modification is not reached during the initial visit, borrowers will need to self-advocate to see the process end with a successful conclusion.

A Google search on NACA complaints turned up over 1,000 hits. Generally the same complaints were made repeatedly: NACA does not return calls, loses paperwork, and does not follow up with lenders. It's hard to imagine a company that makes money only when the borrower has a successful solution could be so woefully disorganized.

As complaints mount, NACA continued its national tour, processing thousands of new members at each location, I wonder if there is a more sinister agenda behind NACA. The contract everyone signed included an agreement to receive NACA e-mails, mailings, and phone calls, and a release to use member images, statements, and testimonials. One of the last pages in the NACA handbook was a voter registration form. I mention this because the NACA Web site has a link labeled the Fight, which describes various "campaigns" the organization has undertaken or is engaged in. The site describes the methods of harassment employed by members against NACA enemies such as Fleet Financial, First Union, and the Associates. One campaign was to unseat Senator Phil Gramm apparently because Gramm spoke out against NACA.

Rather than employ resources to help members, considerable effort is diverted to further the political goals of NACA leadership. It seems to me that an organization that receives federal government grants should refrain from actively campaigning for the ouster of a senator. It would be a shame if NACA's dysfunction leads to my friend Barbara's financial ruin. I would also be a bit concerned that NACA has enough personal information on each member to make an identity thief salivate and may not take adequate steps to secure the information to any significant degree.

According to numerous NACA complaint Web sites, members need to stay on top of the process and make sure NACA, the lender, and investors keep the documents moving. I took away three suggestions for people trying to work out problem loans:

  1. Remain in constant contact with NACA and lenders.

  2. Take meticulous notes of all conversations and be sure to include to whom you spoke, the date, and key topics or agreements discussed. Record the conversation if possible.

  3. Verify that the NACA and lender representatives have an accurate written record of what was discussed.

With programs like HAMP and HARP, and aggressive advocates, more and more homeowners will seek and receive mortgage relief. They will have to deal with overwhelmed advocates and clueless lenders. They may deal with government agencies such as HUD and bang their heads against those walls. Ultimately, more borrowers will work out loans and be able to save their houses. Many more will fail, and the supply of foreclosure homes will continue to work through the REO system for years.

There are resources to help homeowners hang on to their homes—don't give up.
14. I'm Going to Die!

Much has been written about the fearlessness of youth and how young people feel invincible and take chances that older, more experienced people never would. I am no exception. To quote writer Harry Golden: "The arrogance of the young is a direct result of not having known enough consequences. The turkey that every day greedily approaches the farmer who tosses him grain is not wrong. It's just that no one ever told him about Thanksgiving."

Living on Wanderlust, my little Grampian 22, in my early twenties, Mike and I had the ideal situation. The boat was tied to a mooring in Spa Creek about twenty yards from the shore of St. Mary's school and church in Annapolis. The creek was fairly narrow, and the harbor was well protected from weather. Each morning after sunrise we would row the dingy from Wanderlust to the end of Shipwright Street and tie up. Our commute was a five-minute walk to the harbormaster's office, where we would secure a token for the showers. After our morning shower, we would often walk up Main Street to Chick and Ruth's Deli, where you could get a huge breakfast for very little money. We could eat enough to carry us for the entire day.

After breakfast Mike would head off to the Mystic Clipper, where he was galley cook. I was a bartender with a company that owned a number of tourist boats that lined the Annapolis waterfront. If I wasn't scheduled on the Harbor Queen morning cruise to St. Michael's, I had the day to myself. Generally, I would spend late summer mornings working on the boat, stopping by the post office to see if anyone had left me a letter in general delivery, or exploring Annapolis. Most evenings I worked an evening cruise or party.

Once off work, Mike and I would return to Wanderlust. He brought leftover food from the ship, and I brought leftover alcohol. We would have a late dinner on board, illuminated by an oil lamp. Wanderlust had no batteries. We would sit in the cockpit and talk until late evening or head back to Annapolis for dinner or other activities. At bedtime we would crawl into the small cabin and shut the cabin door. We had enough bunk space for three people—or two people and gear. Mike had rigged up a trampoline net in the fore portion of the cabin to store most of the gear with barely enough room for our feet when sleeping.

During the night and early morning, ducks would swim around the boat gently pecking on the hull eating water bugs and small barnacles. We would drift off to sleep listening to the messages tapped out in unintelligible Morse code by feasting ducks. August gave way to September and October brought shorter days and cold nights. Aside from our single oil lamp, Wanderlust had no heat.

In mid-October, a cold front blew through Annapolis dropping temperatures below freezing. We decided it was time to join the geese and head south. Our original plan had been to migrate south and end up in Florida by winter. After the front passed, we put in our notices at work and prepared for the trip. We were ready to go a week later.

We sailed south for two days and stopped at a small fishing dock near Reedville, Virginia, which is situated on the eastern tip of Virginia's Northern Neck, a peninsula with the Potomac River on the north, the Rapahannock River on the south, and Chesapeake Bay on the east. Historically Reedville has been a fishing town; today the largest employer is a fish factory that predominantly processes Menhaden fish netted in the bay and Atlantic Ocean for use in cosmetics and cat food.

The dock we tied up to was close to the bay and catered to fishing boats. We had dinner and beers with the owner in his shack on the pier. Before turning in, we checked the forecast: sunshine with light winds from the southwest.

The next morning clouds blanketed the sky, and a fresh breeze was coming from the northeast, not the southwest. We tuned our AM radio to a local station, and the forecast reiterated sunshine and southwest winds. Figuring that our morning observations must be a temporary condition, we were underway by eight. As we sailed into the bay, several fishing boats were returning. Two crewmembers on one boat were frantically waving to us, indicating we should return to dock. We were well on our way and were confident the forecast was correct.

If a fisherman tells you it is not safe to go out, listen to him and take his advice.

We continued into the bay. The northern wind increased to a strong breeze and waves were a constant two feet. Instead of breaking up, heavy clouds filled the October sky. We were sailing south with the wind at our back. Even if we wanted to return to Reedville, we would be fighting a strong current, heavy seas, and contrary wind. The best course was to continue south toward Deltaville, some fifteen miles away.

We turned our radio on. Even in the technologically advanced early '80s, weather forecasting was an inexact science. Hurricanes and tropical storms were, as they continue to be, largely unpredictable. The revised forecast confirmed the fishermen's warning—a tropical storm, Dean, had taken a left turn straight up the Chesapeake Bay and was heading straight toward us. According to the latest weather prognostication, winds would continue building throughout the day, and waves would build to four or five feet by afternoon, with gale-force winds expected by evening. About that time a wave broke over the stern of Wanderlust and tossed gallons of water into the open cockpit. Behind us were crashing waves and wind-tossed foam dancing from wave peaks.

I quickly calculated that four or five waves slamming into us would lower the freeboard to the point of sinking. Another wave broke over the stern. We were ankle deep in water. I asked Mike to start bailing. The nearest land was about a mile off our starboard. A third wave broke.

Even though we were on the verge of sinking, we were not scared. We were young, invincible, and immortal. The worst thing that could happen would be the loss of the boat and having to swim to shore. The water was warm, and anyone can swim a mile. We weren't worried. Mike was bailing as fast as he could. A fourth wave broke.

Suddenly a porpoise pod surfaced beside us. They were playing in the waves. They swam in front of our bow and returned to our side. About the same time we made a slight course correction causing the waves to hit our stern quarter rather than straight from behind. The porpoises continued to play, and I knew everything would be fine. We were not going to sink. The next breaking wave did not send any water into our little boat. We sailed for the next two hours surfing down larger and larger waves. We arrived in the safe harbor of Deltaville and pulled into an open slip at Fishing Bay Yacht Club. We were in the shower at the club just after noon. The trip from Reedville to Deltaville in a twenty-two foot keelboat had taken us less than four hours—it was an astounding accomplishment.

That afternoon we met two college students from Richmond who wanted to take their dad's boat out for a sail. Thinking of the fishermen's warning that morning, we suggested that they might not want to go out but they declined our advice and uncleated the dock lines from the boat. We watched them motor out the inlet and into the gale. They almost immediately turned around and came back to shore. Since their sailing adventure was thwarted, they were heading back to Richmond. We asked if we could have a ride, and they agreed and dropped us off at my parent's house. That night for the first time in over three months I slept in a real bed, and the next morning cooked breakfast in a real kitchen. Over breakfast I told my friend the trip was over and we would not make it to Florida. He asked what would happen to him, and I said I didn't know, but it wouldn't be on the boat. He ended up going back to Annapolis, working on the Mystic Clipper, and eventually getting his captain's license. He ultimately became captain of a number of tall ships. I on the other hand went back to college.

Years later with my Grampian 30, I decided to sail from Kinsale to St. Mary's for my college reunion. I asked my usual crew if they wanted to go for the weekend, but they all had other plans. No problem I thought, I'll just singlehand the boat for the weekend. The weather forecast was for sunny skies and breezy conditions. When I arrived at my marina, sailors coming in from the river were telling tales of ten-foot waves and gale-force winds on the Potomac. I took their tales with a grain of salt, thinking ten-foot waves on the Potomac River were no doubt exaggerations. The only way for such conditions would be a hurricane and severe tidal convergence, where river currents meet a larger body of water and the currents collide violently. While the mouth of the Potomac can be choppy at times, rarely does it extend five miles upriver where my marina was located. I did however delay my departure until 4:00 p.m. when winds normally subside somewhat.

When I did get underway, Yellowbird was performing beautifully. I hoisted the jib and determined that would be all the sail I needed for the trip. The wind was blowing directly out of the west, which was the perfect angle for my northwesterly sail to St. Mary's. I secured the motor and settled down for what I thought would be an uneventful four- or five-hour trip. As I approached the Potomac, I saw another boat heading toward Kinsale from the bay. They were struggling mightily against the wind that was powering me. I saw the boat heave and shoot over a fairly large wave that I estimated to be about five feet; that gave some credibility to the stories boaters had told earlier at the marina. Still, I was not concerned as the wind was favoring my trip, and my boat had proven herself time after time in these conditions.

As I left the shelter of my river and entered the Potomac, the seas increased, as did the winds. A large gust took me by surprise and caused Yellowbird to heel approximately thirty degrees. Heeling is when a sailboat leans over to one side in reaction to the wind and resistance of the keel against the water. It is measured in degrees, with zero being safely in harbor and anything over ninety meaning the ship is capsizing and dumping the crew in the water. Thirty degrees is about double what Yellowbird heels in a strong breeze. I pulled the tiller hard to steady her against the wind and heard a sharp crack of wood as the tiller broke off at the base.

Boats are steered with a winglike structure under the water known as a rudder. The rudder is connected to a mechanism the helmsman can use to move the rudder and change course. Some boats have steering wheels that connect to the rudder with cables and others use tillers. A tiller is typically a long piece of wood connected directly to the rudder post. I prefer a tiller to a wheel as I can detect subtle changes in the boat's performance simply by feeling them in the tiller with my hand or foot.

With my tiller broken and dangling in my hand, the boat healing at thirty degrees, and waves crashing over the boat, my first thought was "I'm going to die!" This feeling persisted for approximately thirty seconds until the wind gust subsided, and Yellowbird settled into a straight course. She was heeling approximately twenty degrees and was sailing in a straight line for the Maryland shoreline. I was able to sit back and assess the situation. At that point I realized the worst-case scenario would be Yellowbird sailing across the Potomac and plowing into the Maryland mainland. When she came to a stop, I would simply hop off the boat and walk to shore. Unlike the situation on my first boat twenty-five years earlier, I had a high frequency radio, a cell phone, GPS, and a thirty-foot boat that could circumnavigate the globe. I was not going to die in the relative calm of the mouth of the Potomac River. All I needed to do was find a fix for the tiller. I took a length of line and secured my tiller to the nub attached to the rudder post. I was able to leverage the tiller, move the rudder, and control the boat.

Having faced my self-assessed near-death experience, I had the choice of turning back to harbor, which was two miles behind me or pressing on and sailing the remaining ten miles across the Potomac and up the St. Mary's River. Feeling foolish that I had overreacted to the emergency and confident that the situation was under control, I decided to press on and finish the trip. I continued to sail with only the jib and had a pleasant trip. Yellowbird was at St. Mary's by 7:00 p.m. I'd made the trip in just over four hours—a record time for my numerous sails from Kinsale to St Mary's. I made it just in time to catch the last few minutes of the banquet and had a wonderful time with my college friends for the rest of the evening.

The next morning I decided to get underway very early to beat the high winds predicted that afternoon. About five minutes after I hoisted sail and set course for home, the radio cracked with an ominous sound I had heard dozens of times before: "Coast Guard, Coast Guard, help!" That was the only transmission from the distressed boater. Coast Guard stations from Annapolis to Norfolk asked the boat to identify itself and the nature of the emergency. After several tense minutes, a fisherman's voice came over the radio saying he believed the distress call was from a catamaran hard aground on Point Lookout. He attempted to provide assistance, but the water was too shallow for him to get close. He suggested the Coast Guard dispatch a boat. About ten minutes later a Coast Guard boat, with blue lights flashing, sped past me on its way to Point Lookout. For the next three hours, as I sailed home, the radio provided a play-by-play account of a successful search-and-rescue mission. By noon the sailboat had been freed from the sandbar and was on its way. I found it a bit ironic that I could have been in the same situation just a day before.

The reaction of a young person facing peril versus that of someone older is very different and very telling. My reaction to a tropical storm in a twenty-two-foot, open-cockpit boat was matter of fact: if the boat sinks, we swim to shore. Years later my first reaction in a well-equipped oceangoing boat with a broken tiller was "I'm going to die!" Attitudes toward investment also differ with age.

When we are young we can take more chances with our money. Put a couple thousand down on that new cutting-edge company that could be the next Google or could easily go bust. There would be many years to recoup losses from highfliers gone awry. However, as we approach retirement age, we should be much more cautious with our investments and have fewer trendy stocks in the portfolio and more dividend-paying blue chips and safe bonds. Real estate for people of any age is an excellent hedge against inflation, whether mild or rampant.

When you're young and haven't suffered enough calamities to be cautious, you'll leap into risky investments that could pay off fabulously or leave you broke. Know your financial and emotional limits for risk before you begin bidding on property.

15. Are They Sirius? Do Regulators Not Watch TV or Listen to the Radio?

As the economy has faltered and stock prices declined, fraudulent investment schemes have been exposed like Bernie Madoff's Ponzi scheme for example. While Bernie's was by far the largest and garnered most headlines, numerous other pyramids went belly up as stocks tanked. Besides pyramid schemes, many other scams abound. Schemes such as Madoff's come to light when the economy turns sour. Warren Buffett famously said, "It's only when the tide goes out that you learn who's been swimming naked," meaning that schemes, scams, and overextended managers will be exposed when the money dries up.

I purchased an XM radio (now merged with Sirius) several years ago. When the stock market is open, keep the channel locked to CNBC, which broadcasts an audio version of its cable television channel on XM. Because CNBC is a commercial station, advertising slots are available to the host cable company. XM has taken advantage of this by creating a sales department to sell radio ads during these local spots. Some of the ads I have listened to remind me of carnival hawkers beckoning passersby to peek into their tent and see the most amazing, incredible, never-before-seen oddities. Everything on the inside was guaranteed to be alive and as advertised or your two bits would be gladly refunded.

As I listened to these commercials guaranteeing instant credit, forgiveness of debts, incredible investment returns, offers to manage your mortgage forever, no money down real estate investments, making a fortune on the Internet, or to give you 100 sales leads free, I wondered what gullible souls would be tempted to call the 800 numbers. As it turns out hundreds of thousands of people call and hand over their credit card information to total strangers and are taken to the cleaners every week.

Some of the tactics these businesses use are straight out of Dilbert comic strips. Examples include the free trial offers in which the company offers a product or service absolutely free for the first thirty days or first bottle or first newsletter. All the company needs from you is your credit card number to take care of a modest shipping and handling fee. What they don't tell you and what is buried in the fine print of some agreements that you clicked on or couldn't read on the television was a provision that after the thirty-day free trial, you agree to have your credit card charged $19.95, $29.95, $59.95 or some other outrageous sum unless you opted out by following a multistep cancellation procedure exactly. If you miss even one step, your credit card would continue to be charged forever.

Another popular tactic is the money back guarantee. Here the commercial stresses over and over again that if you are not satisfied with the product, you can return it for a full refund and keep whatever cheap add-on the company matched with the product. Again, the fine print that is never clearly disclosed stipulates that the product must be returned within thirty days of the order. The problem is you do not receive the product until five weeks after the order is placed. By the time you get the product, the thirty-day return window has closed, and you're stuck with the product, the worthless add-on, and a charge on your credit card that only your state attorney general can help you resolve—if your state attorney general feels like helping citizens, which is not likely in these times.

These scams can go unchecked for years, and consumers are bilked out of hundreds of millions of dollars. By the time state consumer regulators or federal regulators even begin investigations, the scammers have either moved on or simply agree to a consent decree; they hand over a few million dollars to regulators, never admit guilt, and promise never to do the thing they are not guilty of ever again. They immediately change the scams slightly, set up shop in a new town, and do it all over again.

Some of the more popular offerings relate to buying real estate. One book suggested that investors purchase zero-coupon bonds and offer home sellers more than they were asking for their properties; payment would be made with these bonds. The scam is that zero-coupon bonds are initially sold for pennies on the dollar, and they increase in value until maturity at which point they are redeemed for face value. An investor would pay $300 for a zero-coupon $1,000 twenty-year bond and offer the homeowner $100,000 worth of bonds for which the investor only paid $30,000. After the sale the homeowner would have $100,000 in bonds that he could not collect on for twenty years. No homeowner in his right mind would agree to this. No investor in his right mind would try to pull this scam off. The author of that book walked away with hundreds of thousands of dollars for this advice. Other investment schemes suggested using credit cards to make down payments on houses. Once purchased, the houses would almost immediately be resold at huge profits, and, according to the books, the credit cards could be paid off. Of course, very few are taken in by the bond scam and most of the credit card flippers ended up way over their heads.

Another scam sweeping the nation requires the cooperation of your telephone company. This scam is known as cramming. It is operated by a third-party company that provides a "service" to the customer that typically is absolutely worthless and then bills the customer as a line item on the telephone bill. The monthly charges range from $20 to $50 per month and often show up mysteriously without warning. Victims are targeted one of two ways: a telephone solicitor may call and ask direct questions such as would you like to save money? If you answer yes, the solicitor will follow up with several more equally direct questions, until you have seemingly satisfied the applicable regulations of the Federal Communications Commission and the company can tack on charges to your telephone bill. The second method is even more sneaky. The scam company mails you a check for a small amount of money; fine print on the back of the check states that endorsing and cashing the check indicates your agreement to join the company's monthly service product. So the month after you endorse and cash the check, a service charge is added to your telephone bill that will be there every month until you notice it and cancel the service.

We were reviewing a client's telephone bill recently and discovered a $50 third-party charge. We called the billing company and were referred to another company that provided the actual service. According to a company spokesman, the service included electronic fax, computer maintenance, and discounts on a wide range of services and products. The client was unaware they were being billed or had any available service. We canceled the service and demanded a refund. The client was given a $1,500 credit on their telephone bill. Take a look at your phone bill. If there are third-party charges that you were not aware of, call the billing company and have the service terminated and demand a refund.

Because the scams involve telephone companies, one might conclude that the Federal Communications Commission (FCC) would be the federal agency responsible for investigating and prosecuting these scams. One would be wrong. The FCC can only regulate and fine telecommunications companies. If the third-party vendor is a non-telecommunications company such as an identity protection company, the FCC has no legal regulatory standing. Even the FCC is a paper tiger when prosecuting telephone companies. Fines are laughably low, scammers happily write checks to Uncle Sam and continue to bilk citizens.

During a recent Congressional hearing on cramming, the chairman of the FCC testified that his agency only had jurisdiction over telephone companies or companies doing business under FCC rules. A huge number of crammers fall under the jurisdiction of various other federal agencies. While the FCC is working with the other agencies and devising a method of coordinating enforcement, an estimated two billion dollars per year is stolen from telephone users. Worse, it seems telephone companies profit from the practice because they charge service fees on each of the crooks' bills to the tune of approximately $650 million each year.

Personally, I think these people should be lined up along a wall and shot. Perhaps we could take a lesson from some Middle Eastern counties and punish perpetrators of certain consumer crimes with 1,000 lashes or simply cut off their hands. The unfortunate reality is that they turn over a small portion of their ill-gotten gains in fines to cash-strapped governments and treat it as a cost of doing business. At the very least broadcasters such as XM, commercial radio stations, television stations, cable networks, telephone companies, and Internet outlets should use some common sense before allowing this trash on their airwaves or bandwidth. As the scams proliferate and defraud more people, I think the commercial outlets should share some liability through class action lawsuits or criminal convictions; executives of those companies who abet the scamsters join the scamsters in front of the firing squads.

Disclaimer: this is the United States of America where cruel and unusual punishment has been outlawed. The above paragraph is provided for entertainment purposes only and does not advocate physical violence against those attempting to defraud hard-working Americans or the executives or employees of XM radio, or any other media outlet who provide a dissemination vehicle for these modern day snake oil salesmen.

On the bright side, the Unites States has a new consumer advocate agency—the Consumer Financial Protection Bureau (CFPB). This agency is supposed to protect consumers from all sorts of fraudulent and deceptive business practices. Conservatives and the Chamber of Commerce decry the new agency as a job killer that will hinder the free market. While that is a possibility, considering the government's track record on ensuring consumers are treated fairly, I am hopeful the CFPB will team up with Homeland Security or the marines and aggressively target these scammers with smart bombs, predator drones, or good old-fashioned waterboarding. Only time will tell.

Enter Bank of America with its announcement that it will begin charging a five-dollar monthly fee for holders of debit cards. Other banks quickly followed suit with junk fee announcements of their own. President Obama, touring the country to stump for reelection made this statement in reaction to the fees:

This is exactly why we need this Consumer Finance Protection Bureau that we set up [and] that is ready to go. This is exactly why we need somebody who's sole job it is to prevent this kind of stuff from happening. ...You can stop it because if you say to the banks, "You don't have some inherent right just to—you know, get a certain amount of profit. If your customers are being mistreated...that you have to treat them fairly and transparently.

Okay. Maybe the Chamber of Commerce has a point. While Bank of America is likely the worst managed bank in the country, it is still a company doing business in a free country. If it wants to charge its customers a five-dollar monthly fee, it should be able to. Bank of America will lose customers as competitors advertise accounts with free debt cards. If enough customers leave, Bank of America will go out of business. Similarly, if Verizon Wireless wants to charge two dollars when you pay your phone bill online, consumers can vote with their feet. Fortunately, both companies were rebuffed with negative media attention and rescinded the fees.

This fee and other irritating charges Bank of America and other giant banks have instituted in the wake of Graham Dodd are annoying but do not come anywhere close to the charges imposed by payday or car title lenders. Payday lenders market themselves in low-income areas and charge fees and interest that sometimes exceed 500 percent. The CFPB should go after those lenders before targeting mainstream companies doing routine business.

It is troubling that the president would even consider using the threat of CFPB action to intimidate companies to conforming to the wishes of the oval office. If Bank of America is fair game, who is to stop the CFPB from going after McDonald's if the president thought Chicken McNuggets were too expensive or any of a thousand scenarios?

Scam artists are alive and well on satellite radio. Don't fall prey to their schemes.
16. Sue the Banks Or How to Freeze Home Lending

On September 2, 2011, lawyers for the Federal Housing Finance Agency (FHFA) wandered into a federal court and plopped down a pile of lawsuits against seventeen banks that alleged the banks had sold the government bad mortgage-backed securities. It was estimated the potential liability for the banks could approach $200 billion. World stock markets reacted with sell-offs reminiscent of 2008. European banks, already reeling from the liquidity crisis in the European Union, looked like passed-out drunks on the street corner being kicked in the gut by Uncle Sam.

According to the FHFA mission statement, FHFA is supposed to "Provide effective supervision, regulation, and housing mission oversight of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks to promote their safety and soundness, support housing finance, and affordable housing, and support a stable and liquid mortgage market." Just try to say that sentence in one breath. Only a government bureaucrat could come up with something like that.

So, FHFA regulates Fannie, Freddie, and the Federal Home Loan Banks (FHLB). We know about Fannie and Freddie, but what is the FHLB? According to the FHLB Web site, in a glowing self-assessment, "This is a System that works." The Web site gives a brief history:

Every day for decades, the Federal Home Loan Bank System has worked to improve the lives of millions of Americans. Through all economic cycles, the FHLBank System supports the efforts of our member lending institutions to help families realize the dream of home ownership, stimulate the creation of affordable housing, and improve the local business environment.

Created by Congress in 1932, the System's public policy mission is to support residential mortgage lending and related community investment through its member financial institutions. The System fulfills its role in housing finance by providing members with access to reliable, economical funding and technical assistance, and special affordable housing programs.

This is a System that works. Today, there are over 7,800 FHLBank System members, including commercial banks, thrifts, credit unions, and insurance companies. Each member is a shareholder in one of the twelve regional Federal Home Loan Banks; each regional Bank is an individual corporate entity, which must meet strict management and capitalization criteria befitting its status as a government-sponsored enterprise. Federal oversight, in conjunction with normal bank regulation and shareholder vigilance, assures that the twelve regional Banks remain conservatively managed and well capitalized.

While the Federal Home Loan Bank System mandate reflects a public purpose, all twelve regional Banks are privately capitalized and do not receive any taxpayer assistance.

The FHLBank System plays a critical role in the continuous flow of funds to the residential mortgage market. These funds originate with the sale of debt securities, called consolidated obligations, in the capital markets. The proceeds of these sales are then loaned to member financial institutions, which in turn provide mortgage credit to homebuyers.

Just so we understand completely, consider that FHLB provides funding to almost 8,000 lending institutions to make home loans. FHLB gets the funds through the sale of debt securities backed by mortgages on the open market. We know that the debt securities FHLB sold and still sells are gold standard because the FHLB told us so: "Federal oversight, in conjunction with normal bank regulation and shareholder vigilance, assures that the twelve regional Banks remain conservatively managed and well capitalized."

Now that the loans have gone bad and the consolidated obligations are worthless, Uncle Sam has decided to sue the member banks? Where in the world were the overseers as the mortgages came in the front door? The mission statement for FHFA and FHLB regulatory documents indicate that there is some internal review of the products that pass through the organization. It is the fiduciary responsibility of FHFA and FHLB managers to ensure member banks are adhering to the high standards the agency claims it maintains. A fiduciary would audit a percentage of the loans to verify the properties were worth the selling price, verify the buyers had good credit, verify buyers actually had the income claimed on mortgage applications, and verify payments were made on a timely basis. From all appearances, FHFA and FHLB overseers were asleep at the wheel between 2002 and 2008.

If FHFA and FHLB officials had actually done a minimal review, some aggressive loan originators would have been flagged early and banned from the program. If a pattern of abuse were detected, FHFA and FHLB would have issued stricter guidelines to reviewers and member institutions. Unfortunately, as a government agency, FHFA was driven not by sound business practice but instead reacted to the hot air blowing from inside the DC Beltway.

When the dust settled, Fannie and Freddie were holding the bag for billions of long-gone-bad loans the solution was to attempt to extract blood from turniplike banks? Banks have already slammed the door on new lending and require borrowers to have stellar credit to be considered for a loan. Post lawsuit, banks will further tighten credit requirements and reduce lending even further.

There is encouraging fallout for readers of this book. Once the seventeen banks have determined the potential liability, they will need to raise cash to offset possible losses with additional reserves. For real estate investors that means banks will be exceptionally motivated to unload their massive portfolios of REO properties. An unintended consequence will be the creation of more One West banks who will let properties go to whomever brings a wad of cash to the table.

As the banks caved to the government and settled with yet another bailout fund, I am reminded of a tax case an acquaintance faced a few years ago. The government charged him with tax evasion as he apparently forgot to pay taxes on some income. He went to trial in his own defense. He was quoted as saying, "With my vast resources, the government doesn't stand a chance." He lost in court and served some jail time.

Banks facing the full force of the vast prosecutorial resources your tax dollars can muster have substantially more defense ammunition than my acquaintance, yet they decided twenty-four billion dollars would be an adequate sacrifice to the government lawyer-thugs.

Bank of America is our family bank. By the time you read this book, Bank of America should be our former bank. I am convinced Bank of America has absolutely no idea what it is doing. Bank of America is not the only poorly managed bank.

My partner was a customer of another large bank. It was purchased by yet another large bank at a fire sale price and at the end of a shotgun held by the Federal Reserve. In the late summer of 2010 the transition was complete and signs were replaced with hideous maroon and yellow signs of the new bank. Immediately after the transition my partner saw errors on her statements and unexplained fees on her accounts. The bank waived the fees when she brought them to the bank's attention, but the fees continued to show up. She moved her accounts to Bank of America. She should have talked to me first.

When we moved back to Richmond in 2001, we opened a checking account at Bank of America. We also had a credit card with Bank of America. Our mortgage was with Countrywide, which merged with Bank of America in another shotgun wedding.

Soon after Bank of America, the worst managed bank in the solar system, took over our mortgage, we began receiving letters asking us to provide the bank with a copy of the insurance policy for our condo. I can only assume the bank concluded we live in a condo because we pay homeowners' association dues to our community association. Bank of America sends this letter every six months. We ignore it.

In July 2011, Bank of America began charging a monthly maintenance fee on the checking account. I went into the branch and asked what that was all about. The bank manager asked if we had any other accounts with the bank. I told him we had a credit card and a mortgage. He verified those accounts and noted the "system" had not linked them together. Because we had a substantial relationship with the bank, he was able to cancel the charges. I guess anyone lacking a "substantial" relationship with Bank of America will be contributing $25 per month to the bank's profits for the privilege of having them hold your money and pay you no interest on it. Perhaps President Obama will sic the CFPB dogs on Bank of America for this fee too.

When interest rates hit historic lows, we decided to refinance. I found a mortgage broker who found a very low rate and favorable terms. I decided to give Bank of America the opportunity to match the offer. For months Bank of America had been inserting advertisements in our mortgage statements urging us to call the bank and check out their refinance opportunities. I called the number and spoke with a fairly gruff individual. I explained that I was ready to refinance and was wondering if Bank of America would match or better the offer to keep our business. He did some quick calculations and said there was no way Bank of America could possibly match the deal I had found and hung up.

A few weeks later I received a postcard from Bank of America thanking us for requesting information about a mortgage. To determine other business we conduct with the bank, the postcard posed two questions: Do you have a checking account with Bank of America, and do you have a credit card with Bank of America? The postcard was not prepaid. We would have to buy as stamp to tell Bank of America the extent of our relationship with them. Amazing. The data cross-reference "system" must remain hopelessly disconnected at the bank. Hopefully my partner has better luck with Bank of America than we did. Perhaps we will be with a credit union as you read this.

Wells Fargo, Bank of America, Citi, Chase, and all the other "major" banks are in a state of paralysis when considering new loans. They are deathly afraid of originating risky loans and then Washington regulators would throw them in jail or the CFPB would launch an investigation. The safest thing to do is simply stop lending. There are other factors, of course, but if banks had the will to originate more loans, they could.

Our refinance should have been simple. We were refinancing less than 50 percent of the assessed value of the house, we have excellent credit, we have income to qualify for a loan twice as large, and we have enough assets to cover the entire loan. In the liar-loan days this refinance could have been done in an afternoon.

I went on the Internet and found a mortgage broker. Mortgage brokers have arrangements with banks and other lending institutions to sell newly formed loans. They make their money by charging fees to the borrower, the lender or both. Mortgage brokers got a bad reputation in the wake of the housing meltdown when the finger pointing started. A few brokers specialized in no-doc loans and were a major contributor in the pipeline feeding toxic loans through Wall Street. Since the bust, mortgage brokers have become an excellent clearinghouse that weeds out unqualified loans and save banks money in loan origination departments.

The application process started easily enough, with a generic application, credit check, income verification, and request to explain large cash transfers. Then came the appraisal. We figured there would be no problem with our house since the county assessed it over $150,000 more than the loan. Were we wrong!

When blame for the housing bust was being doled out in Washington, appraisers got their share. During the bubble, when house prices were increasing at 10 percent per month in some areas, appraisers were under pressure to assert the value of a given property to make the loan. Often appraisers would look on the Internet to verify values and sign off. Others would simply ask the realtor what number they needed and send it back.

Times have changed.

One complaint about the real estate and lending system was possible collusion between realtors, lenders, and appraisers. The solution was to create a pool of appraisers from which an appraiser would be selected at random. Appraisers were also required to actually visit the property and take pictures.

Our appraiser showed up on a Saturday morning driving a BMW. He was impeccably dressed and carried himself like Elton John. He walked through every room snapping pictures and asking questions. He noticed we had some cracks in the drywall over a few doors and asked if there were cracks in the foundation. There are some hairline cracks as a result of local soil conditions. I said yes and showed him. He took pictures and went on his way.

Several days later, our mortgage consultant called saying there was an issue with the appraisal. Elton wanted an engineering report to certify the house was not about to fall down before he would sign off on his report. An engineering report would cost about $1,000.

The year after we moved into our house, Richmond had a severe drought. We noticed cracks developing throughout the house. We did some research and discovered our house was built on a geologic patch of land containing shrink-swell soil. Having lived in Richmond most of my life, I was aware of this phenomenon in the neighborhood about three miles from our house but did not know it extended to our house.

Shrink-swell soil is a spongelike material that swells when it gets wet and shrinks when it dries out. If the soil gets too dry, it causes immense pressure on the foundation, which sometimes cracks concrete footings that radiate throughout the house. In extreme cases, the foundation must be repaired using steel beams and subterranean hydraulic jacks. Minor cases can be overcome simply by watering the foundation during dry spells.

The shrink-swell soil problem in our county resulted in several lawsuits against developers, builders, and even county inspectors. After thirty years, homeowners recognize the problem and install drip hoses around houses to water foundations. When the county imposes water restrictions during droughts, watering foundations is expressly excluded.

Elton should have known about this problem. However, the stipulation in his report stopped our refinance in its tracks. Our mortgage broker could not proceed without the report, and we would have to pay for it. We decided to cancel the application and eat the $400 appraisal fee Elton used to make the next payment on his BMW.

Our second mortgage broker advertised "no closing cost" loans. Like other brokers, they made their money on fees paid by banks but opted to pay all closing costs and operate on lower margins. While we were going through the process with our first broker, Europe melted down and interest rates on ten-year Treasuries went below 2 percent. Our second broker not only offered a no closing cost loan but at an interest rate lower than the first! We would be able to refinance with a lower monthly payment, a shorter term, and get $20,000 cash—if we could qualify for the loan.

The second loan application went almost exactly like the first except that I already had most of the necessary documentation saved in my computer. I did some quick patches and painting on the walls before the second appraisal. Our second appraiser was a working mother who had just picked up her daughter from school. She walked through the house asking questions and taking pictures. Her report listed the value of our house exactly the same as Elton but didn't require an engineering report. The loan closed in just a few weeks. Our broker sold the new loan to Wells Fargo. Wells Fargo sold the loan to Fannie Mae but will continue to service the loan. Wells Fargo must have taken a page from Capital One's book.

Just after World War II, Hollywood produced a movie titled The Best Years of Our Lives. It was the story of three returning veterans and their transition to civilian life. One member of the trio, Al Stephenson, was a banker. When he returned to the bank, Al was put in charge of making small loans. After reviewing several loan applications and being admonished by his boss to refrain from making risky loans, Al made a speech at his welcome home dinner:

I want to tell you all that the reason for my success as a sergeant is due primarily to my previous training in the Cornbelt Loan and Trust Company. The knowledge I acquired in the good ole bank I applied to my problems in the infantry. For instance, one day in Okinawa, a major comes up to me and says, "Stephenson, you see that hill?" Yes, sir, I see it. "All right," he said. "You and your platoon will attack said hill and take it." So I said to the major, but that operation involves considerable risk. We haven't sufficient collateral. "I'm aware of that," said the major, "but the fact remains that there's the hill and you are the guys that are going to take it." So I said to him, I'm sorry, major, no collateral, no hill. So we didn't take the hill, and we lost the war. I think that little story has considerable significance, but I've forgotten what it is. And now in conclusion, I'd like to tell you a humorous anecdote. I know several humorous anecdotes, but I can't think of any way to clean them up, so I'll only say this much. I love the Cornbelt Loan and Trust Company. There are some who say that the old bank is suffering from hardening of the arteries and of the heart. I refuse to listen to such radical talk. I say that our bank is alive, it's generous, it's human, and were going to have such a line of customers seeking and getting small loans that people will think were gambling with the depositors' money. And we will be. We will be gambling on the future of this country. I thank you.

You might be thinking that such an attitude is what got us into this mess in the first place. Not exactly. The Cornbelt Loan and Trust Company evaluated the individual risk of each customer. More than likely, it did not sell its loans to Wall Street. Al Stephenson knew his customers and knew their financial situation. He would never falsify a loan application with phantom income just to make a commission. He would not allow a machine to robosign documents for him. No, if there were Al Stephenson's in charge of lending during the bubble, maybe it wouldn't have blown up so big or burst so badly.

As we recover from the housing bust, as solvent homeowners attempt to refinance underwater loans, as investors attempt to buy and rehabilitate foreclosed homes, we could use a few divisions of Al Stephensons at large and small banks across the nation making loans that have an excellent chance of being repaid.

A news story in the fall of 2011 chronicled the story of a young man who had opened a bank account at TCF Bank in McCullom Lake, Illinois, in response to his mother's encouragement. She reasoned that by opening an account, he would learn the basics of banking.

After opening the account, the young man discovered bank fees were draining his savings so he stopped depositing checks from his job into the bank. The balance fell to less than five dollars. The bank sent him a letter saying that it had charged him almost ten dollars as a maintenance fee because of his low balance. The maintenance fee resulted in an overdrawn situation so the bank assessed the account a $28 per day overdraft fee! Eventually the fees added up to a $229 bill for the young man. The bank waived the debt only after the story gained national press attention. I think this scam is better than any reported in the Sirius chapter. Imagine, a company with the ability to cause an account to be overdrawn and then assess damages as a result of its own action. Dogbert couldn't have come up with a better business model!

The major banks have settled with the government and embarked on their own internal bailouts for their own customers. Bank of America will be granting loan forgiveness to underwater customers who bought in the height of the frenzy of up to $150,000. A Bank of America spokesperson said the bank would actually make money doing this because they would save the considerable expense of foreclosing and evicting the mortgagees. It is indeed a crazy, upside-down world!

Credit unions are looking better and better all the time!

17. I've Seen the Future at Walmart

Education is the key to the economic success and future viability of our country. In the current recession, the unemployment rate is 4.5 percent for college graduates, 12 percent for high school graduates, and over 16 percent for all others. Without question, more education means better chances for employment.

For real estate investors a better-educated population means a bigger market for resale or rental. In all likelihood you will not be selling or renting your property to an unemployed high school dropout—unless your business model is Section Eight (government paid) housing or you aspire to be a slumlord.

While working on my condo in Fayetteville I had cause to visit Lowe's and Walmart several times each day. I spent a fair amount of time observing people come and go as my condo was in a general state of disrepair and had no running water. If you have the opportunity, go to your local Walmart and just people watch for a half hour or so; you may come to the same conclusion I did because the phenomenon I will describe here is not limited to the two Walmarts in Fayetteville. I have seen it in Richmond.

The scene that repeated itself throughout the day is indeed a frightening one and is, I believe, a wake-up call for America. The future is a single, pregnant, tattooed, pierced woman with dyed hair and long, loudly painted fingernails who is dragging a toddler through the store and cussing at it. The melodrama is played out every day at virtually every Walmart in the country. The cast includes all races and creeds. Interestingly, adult males are never part of the ensemble.

I offer this vignette to show what we may expect if we continue on our present path of tolerance for antisocial behavior, tolerance for a never-ending flood and even glorification of pregnant at sixteen, tolerance for fathers who abandon their paternal responsibilities, and a tolerance for dropping out of school.

As the continuing debate rages in Washington about raising taxes or cutting spending, occasionally a voice of common sense reason comes through: "We don't need higher taxes, we need more people paying taxes!" Unemployed people don't make enough money to pay taxes.

We ask the ghost of Christmas yet to come: "Men's courses will foreshadow certain ends, to which, if persevered in, they must lead," said Scrooge. "But if the courses be departed from, the ends will change. Say it is thus with what you show me!" I believe we have the beginnings of a new dawn in this country where mere tolerance will give way to high expectations, and those high expectations will be met. The beginning, middle, and end of the solution is education.

While working at the Virginia Department of Education, I had the honor of playing a small part in an educational revolution in Virginia. The solution had nothing to do with the utter failure of Washington's No Child Left Behind law. The solution was a homegrown answer to challenges facing Virginia in its struggle to remain competitive and relevant in a global economy.

Long before No Child Left Behind, Virginia adopted a set of educational standards, known as the Standards of Learning (SOL). Every child was expected to learn and show a level of knowledge in core subjects before earning a high school diploma. The standards were developed over a number of years and standardized tests on those standards a few years later. All students must pass certain SOL tests in order to graduate from high school.

The underlying goal behind the SOL movement was to validate the high school diploma. Young people in possession of a diploma from any Virginia high school can show potential employers, colleges, military recruiters, or trade schools that they are proficient in reading, writing, and mathematics, and would make excellent employees, students, solders, or technicians. Employers would come to Virginia knowing an intelligent, viable workforce is ready and able to get started!

Support for the SOLs came from the Virginia General Assembly and a succession of governors, with full implementation under the stewardship of Mark Warner, now the senior senator from Virginia in Congress. Governor Warner could have punted on the SOLs. There was a public backlash and budgets were tight. Implementing the SOL program was expensive. Governor Warner did two things to secure the SOL program. First, he spoke to the General Assembly strongly advocating for full implementation and funding; second, he reappointed Jo Lynne DeMary as state Superintendent of Public Instruction. Dr. DeMary had been appointed by Republican Governor James Gilmore.

Governor Warner, a Democrat, could have appointed a political friend as so many previous governors had done, but he chose to stay the course with Dr. DeMary. She had been instrumental in the development of both the standards and assessments and was the natural choice to finish the job. The relationship the two leaders had was nothing short of magical. As Forrest Gump would say: they were like peas and carrots.

One potential downside to SOL testing was the fact that passing several tests was required for graduation. Students might have achieved all the requirements for graduation at their local schools but failing a state mandated test would deny them a diploma. If too many students failed the "barrier" tests (as they were known), the state and SOLs might be blamed for a higher dropout rate.

Early in Governor Warner's term, Dr. DeMary called a staff meeting. She posed a simple question to the assembled educators: "Do you know what the dropout rate is in Virginia?" She went on to qualify that with another query: "What percentage of ninth graders will actually graduate high school by the time they are supposed to?" We threw out numbers: 90 percent? "No." 85 percent? "No, lower." 80 percent? Certainly we don't lose 20 percent of our ninth graders! "NO! Lower!" At the time only 75 percent of ninth graders in the state of Virginia graduated on time. Naturally, the figure is higher at affluent schools and lower at poorer ones. "This number is too high and is a disgrace. I need you to submit ideas to lower the dropout rate. Oh, and I need ideas to help students succeed on the SOL tests!"

What followed was a three-year, exciting roller-coaster ride for me that was both challenging and satisfying. From that initial meeting, an array of initiatives was born under a unified umbrella called Project Graduation. It had three simple goals: help students and educators learn and teach the SOL subjects, provide assistance to students who were at risk of dropping out or struggling with one or more barrier tests, and encourage former students to get their GED (a proxy for a high school diploma).

We had regular meetings in which we would update Dr. DeMary on the progress and challenges of our respective programs. We would offer suggestions and counsel to other directors on their programs. We would frankly discuss systemic problems with schools and potential solutions for them. I had visited a school where students were allowed to wander the halls during class. Three weeks into the school year, teachers didn't have accurate class rolls. I noted a sense of tolerance of these shortcomings by the school administration.

Then there were the weekly reports. Each week we sent reports to Dr. DeMary who would review, edit, and send to Governor Warner. Governor Warner would meet with Dr. DeMary and pose questions and challenges for her to bring back to the directors.

One day I was driving to Washington, DC, and tuned my radio to WTOP, Washington's news station. I happened to be listening on the very day WTOP was interviewing Governor Warner on an extended talk show format called "Ask the Governor." The conversation turned to education and the hot button SOL issue. Governor Warner calmly listed the various programs and quoted figures from each, including mine—actual figures from a report submitted a few weeks earlier. I almost wrecked the car on Interstate 95 when I heard it. Governor Warner showed similar command of every other issue when questioned on the WTOP program.

For three years we toiled with this labor of love and implemented our programs. Some were extraordinarily successful and some less so. Overall, the educational fabric of the commonwealth was strengthened because of the leadership of these two exceptional individuals.

After Governor Warner left office and Dr. DeMary retired, we continued to send reports, but the meetings were fewer and I don't believe anyone in the governor's office read the reports. The General Assembly slashed funding and many of the programs were shuttered. I retired from state employment soon after.

One morning I was reading the newspaper and buried on page three or four was a story on the high school graduation rate for Virginia in 2008; it was 77 percent—two percentage points better than when Governor Warner initiated Project Graduation. Put another way, eight percent more students graduated high school because of programs initiated during the Warner Administration. That is eight percent more young people with a head start on a successful future.

Virginia was named the 2011 CNBC Best State for Business and was runner-up to Texas in 2010. With education as a major component in the annual evaluation, the SOL movement and implementation of rigorous standards have kept Virginia at the forefront of educational leadership.

If more young people are able to graduate and pursue productive careers, we will see fewer pregnant, tattooed mothers parading through Walmart while uttering obscenities at their offspring. However, if high school drop-out rate of 25 percent or higher is tolerated by state or school officials, the national deficit and debt will continue to balloon, and your rental market will continue to be 25 percent smaller than its potential. Intolerable!

Ensuring that every citizen has an opportunity to receive an education is the only way to assure of a good future for our country and its citizens.
18. Let My Houses Go!

Just as God's chosen people were enslaved by Pharaoh in ancient times, foreclosed houses are being held hostage by a government scared to death of the market. To free these houses, may take a Moses-like effort that I hope will fall short of the plagues that befell Egypt.

Fannie Mae, essentially a wholly owned subsidiary of Uncle Sam, is the single largest holder of REO properties. My experience with Fannie Mae, which I described earlier, while anecdotal, is more indicative of reality. According to real estate sources, Fannie Mae alone was sitting on almost 300,000 foreclosed, vacant properties at the end of August 2011. The properties are offered at auction, listed through real estate brokers, or available online at homepath.com.

Homepath is Fannie Mae's exclusive portal to peddle vacant properties. Fannie Mae has set prices for the properties but will consider offers. It appears any offer lower than a figure relatively close to the asking price is rejected. Owner occupancy is encouraged through a program known as First Look. For the first two weeks of a listing, owner-occupants are given the exclusive right to make offers on properties. If an acceptable offer is not received during the First Look period, the property is offered to the general public. Fannie Mae provides additional incentives in the First Look program such as low down payment, bonuses to realtors, and loan guarantees. While not as generous as zero down and no doc. loans, the terms are far more generous than most postbailout loans offered by banks. Investors are essentially persona non grata at Fannie Mae. As the crisis continues, Fannie and Freddie will continue to offer select incentives to various constituents.

Banks are similarly reluctant to provide investor financing, requiring stellar credit, whopping fees, and down payments for investors. Potential returns on foreclosure properties are diminished with fees, high interest rates, and down payment requirements. Owners of foreclosed homes (both public and private) appear to be pushing on a string, hoping owner-occupants will someday return.

The fact is home ownership peaked at the height of the bubble at 69 percent and has steadily decreased during the housing crisis to 67 percent. However, the long-term average is around 64 percent. It would appear the trend is screaming for more, not less, investor participation in the single-family real estate market. People thrown out of their houses will need a place to live and for most, homeownership is simply out of the question. The market is ripe for a robust rental market. According to an Associated Press story, the rental market in 2011 has seen its best start since 1999.

Second, and more importantly, selling the vast inventory of vacant homes will provide a huge shot in the economic arm for the country. In the first two weeks of closing on my Fayetteville condo, $5,000 went directly into the Fayetteville economy through labor and trips to Lowes. Four days after closing the Myrtle Beach condo, another $5,200 stimulated the Grand Strand. Virtually every property your government owns has deteriorated somewhat under your government's stewardship. Aside from damage inflicted by the previous owner, thieves have made off with any remaining valuables, including copper pipes and wiring. Of course the government is not entirely to blame. I noted earlier the sad story of a house in my area that sat vacant for ten years and slowly burned while Bank of America played its fiddle.

If these properties are offered at auction or incentives provided to investors and actually sold, the new owners would make trips to Lowes, Home Depot, Walmart, and the corner hardware store. They will hire plumbers, electricians, carpet installers, painters, and even decorators. The new owners will turn on power, water, and gas utilities. They will protect their investment with private security monitoring services. They will hire property managers or real estate agents to market the properties. The demand for goods and services could boost GDP by at least two percent.

Once properties are renovated and offered for rent, local rental rates should stabilize or even decrease. While property values may decrease with the flood of houses on the market, this will be temporary. New construction of single multifamily homes has decreased 80 percent in the past year to an unsustainably low 250,000 units. There are not enough houses being built to satisfy long-term demand; however, developers will not initiate projects until housing prices stabilize at a point somewhat higher than construction costs. The reservoir of unsold and foreclosed homes sits behind a shaky dam that could rupture at any time. Developers fear the dam will break in the middle of a new project leaving them swamped in a sea of brand-new but worthless houses. If the government were to break the dam, bargain hunters and entrepreneurs would scoop up inventory, and uncertainty would be removed.

There are banks willing to let the house go at almost any price. Now it's the government's turn. Bank of America is the largest private holder of REO properties. If it and its mortgage service arm can figure out how to properly maintain mortgage paperwork, it should start moving its inventory.

However, disturbing noises are coming out of Washington. The Obama Administration has hatched a plan to take the government's vast inventory of vacant, deteriorating homes and rent them. The Department of Housing and Urban Development issued a public notice for ideas. "It's critical that we support the process of repair and recovery in the housing market," Treasury secretary Timothy F. Geithner said in a statement, "Exploring new options for selling these foreclosed properties will help expand access to affordable rental housing, promote private investment in local housing markets and support neighborhood and home price stability."

When an agency issues a public request for comment, the agency usually has a fairly good idea what they want to do and will plow ahead when the time is right. According to HUD insiders, the plan is to promote private-sector partnerships where collections of real estate in inventory would be purchased and turned into rental units. The partnerships could include community groups, private investors, or nonprofits. The public-private partnerships "may reduce taxpayer losses" and "bring stability and liquidity to housing markets," Edward DeMarco, FHFA acting director, said in a statement.

Don't ACORN and its subsidiaries operate in the real estate universe?

The plan can be implemented without Congressional approval because HUD doesn't need permission from Congress for any plan to dispose of its inventory. To be sure, the administration would be pulling the strings of this puppet and determining who has priority for homes, what rents to charge, who manages the properties, and how tenants will be evicted.

The idea of a government bureaucracy as the single largest landlord in the country should send chills up the spines of most Americans. Thus far the government has affected homeownership through policy, tax law, incentives, credits, and regulation but has never systematically taken control of thousands of homes and dictated their use after sale.

The government is already renting houses in inventory. In 2009 Fannie Mae introduced the National REO Rental Program. People living in foreclosed homes as tenants are offered the option of a month-to-month lease. Once the foreclosure is complete, the tenants are offered cash to move immediately—Fannie calls it Cash for Keys—or they may remain in the property as tenants until the property is sold. Given that Fannie delights in turning away bids, tenants could live in the property for years.

Fannie contracts with local property managers to collect rent and respond to tenant calls and emergencies. I wonder just how responsive property managers are with mighty Fannie bureaucrats overseeing the operation.

The tenants in my Fayetteville condo called one Friday evening with an emergency. The water heater was leaking. It was just a small leak but needed immediate attention. The condo is heated with water from the water heater so it is a rather specialized unit. Lowes or Home Depot normally do not carry these units. I made several calls to Fayetteville plumbers before finding one who was familiar with my complex and knew where to find an Apollo water heater. By Saturday afternoon my condo had a new water heater and the tenants were happy.

Imagine the same situation with a Fannie-owned property. The tenant would call the property manager. Because a water heater replacement is a fairly high-dollar repair, the property manager would have to get permission from Freddie before authorizing the repair. Because the emergency happened on Friday afternoon, the government agent responsible for approval could not be reached until Monday because he was in Las Vegas on a morale building trip (pictures on Facebook). On Monday the Fannie representative would notify the property manager that Fannie would need a picture of the leak before authorizing repair. On Tuesday the manager would make it to the property and take the required picture. On Wednesday Fannie would approve the water heater replacement. However, according to the "Fannie Mae Property Management Contractor Guidelines" page 253 under Authorized Repair Costs, water heaters replacement costs are capped at $900, including installation. Apollo water heaters cost $850 because of the earlier mentioned heater connections. Installed, the water heater runs $1,150. In this situation the guidelines may require the property manager to apply to Fannie for cost overrun approval. Emergency approvals might normally take two business days. By the time Fannie approved the work and the property manager had found a contractor, the water heater would have burst, water would have flooded the condo, ruining carpets and personal property in the condo and flooded the unit below. There would have easily been $10,000 in damage.

This is a fictional account of course. Or is it? Property managers do have a set of guidelines from Fannie and are constrained to some extent. Fannie already has some restrictions on the sale of their properties. For example, many Fannie properties forbid buyers from selling properties at a large profit for a given length of time.

When Fannie finally decides who should be allowed to purchase its properties for rent, there will be guidelines. We can only hope they will not be as complicated as Dodd Frank or the Health care act.

A more fundamental question is why the government would sell properties with the express requirement that they be made into rentals? Shouldn't buyers be allowed to do whatever they want with their purchases? If they want to become landlords, they can rent the properties. If they want to flip properties, let them rehab and renovate, and employ real estate agents to list the property. Does Fannie expect purchasers to rush in and pay premium prices for the opportunity to be dictated to by Fannie long after the sale?

The reality will be legions of realtors, contractors, tenants, and property owners dependent on the government to dictate how they will be able to use private property. This government takeover could be bigger even than health care reform!

On the other hand, for the thousands of families turned out of their houses because their variable loans or balloons come due and are unable to refinance, find a vacant government owned home and move in! Months could pass by the time Uncle Sam notices someone is living in one of his houses. Even when he makes the discovery, simply show the nice government-paid manager the "lease" you have with the previous owner and start paying rent to Uncle Sam's property manager.

The same public notice opening the door to what amounts to a government expansion into the property management business, asked whether or not the government should tear down foreclosed properties. Remember the fantastic Cash for Clunkers program? Once implemented, the price of used cars shot up because the used car supply literally bypassed car lots and ended up in scrap heaps. Ironically, a program designed to stimulate demand and increase national gas mileage, penalized the lowest income individuals who suddenly found the supply of cheap cars in short supply.

Tearing down houses would certainly help solve the housing crisis because the underlying supply of homes would disappear under an army of bulldozers. How about that for a jobs plan? If I had faith that the government could identify future ghost towns, I would be fine with selectively plowing under a few houses. But I don't. No, the government would apply some formula to the problem and put an idiot bureaucrat in Washington in charge of selecting houses to be razed. From a six-by-six cubical, instructions would be issued to go forth and wipe out some of those beautiful Georgia McMansions I have been drooling over.

I would much rather have the government sell everything in its inventory and allow new owners to either fix them up or tear them down. Either way, the renovation contractors or demolition contractors would be paid by private money, and the end result would be accomplished much more efficiently.

Since HUD finally sold a property to me at a bargain price, the tide may have turned and wary buyers can bid on HUD (Homepath) properties with a remote expectation that the offers will be considered seriously!

As banks feel the pinch, more properties will be released for auction, and you need to be ready to buy.
19. Is NOW a Good Time to Buy?

The housing crisis has dragged on for almost six years. Housing prices have crashed harder than the stock market. While prices have stabilized somewhat, government and private reports indicate price declines continue. Why would anyone want to buy now?

First, housing construction has stopped. In 2009, 1.2 million new houses were built. In 2010 that number dropped to 250,000. On the other hand, approximately 500,000 to one million households are created annually. Those new households need places to live. When investors or households have purchased the glut of foreclosed homes, demand will outstrip supply of homes.

Second, houses sold at auction are going at fire-sale prices. This will continue until Fannie Mae and banks have emptied their inventories. Construction will not rebound until prices rise. At some point lenders will lend. For those who can borrow, interest rates are at historic lows. Cash buyers rule the world. If you can't sell, renters will give you an excellent return while you wait out the storm. Fayetteville has already turned and Myrtle Beach has about a year before a rebound. Prices cannot stay below construction cost for an extended period of time. Need more convincing?

Then there is the third factor—inflation. The absolute pain homeowners are feeling today is whiplash from their leveraged, deflating homes. They put little money down to control a huge fixed asset and counted on the asset continuing to increase in value, thus multiplying their gains. In a deflationary environment the same leverage works against you like a sledgehammer. Thus far the Fed has only been able to stimulate commodity prices through quantitative easing one, two, and possibly three, but has made no headway with persistent declines in real estate. Eventually as the dollar becomes less valuable on world markets and foreclosed homes are bought up in the market or torn down, inflation will return to home prices. Indeed, the Miami market is turning around with an influx of cash buyers from Central America.

Ben Bernanke was a guest on 60 Minutes in January 2011. He was asked about the unprecedented Federal Reserve purchase of Treasuries, designed to hold down interest rates and add liquidity to the financial system and if it could spur inflation. Bernanke said inflation is low and there are no indications that it is heating up. Bernanke's response to the next question convinced me we are about to enter a period of high inflation similar to the late 70s and early 80s. Bernanke was asked how certain he was that the Fed would adjust monetary policy to prevent runaway inflation. He said confidently, "One hundred percent." His statement reminded me how equally certain securitized mortgage issuers were that house prices would rise every year—forever. Meanwhile, governments around the world dump paper currencies on the market to stave off disaster, flooding the world with paper dollars, euros, yen, or pesos rushing to devalue their currencies to a point where exporting industries would be competitive on the world stage.

When I was in the Coast Guard, I had the good fortune to spend a year at a LORAN station on a tiny group of islands called Yap. LORAN stands for Long Range Aids to Navigation. It is similar to GPS except the transmitters are on the ground rather than orbiting the earth. LORAN was the only electronic navigation system from the late 1960s until GPS became ubiquitous in the mid- 2000s. Both systems are still available, but LORAN usage has diminished to the point President Obama called it a duplicative system and recommended dismantling the worldwide terrestrial network to save money.

Yap, located in the island chain of Micronesia between Guam and the Philippine islands, is known as the island of Stone Money, referring to great stone disks throughout the island and historically used as currency. Yap is a tropical paradise where natives still go topless. One remote island, Rumung, forbids foreigners, and natives will happily separate your body from your head if you visit uninvited.

Like most western Pacific islands, there are many theories about how natives first arrived. For Yap, one popular myth suggests a god named Gusney first sent humans to the island over 3,500 years ago. Gusney and four supernatural beings erupted from a water well in the harbor area now known as Colonia.

Gusney left the island one day in an outrigger sailing boat to explore the world. Gusney happened on a human family in India. He sent them to Yap to inform the other beings of his whereabouts. The family, Wan and Rayina with their daughter Ruliya, made Yap their home and are the original parents of the Yapese people.

Europeans first discovered Yap in 1525, when Portuguese sailors searching for the Spice Islands, happened on Yap. Spanish expeditions followed years later. In 1874 Spain proclaimed sovereignty over Yap. Germany laid claim, challenging Spain and ended up buying the island and inhabitants from Spain for $4.5 million in 1899.

During WWI Yap was a base for German U-boats and elaborate canals were carved throughout the islands. Many remain today. After WWI, the Japanese Empire controlled Yap. During WWII the Japanese established two airfields and had numerous artillery nests dug into the hills of. Following WWII, Yap and other Micronesian islands were placed under the United Nations trusteeship with the United States as the administrative authority. Yapese did not need passports to travel to America.

Before the Europeans, generations of Yapese would embark on their outrigger boats and sail to the neighboring island of Palau. They would battle the Palauans and, after defeating them, remove rocks native to Palau and not found on Yap. The rocks were rounded and holes chipped in the centers. Bamboo poles were put through the holes and the stones were secured to the boats and the fleet sailed 200 miles back to Yap. Americans may remember Palau from the Survivor television series.

Because the stones were not native to Yap, the value of each stone could be set by the authorities. Initially, the value of stone money was determined by the number of lives lost gathering and transporting the stones from Palau to Yap. Yapese gathered the stones for generations and used them as currency to buy land, wives, food and entertainment. The largest piece of stone money is twelve feet in diameter. Yapese gave new meaning to the expression pocket change.

In the late 1800s a Scotsman named David O'keefe stopped by in his Chinese junk—that's a sailboat not the private parts of a Chinaman. O'keefe saw the value placed on stone money and decided he would become the island's banker. O'keefe, his crew and some Yapese set out in the junk to Palau where he would use the boat's cannon and muskets to defeat the Palauans and load the bilge with newly minted stone money. O'keefe returned to Yap and built the most magnificent house on the island. The house was built by the harbor and had a grand staircase. He had servants and many wives. He made numerous trips back to Palau, bringing thousands of coins back to Yap. The flood of new money to the island devalued the existing stones to a point where the stones were so commonplace that they were used to line paths rather than make major purchases.

O'keefe set sail one day and never returned. Some say he was lost at sea. Yapese elders said he was killed by a group of Yapese for corrupting their society. However he met his demise, O'keefe's Island, where his house stood, is devoid of stone money. The only remnant of the mansion is a grand stone staircase used by his grace to enter his mansion when his wealth ruled the island.

We place value on something based on the difficulty to attain it. Things that are more difficult to attain will cost more while things that are commonplace will be worth less. It was true of Stone Money and it is true of the American dollar. If the supply of dollars is held in check, making it relatively difficult to obtain dollars, the dollar will retain its value versus other currencies and things such as food, gasoline, and houses. However, if Ben "O'keefe" Bernanke, the Federal Reserve, and Congress flood the world with dollars, then dollars will become less valuable relative to everything else. The result is inflation. Considering the number of dollars being churned out by Washington, the inflation genie is already out of the bottle. We are seeing it in food and gas prices. Soon we will see it in house prices. If you are leveraged with property, you will be able to ride the next inflation wave. Based on the unprecedented amount of liquidity the Fed has injected into the system, this inflation train could be bigger and faster than we've ever seen before.

A recent editorial describes the current inflation situation as buynflation: the prices of everything we own such as houses, appliances, computers, furniture, and the like are decreasing in value, but everything we buy such as groceries, gas, health care, education and other consumables are inflating at double-digit rates. Because the government is in charge of determining inflation, it can (and does) manipulate the formula for the inflation rate. Consequently, while you and I feel an uncomfortable inflation, the government reports almost no price rise.

I recently attended a real estate investment seminar and gained some insight about bank motivation for selling properties at fire sale prices. Banks are required to maintain adequate cash reserves to be able to liquidate a certain percentage of deposits in the unlikely event of a run on the bank. When a bank's reserves fall below that percentage, federal banking regulators may declare the bank insolvent and give it to a larger bank. REO properties are not considered cash. Banks can sell the properties either in bulk or individually to raise cash and satisfy regulators. If you are the winning bidder for a property held by a motivated bank, you have a much greater chance of scoring a bargain. The bank that owned my Fayetteville condo was motivated by the prospect of a big payday from your government. Whatever the case, the combination of a motivated bank and a property that needs some cosmetic repairs can result in a terrific bargain!

This is your once-in-a-lifetime chance to buy real estate at stunningly low prices. Don't miss creating your bailout.
20. How to Make a Fortune in Real Estate With No Money Down

I hope you have enjoyed reading these little stories as much as I have enjoyed sharing them. They are snippets of my life and indelible memories.

Now to the heart of the story and probably the real reason you slapped down your hard-earned money to buy this book. Each story thus far has hopefully entertained as well as educated. However, for those of you who like to skip to the last chapter and see how the story ends before reading the first, I have put the entire investment experience in a simple step-by-step, no-nonsense form in this chapter.

Getting Started. Before taking the plunge into real estate, write down your goal and set a deadline. I attended a real estate guru's free evening seminar on real estate investing. I had already finished and rented the Fayetteville condo and wanted to see what these characters had to sell. The entire point of the "class" was to feed the crowd with just enough information to entice them to fork over $1,900 for an in-depth workshop that would teach them the particulars of the schemes glossed over during the three-hour pitch. Ultimately, they want you to pay them a monthly fee for various valuable services only they can provide. Sound familiar?

I did come away with a couple ideas and met some other investors who had purchased houses and were not taken in by the pitch. First, write a goal for your real estate investment and give yourself a deadline. Sign it and post it where you can see it every day. For those of you with project management experience, go ahead and put up your milestone chart too. I also came away with two catch phrases: If you haven't failed, you haven't tried hard enough, and before you ride the wave, you've got to paddle out to it. I liked the second one.

There will be challenges and even failures along the way, and it will take work! Just remember your goal and work toward it. Learn from the setbacks or mistakes and avoid them on the next deal. One of my failures was at a repossession car auction. I spotted a beautiful Oldsmobile 98 with low miles and a beautiful body. The bidding was unusually low so I jumped in. A car dealer I knew shook his head. "It's a dog," he said. He often said that about bad cars. Well, I won the auction and took my Olds 98 diesel home. As it turns out, when GM introduced the diesel models in the early 80s, they just took gasoline engines and torqued down the bolts for more compression. The engines had a tendency to blow up! I was lucky in that mine didn't blow up. I drove it one summer and sold at a loss in the fall.

The appendix of this book includes a list of popular auction sites. They will come and go with time. Search the Internet or local papers for more auctions. I also mentioned Fannie Mae's official selling Web site homepath.com. These are just a few of the places to find discounted real estate as the market remains under pressure. If you are staying close to home, drive around neighborhoods and look at houses. Check out property transfers in the local paper. Talk with realtors and get a sense of your local market.

Protect Yourself. I highly recommend setting up a limited liability corporation (LLC) for your real estate endeavor. In the unlikely event of a lawsuit from a tenant who trips on a fold in the carpet, or a contractor who falls through a rotten floor, a LLC will protect you from financial ruin. Your personal wealth will be separated from the LLC and the tenant can't touch that. Any legal judgment is against the company, not you personally Setting up an LLC is relatively simple and provides added tax benefits. Rather than filing for an LLC yourself, an Internet search displays dozens of companies that will file necessary paperwork for $300 or less.

Benefits beyond protection from personal liability include flexible tax status and corporate structure. An LLC owner can opt for taxation as a sole proprietorship, partnership or S corporation and an LLC is not required to have a board of directors or hold annual meetings.

Choose Your Auction. When the bank forecloses on a property, it is offered to the public in a trustee sale. These are auctions on the steps of local courthouses. Inspections of these homes are limited the downside risk is great. Lenders generally want the amount owed on the home at these sales. Because the home is foreclosed, the loan amount, back interest, and fees far exceed the value of the home. In most cases Fannie, Freddie, the VA, or other government agency has guaranteed the loan so the bank has little incentive to release the property at a bargain. Another problem with trustee sales is obtaining clear title. If a contractor worked on the home and has not been paid, when the announcement of sale hits the paper, the contractor will rush to the courthouse and swear out a mechanic's lien on the house at the last minute.

Even if you had done a title search the week before the auction, last minute liens can ruin your purchase.

After the trustee sale, the bank either turns the title over to the loan guarantor and pockets the cash or puts the house in its inventory. The property can sit for months while paperwork makes way through the system. Properties are vulnerable to vandalism, theft, or squatters during this period. Properties are obviously vacant and systems are not in place to maintain them. Once paperwork has been completed, the property shows up in the bank's REO inventory. For homes turned over to the government, they will show up on Homepath.com for Fannie and Freddie or one of the individual agency sites for other properties. You can inspect homes and make offers directly to the banks or government at this point. Eventually, the properties find their way to an auction. These auctions guarantee good title to the property and allow fairly extensive inspections. Post trustee sales or auctions provide excellent bargains and fairly low risk. I recommend purchasing investment properties at this stage.

Location, Location, Location. This has been the mantra for successful real estate investing throughout the ages. When buying real estate online, you can literally purchase a property anywhere in the world. I suggest starting locally. Each Web site mentioned above allows you to search by state, city, and county. Start searching for properties in your immediate area to determine the relative value of houses and condos. Compare prices of recently sold homes, listings on Web sites like Zillow, listings online, and craigslist, and don't forget to check the newspaper. You'll soon get an idea of what the discount foreclosed homes are drawing in your area. In localities where newspapers still exist, property transfers are often printed weekly. Early in my search I determined that Virginia was not the place to find an outstanding bargain even though discounted houses are available.

Consequently, I began searching outside of Virginia. At auctions in some areas of Florida such as Lee County, houses were selling at fifteen to twenty cents on the dollar, and houses in Michigan were actually being given away. So, is a free house a bargain or is a house purchased at twenty cents on the dollar a bargain? Is either of them a good deal?

Throughout American history, towns and cities have sprung up, flourished, and vanished from the face of the earth. Everyone is familiar with old west ghost towns that were once bustling economic centers, generally adjacent to a gold, silver, coal, or copper mines. When the mines were exhausted, the parent company would simply close the mine. As the largest employer in the region, once closed literally everyone moved away leaving vacant churches, restaurants, offices, and homes. United States Gypsum was recently in the news when it closed its Empire, Nevada, mine and subsequently closed the town. Is a free house in Empire a bargain?

A few years ago I gave my brother-in-law a map of North Carolina, South Carolina, and Georgia from 1868. The main "roads" were actually railroad tracks, rivers, and canals with towns built along the tracks and rivers. If you superimpose a modern map on the 1868 map, the main thoroughfares are now roads and highways with population centers connected mainly by interstate highways. Many towns along the old railroad map no longer exist. If you had purchased real estate in one of those towns, it would be virtually worthless today. When investing in foreclosed properties you want to make sure there will be a demand for your house next year or ten years. A house in Michigan close to a factory that is closing or has recently closed is no bargain—even if it's free. This is probably a future ghost town. On the other hand, a cheap property in Lee County Florida will likely retain some of its value as retirees continue to flock to the Sunshine State, escaping high taxes and frigid temperatures up north. I did not invest in a Florida property because Florida is just too far away for me to adequately manage.

I first began looking for property on Oak Island, North Carolina, as an investment and vacation home. While the Outer Banks have seen the prices of real estate decline more than the national average, demand for vacation places will likely remain strong. The main reason for the price decline was the unavailability of financing during the crisis and the fact that people could not afford a second house.

Purely by chance, I ended up in Fayetteville, which is essentially a one-industry town, with the industry being the U.S. military. Home prices in Fayetteville took a hit with the closure of Pope Air Force Base. Just as I closed on my condo, the military announced 50,000 additional troops would be stationed at Fort Bragg. For the near future, Fayetteville will keep its primary industry and Fayetteville will remain a vibrant economic center. Myrtle Beach on the other hand depends on tourists from economically hard hit North and Carolina and Georgia. Myrtle Beach was also overbuilt during the boom. Prices will continue to stagnate or drop until the overall economy improves. I anticipate keeping the Myrtle Beach condo and enjoying the beach, shagging, Broadway at the Beach, golf and all the other activities until the market turns.

Start by crossing off locations you absolutely will not invest. For example, you might immediately limit the distance from your home location. Fayetteville is three hours from my house. I can make a round trip in a day, including at least five hours of work at the condo. My geographic area is Maryland, Virginia, North Carolina, and the Myrtle Beach, South Carolina area. Next, within your geographic area list places you will not consider purchasing property. I will not buy houses on Bald Head Island because it is inaccessible by car. I want to be able to drive to my property. I will also not buy a property at the beach that I have to finance. Lenders will require hurricane and flood insurance that is very expensive. If I own my property outright, either the HOA will pay the insurance or I'll go naked and take my chances. Therefore, I want a substantial discount for a beach property. There are a few more places on my list that I won't name, but they are generally factory towns with a single factory and not close to another business center. Textile factories have left the country and textile towns are quickly losing populations.

Ideally, I want a location with a diverse economic base and a mix of industrial, government, education, and finance institutions. Good locations include Richmond, Norfolk, Virginia Beach, Northern Virginia, and Charlottesville in Virginia and Raleigh, Charlotte, Winston-Salem, Greensboro, and, of course, Fayetteville in North Carolina. Charlotte has the best deals in North Carolina at the moment because the economy was influenced to a large extent by the banking industry. After the banking meltdown, two of the largest banks were taken over by outsiders and jobs went with them. As banks become healthier, Charlotte should benefit. Atlanta has been doubly hit because finance was also a large local economic component and the metro area had experienced unusually rapid housing development during the bubble. Recently I have been looking more closely at the Atlanta area because prices are so low, and the economy is diverse. I have a good friend who manages property in the Atlanta area who has agreed to manage my purchases. Hiring a property manager adds to the expense of either a flip or long-term rental but is worth the cost in the right market.

Even if you select a rapidly growing community, it is important to find a property that is likely to hold or increase in value. As discussed, finding an inexpensive house in a declining neighborhood may not be a bargain after all. With so many choices, you can be selective with your purchase.

Age of the Property. As a general rule, avoid older homes because people tend to make changes to properties over the years and may not obtain proper building permits or inspections. Also homes built after 2001 should be inspected for toxic drywall. **U.S. Southeast Homes built or remodeled between 2001 and 2008 may have potentially toxic Chinese drywall in the house or condominium. According to the Chinese Drywall Complaint Center, "if your home or condominium was built or remodeled after 2001, you have experienced numerous air condition coil failures, your copper electrical ground wires have turned black, and you are suffering from upper respiratory issues, nose bleeds, unexplained rashes, or severe allergy type symptoms, your house may contain toxic imported Chinese drywall or tainted U.S. drywall. If this is the case, please call the Chinese Drywall Complaint Center at 866-714-6466.**

**I have to wonder who was watching the border when this drywall was coming into the country. According to sources, the drywall was processed in China with heavy metals, toxic electronic waste, including mercury. Perhaps it was the same person who allowed Chinese toys with high lead content to pass customs. So, look for homes built between 1985 and 2003 or after 2008.**

Financing. Before shopping for a bargain home, get your finances in order. We talked about the no money down myth and the get rich scams on radio and television earlier. Now let's get down to the bottom line. You need to have your personal finances in a good place. You need to be able to afford your lifestyle and be solvent enough to convince a lender to loan you the money to buy this property. If you don't have cash, there are options.

Angel Investor. You are armed with the knowledge to find a bargain house and the ability to quickly fix it up and either rent or sell it, but you lack the cash. Find a partner who will agree to finance the house or partner with you for the purchase and rehab. Once the house is sold, you split the profits and move to the next deal. If the first deal makes you enough money, you are on your own form there. There are people with money even after market meltdowns. The best return they can safely get is five- or ten-year treasuries paying less than 3 percent. Short-term returns are near zero. The Federal Reserve plans to keep rates low until 2013. Once you get your plan in place, put an ad online or network within your community. Be honest and upfront—you will do the heavy lifting and split the profits with the investor. Once you build a good reputation, finding additional investors will be no problem.

Network with friends, at church, or with local investment clubs to find potential partners. Advertise online on sites such as Craigslist. When you find a partner, put your agreement in writing and spell out in detail roles, expectations, and outcomes. An investor wants to maximize profits and minimize his effort. Your job will be to make the real estate investment experience painless and profitable for your partner. He will want to see the house transform from total wreck to shining gem in short order and with minimal cost. If the first property works out well, you are on your way to a successful partnership or your own investment property!

Fannie Mae. Fannie Mae is lending again! After two years of giving the cold shoulder to homeowners, your government is finally offering to guarantee mortgages to owner-occupants with only 3 percent down! That means you could purchase a $100,000 house at auction and be able to move in with only about $9,000 cash! You will be required to occupy the house but there are no restrictions on the period of occupancy. If you got the house at $30,000 below market value, lived in it for six months, and worked on it in your spare time, you could sell the house for $130,000 and pocket the profit yourself. Your net profit would be about $20,000 after realtor commission and other expenses. Not bad for six months' work and a place to live! Even if the market doesn't turn around, you will be able to rent the house with positive cash flow.

Veterans Administration. If you are a veteran, you can borrow using your VA benefits. VA loans are guaranteed by the Veterans Administration and require sellers to pay a substantial part of upfront costs. Banks trying to move REO properties are happy to shift the financial burden from their balance sheets to any agency of the federal government and pay a premium to do it.

Friendly Banker. After the bailout, bankers and lenders became very unfriendly people. They wanted proof of income, large down payments, and your firstborn male child to make a loan. It was a far cry from the halcyon days of liar and no-money-down loans. Slowly, bankers will come out of their caves and will lend again. They are hard to find but like that five-pound bass or twelve-point buck, they are out there. Go shopping. Find a banker who believes in you and your ability to find a bargain and turn it into a profit. Armed with a letter of credit, you can start bidding on property. Regulators are a big part of the problem and will eventually loosen regulations, allowing loans to flow again.

One unfortunate, unintended consequence of new banking regulations is a reluctance of banks to originate loans for less than $50,000. New regulations cap the percentage of origination fees to loan amount, and small loans exceed the cap. I have talked with bankers who confidentially tell me that they will not consider a home purchase of less than $80,000. After the 20 percent down payment and other fees, the loan amount will be just over $55,000. When considering a potential investment, make sure the anticipated value after renovation will exceed $80,000 so you will be able to sell the property!

While banks have abandoned small loans, credit unions still provide a lifeline for families looking for low-cost housing or investors seeking properties at pennies on the dollar.

Retirement Account. The IRS allows you to use your IRA for real estate investment. The rules are rather complicated, and you should consult your tax adviser before attempting this. With a self-directed IRA you can easily invest in REITs or stocks with real estate exposure. However, the ability to use your IRA to invest directly in foreclosure property allows you to take control of your financial destiny without relying on money managers and diversified real estate investments.

Some downsides of using your IRA for financing an investment property include requirements that all income and expenses for the property go through your IRA, you must hire a property manager, and you will not be able to depreciate the property value. On the other hand, if your property increases significantly in value and you sell, all the proceeds go back into your IRA and continue to grow, tax deferred! See IRS publication 590 for more information.

Seller Financing. Sellers are frustrated that prospective buyers cannot get loans. People need to move and do not want to leave the house vacant. Sellers may be willing to hold a note on their house. You would need some cash for a down payment. As more houses are underwater, this strategy will be harder to execute since you want a bargain not another submarine.

Some real estate gurus have been touting a financing scheme that involves taking cash out of credit cards and using that money to finance purchases. This is a bad idea. Do not even think about doing this! In your $1,900 class, instructors will gloss over the fact that you would have to float your credit card loan for many months. They reason that you paid such a low price for your new house that you will be able to quickly find a qualified buyer and close in no time. The minimum time from winning the auction to final sale is four months. Can you pay loan-shark rates for a quarter of the year?

Start Looking for a Bargain. Once you have financing in place or a wad of cash in your pocket start looking for a bargain property. Almost every bank has a Real Estate Owned (REO) department and often lists properties on the bank Web site. Federal government agencies also list properties for sale such as the Veterans Administration, the Treasury Department, the General Services Administration, and, of course, the Internal Revenue Service. If you are serious about finding a bargain property you can spend hours on these Web sites searching for the right property; don't limit yourself to just one property, find a number of good prospects in the area or areas you have selected. With the number of properties available everyone can find something they want. Many auction sites charge a buyer's premium. Auction.com charges 5 percent with a $2,500 minimum on some properties. If you win a $25,000 bid on Auction.com, you may pay an extra 10 percent for the thrill of buying a house online. I simply subtract the premium from my bid so my profits won't be eaten up by the auction company.

Be Patient. Don't get frustrated if you don't find the properties you like right away. I won two auctions for beach homes, but Fannie Mae decided my price was not high enough. I bid on the Myrtle Beach condo fully expecting to be turned down but Fannie felt generous that day. On the bright side, the properties that didn't sell were at a price I found reasonable, and no one else bid higher for the properties. As far as I know they are still available for sale. As this book is being published, Fannie and Freddie have record inventories and are caving to political pressure to hold back houses from the market fearing further price destruction. Banks, on the other hand, may need to raise cash and may let properties go at any price. Some banks are more motivated than others. I was able to buy my condos at less than fifty cents on the dollar because One West Bank was motivated to reduce its inventory and was selling everything, regardless of price. At some point even mighty Bank of America, the worst managed bank in Virginia, will start dumping properties.

Check Out the Property. Before buying my Fayetteville condo I did not visit or have it checked out. I was relying on the incredibly low bid to compensate for any shortcomings the condo may have. After I won the bid but before closing, I did visit the property to determine what repairs were necessary. If it had been a total dump, I would have walked away and let the bank keep my deposit. Before you bid on your property, you should have it checked out or check it out yourself. If the property is too far away or your schedule does not permit a visit, have someone inspect the property for you. You could hire a home inspector to thoroughly go over the property and send you a detailed report for a cost of several hundred dollars, or you could hire an amateur to visit the property, verify it has four walls, toilets, sinks, a floor, ceiling, plumbing, electrical wiring, and appliances. That person can take pictures and e-mail them to you. Advertise on Craigslist and pay a local $50 cash to visit the property and send you pictures.

Realtors are an excellent source to inspect houses. Fannie Mae and the banks generally offer a buyer's agent fee to agents representing buyers. Your agent will be happy to check out the property and give you a report. If you win the auction, the agent gets paid. If you don't, the agent doesn't get paid, and you owe him nothing. I would recommend this strategy if you are very serious about a property. I did this with the first Oak Island condo, and the agent was very excited when we won the bid. I think he was more disappointed than I was when Fannie Mae rejected the winning bid as he saw his $3,000 payday evaporate. Give the realtor a copy of the checklist in the appendix of this book or list things to look for, including Chinese drywall, mold, and holes in walls, floors, or an unsightly three-inch crack in the foundation. Ask the realtor to take pictures and send them to you. This will not cost you a penny upfront as your broker will be paid much more on a winning bid. My property manager friend in Atlanta will check out potential investments and give me a full report before I make a purchase decision. The Myrtle Beach condo was inspected and verified by my realtor before I began bidding. I did not have any surprises when I visited after winning the bid.

If it sounds too good to be true, it probably is. The oceanfront house in Nags Head for only $68,000 comes to mind. The house was literally standing on the beach, and the road had washed away. Only a miracle could have saved that property from a swim with the fish. That doomed property was no bargain.

Bid on the Property. Live auctions can be very exciting indeed. For the last thirty years I have purchased all of my automobiles at either repossession auctions or more recently at auctions from the General Services Administration of the federal government. I like the GSA auctions because I know where the cars came from and the federal government generally takes care of their cars. I also know GSA employees know that it is important to promote team building and keep morale high with trips to Las Vegas or Orlando. That said—I never buy a police or an FBI car because those cars have had particularly rough lives.

The auction has a carnival atmosphere with auctioneers chanting the bid cadence through loudspeakers, the current bid flashing on a big screen TV, and auction assistants roaming the crowd looking for prospective bidders and urging them to run up the price. I attend the GSA auctions in Fredericksburg, Virginia, where a typical auction has over 100 cars for sale. Like the timeshare purchase, I generally let the first dozen cars go by without even looking at them, as the public will bid up the prices to get the car they want. Once they are exhausted, only the car dealers and me are left to compete with. Prices generally tail off toward the end of the auction, and if there's a car I like I usually get it at a bargain price.

Auctioneers Are Human Too. While they want the best price for their property, they will settle for less to expedite a sale. While buying cars at auction, I purchased a string of Ford Aerostars. The first one was a 1996 model at an auction in 1999. The van was one of the last items for sale, and I was the winner at $5,000. The auctioneer looked down at his sheet and shook his head. He could not let this car go for that price. I asked him to run it around again, and he agreed. I watched patiently as the last cars went up on the block. Finally, my Aerostar came around again. Most everyone had made his purchase and was heading for the exit or filing paperwork to claim the winning bid. When my Aerostar opened bidding for the second time, I held up five fingers indicating a bid of $5,000. I waited about thirty seconds for someone else to bid, but there were no takers. Knowing $5,000 would not purchase the van, I committed an auction miscue and bid against myself by holding up six fingers to indicate a bid of $6,000. The auctioneer recognized my bid and continued singing the auction song futilely looking for a higher bid. With no more bids and the prospect of additional cost to re-auction this vehicle, the auctioneer decided to take the six grand and call it a day. I got a $10,000 car at a 40 percent discount and walked away happy.

Car prices, like home prices are a function of the prevailing environment. In areas of high unemployment, housing prices will be lower. When gas prices are high, guzzling cars will sell for lower prices. In 2007 with gas nearing $4.00 per gallon, I decided to replace my Ford Aerostar. Aerostars were discontinued in 1997, and as much as I love the distinctive, boxy vans, I did not want to buy a car that was ten years old, not even from good old Uncle Sam. Knowing that I would be leaving state employment soon and working from home, I wanted the biggest most comfortable car the government would sell. I was looking for a sport utility vehicle or truck because of my Aerostar experience. When I got to the auction, the biggest passenger vehicle was a Ford Excursion. Frankly, that truck was just too big. There were a number of Explorers and Expeditions. I opted for a green 2000 Expedition formerly used by the Department of Energy. When my car finally came up for bid, most dealers had filled their quota and were not paying attention to the auction. I was standing next to a dealer as the bidding started and asked him why he wasn't bidding. He shook his head and said he couldn't move these gas hogs; the bidding was in the $5,000 range. I told him the car had a full tank of gas that had to be worth a grand or so. He laughed and walked away. I ended up getting my Expedition for $7,500 and still own it today.

Live real estate auctions are similar to the GSA auctions except the stakes are much higher. The television screens are bigger, there are more people in attendance, the auction assistants wear tuxedos and are much more aggressive, and you end up with a house instead of a car that you can drive away. I have seen people at live real estate auctions get carried away and pay way too much for a house. Online auctions are rather uneventful. You sit in front of your computer, find the house you're interested in, and click on Bid Now, and your bid is registered. You walk away and come back later to see if you've been outbid. No one is standing behind you cajoling you to bid higher because "this is such a bargain that you can bid one more time" or telling you why the price is still very low. When bidding online you set your limit, and you will not go over it. If you don't get that house, you'll get the next one. If you don't get the next one, there are about one million more waiting to be sold. Stay cool.

Win the Auction! If you've done all your homework, selected the right property, set a reasonable price, and are the last one to click on Bid Now, you will eventually win an auction. After buying over a dozen cars and winning four property auctions, I still get a nervous rush when the auctioneer slaps the gavel and points at me while screaming "SOLD!" over the loudspeaker.

For a home auction, hopefully your bid will be below the minimum reserve set by the bank, meaning your price is less than the bank was willing to take immediately. For you that may mean your property is in the bargain category. It also means the seller will have to agree to sell at your price. If the highest bid is below the minimum reserve, the seller usually has fourteen days to either sell you the property or reject your bid. At one of my condo auctions I was the high bidder at $59,000, and the seller offered me the exclusive right to increase my bid to a more reasonable price. I voluntarily raised my price to $72,000 and put the ball in the bank's court. The bank (Fannie Mae) decided $72,000 was too low and rejected my bid. If the bank or Fannie Mae rejects your bid, and you absolutely must have the property, make a higher offer. The worst they can say is no.

Sign the Contract. You won the auction. Congratulations! Now the real fun begins. The auction company will send you a contract and expect your down payment to be wired to them within twenty-four hours. The contract is about forty pages of legalese detailing the terms and conditions of the sale. It essentially says the seller will provide an insurable title to the property, which is being sold as is, where is with no guarantee as to the condition or salability of the property. When signing the contract you agree that you will not visit the property before closing. A typical auction will allow the seller fourteen days to countersign the contract and start the closing process.

Close on the House. Once the seller countersigns the contract, you begin dealing with the closing attorney. With foreclosures, the closing attorneys are usually overwhelmed. Because of penalties incorporated in the contract for failure to timely meet deadlines, I had to stay on top of the process. My paperwork was misplaced twice, and I had to send letters to both the seller and closing attorney confirming that I had submitted my paperwork in a timely manner and any breach of contract due to missed deadlines was not my fault, and I would not be liable for any expenses due to breach of contract. The seller wrote back acknowledging delays are not out of the ordinary, and the bank would honor the good faith efforts of all parties. Apparently, closing delays are commonplace in the booming foreclosure market.

The seller will offer to do a title search as part of the closing package. I highly recommend hiring your own title search company and securing your own title insurance if you are a cash buyer. Considering the problems banks have had with robo signatures and lost paperwork, I would not be comfortable relying on their word that the title is good and their insurance company insuring your time. If you are financing the property, your lender will require a title search and insurance separate from the seller's offer.

Line up Contractors and Realtors. With my condos I ignored the provision of the contract that stipulated I could not enter the property before closing. I did indeed visit and was able to open the front door with my credit card in Fayetteville and my realtor had the key in Myrtle Beach (although I could have broken in). Considering how easy it was to break in the Fayetteville property, I'm surprised I had any appliances in the condo. Once inside I was able to determine what repairs were needed and could start locating contractors.

During my visit I noticed my neighbor had a real estate sign in their window with Sold! plastered over it. Any real estate agent that could sell property next door to mine was going to be my agent. I wrote down the number and called it when I got back to Richmond. Visiting the property before you actually own it is one thing. Starting any repairs before closing is another matter entirely. Before you actually close on the property do not paint it, change the locks, take anything, or disturb the property in any way. You can however schedule contractors and real estate agents to begin work immediately after you close. If you had visited the property before purchasing, you would have a good idea of what repairs were necessary and could line up contractors during the closing process.

Fix the Property! To maximize your profits, I recommend advertising for labor on sites such as Craigslist and supervise any work personally at your property. You will be able to save thousands of dollars and inspect the work as it progresses. Offer reasonable compensation for work performed but don't pay anything until the job is done. This will ensure a motivated workforce and better attention to detail. Little things such as brass faceplates on electrical outlets and light switches will give a marginal property more appeal. Replace outdated lighting fixtures and ceiling fans. Window treatments can give rooms a nice homey touch and can be installed inexpensively. If you have purchased in a condominium complex, look at some of the other units to see how they have been upgraded and consider upgrading yours accordingly. For example, in a middle-class mid-priced condo complex, granite countertops in the kitchen would not significantly enhance the value of your property. In my Fayetteville condo I replaced all of the flooring, two light fixtures, all door hardware and hinges, window blinds, the stove, over-the-stove microwave, bathroom mirror, a section of the floor, the utility room ceiling, painted all walls and ceilings, and replaced a ceiling fan. I did it all for $5,000. In Myrtle Beach I replaced the floors, painted, added two ceiling fans, fixed the air conditioner, and installed tile in the entrance hall and bathrooms all for $5,200. Two years of accumulated rent from Fayetteville paid for the entire Myrtle Beach renovation.

If you are in partnership with an angel investor, your sweat equity and bargain shopping should be noted in the bottom line. For example, agree beforehand what the retail cost of a renovation would be and include a provision in your partnership agreement that you would realize any additional cost savings.

List the House. Interview realtors who are active in the neighborhood. You want to find a realtor who works with the type of buyer who would be looking for your property. If you have a mid-priced starter home, you will find a realtor who has connections with young couples or singles looking for their first or second homes. The real estate market is heating up for investors. Numerous real estate investment trusts are buying foreclosed or other bargain homes with the intention of renting them until the market turns. If the trusts can find a reasonably priced renovated home they will be happy to buy that. A realtor who specializes in investment properties may find a match for you fairly quickly. If you used a buyer's agent for the purchase, you might think about using the same agent for the sale. If the property is out-of-town and you have a solid relationship with a broker, you have a ready contact for future purchases.

Once you have listed the house, be patient. I hope you purchased the property at a bargain price and your renovations were not expensive. Even if you're expecting a decent profit, you should be able to list your property below comparable listings in the neighborhood. Even with a low price it may take a fair amount of time to find a buyer. During this housing crisis it is not unusual for a house to be on the market for a year or more. You should not face this situation as your house will be priced below market value and will be in great shape. Even with a beautiful property priced to sell, it may take some time to sell. Be patient.

When you get an offer, your realtor should have qualified the buyer to ensure he's able to afford your house. However, a qualified buyer can run into problems. In my case it was a policy enacted by well-intentioned but mentally challenged bureaucrats. Decision makers at FHA have decided that it is their job to protect American taxpayers by ensuring the loans FHA guarantees will be in only the best neighborhoods. Consequently, FHA has a policy to deny loan guarantees in neighborhoods where a certain percentage of homes are owned by off-site owners (landlords). The policy is inherently racist in nature because it targets predominantly minority neighborhoods. The policy is also counterproductive on its face because FHA loan guarantees require borrowers to be owner-occupants. If the FHA works to guarantee more loans in the redlined neighborhoods, the percentage of owners would increase and presumably stabilize the neighborhood and increase home values.

Realtors and borrowers are well aware of the FHA redlining policy, yet Washington bureaucrats deny its existence. Washington bureaucrats are experts at denying what everyone else knows to be true.

When you finally find a qualified buyer and successfully close the sale, you will be able to take your profit and flip it into another investment property. However, before you sink every penny into a new property, you may have to consider tax consequences.

When the health care reform act was signed into law, a great deal of press buzzed about the provision requiring every American to buy health care coverage or face a federal fine. What very few people noticed was a significant tax increase targeted at investors to cover the cost of health care coverage.

According to the act, a new Medicare tax will apply to investment income of "high earners." The tax is 3.8 percent on the lesser of unearned income or the amount by which adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples. The law defines unearned income as interest, dividends, capital gains (sale of real estate), royalties, and rents. Excluded from this new onerous tax his income from retirement accounts.

This little-known provision of the health care act, which will be implemented in 2013, was not challenged on constitutional grounds because it is perfectly legal under the Constitution as a new tax; however, it will affect millions of Americans who would not be considered "wealthy" by outward appearance. It will affect people who sell houses at a profit or collect a significant amount of rent on properties that are highly mortgaged and barely cash flow positive. Because of the IRS change with reporting income for short sales, short sellers will be very motivated to close before December 31, 2012!

Rent the House! While the market has bottomed, there are no signs of a quick turnaround in the housing prices. It may take some time to move your house. In the meantime you can get a good return by renting the house. I only kept my condo on the market for three months before deciding to rent. I had an offer to purchase, but the FHA would not guarantee the loan, and the buyer was forced to back out. Meanwhile there were two more foreclosures in complex so I decided it would be better to wait out the market. I did find a renter who is looking to purchase a house and was interested in a rent with option to buy arrangement. I set the price significantly below the asking price for nonforeclosure homes and applied 50 percent of the rent toward the purchase price. At the end of the lease I will either sell the condo at a 50 percent profit or have a 17 percent return on my investment and put the house back up for sale—I hope at a higher price.

If you are working with an investor, building a portfolio of rental properties can be a good strategy. The investor will share with you rental profits that far exceed recent market returns or bond yields. When the housing market stabilizes or succumbs to the pent-up inflation creeping into the economy, sell the property at a tidy profit.

Rinse and Repeat. What you do with your own real estate investments will depend on your situation. I started with a single condominium with the plan to buy it, renovate it, and sell it for a quick profit. However, it has turned into a longer-term project. I still have the option of taking out a mortgage for the full amount I've invested or even more, considering the assessed value of my unit and use that money to purchase another property. The rental income will cover the mortgage payment (even at the astronomical rates banks charge on investment property), taxes, HOA fees, and a contingent for unexpected expenses. One could build a real estate empire using this strategy. Rental income from Fayetteville helped me purchase Myrtle Beach and the renovation. We will be able to enjoy our beach house this summer and fall and rent it to northern snowbirds next winter. The goal will be to simply charge enough to cover expenses so we can enjoy free vacations.

If you buy only two properties per year and rent them with a conservative $200 per month positive cash flow, you will own four properties generating $800 per month in excess cash. By the time the inflation train leaves the station, strap yourself in for the ride of a lifetime! Doing research and renovation yourself, two houses per year is a reasonable goal. The other option would be to buy gold, silver, or Swiss francs, but you can't live in those investments, and they don't pay you rent.

I should turn this advice into an infomercial and sell it for three easy payments of only $19.95, plus shipping and handling. Of course, you would need to subscribe to my monthly updates. I'll bill your credit card directly.

Like anything that sounds too good to be true, there are some things to consider about this advice. The real estate crash will run its course, foreclosures will make their way through the market, housing prices will rise, and true bargains will be much harder to find three or four years from now. I began earnestly looking for properties in January 2010. I won two auctions in February and March that were rejected by Fannie Mae; I won my successful auction on April 15, and closed on Memorial Day. The renovation extended until the Fourth of July, when the condo was listed for sale. With the property vacant and not generating income, I chose not to take out a loan. I received the purchase offer in September, but it fell through because of the misguided policies of the FHA, and I decided to rent. I had paying tenants move in on November 15. At that point I could have taken out a loan and begun looking for a new property. To search for a new property, win an auction, close, and renovate the property could conceivably stretch well into 2013. Using this timeline, I may be able to purchase six or seven properties by the time the crisis winds down.

I know of a retired painter in Florida who currently owns three houses and is actively purchasing Florida foreclosures. He utilizes the strategies outlined here and has been very successful. It helps that he lives in the eye of the storm and is able to inspect the properties personally and has a network of contractors he is able to call on to renovate his properties. He is satisfied now to rent his three properties and enjoy the rental profit while waiting at the station for the inflation train to leverage up the value.

I hope you take the next step and begin researching properties and lining up your financing. This can be a fun and profitable endeavor for anyone who can dedicate the time and resources necessary to take advantage of the best real estate buying opportunity in more than thirty years.

Resources

Online Real Estate Auction Sites:

Auction.com

Realtybid.com

Williamsauction.com (online and live)

rowellauctions.com (Southeast U.S.)

r-bid.com

https://www.hudsonandmarshall.com (national)

http://www.marknetalliance.com (a collection of various auctions nationwide, live and online)

http://www.usa.gov/shopping/shopping.shtml (THE clearinghouse for all U.S. Government sales)

treasury.gov/auctions/irs/ (Real estate, cars, boats, and seized property)

Distressed Sale Sites

Homepath.com (this is the Fannie Mae listing site. Careful shopping can result in good deals.)

Bank REO sites:

Go to any bank Web site and search REO on the bank homepage. Bank of America has the largest number thanks to the Countrywide takeover, but all banks have healthy REO inventories.

Real Estate Value Estimators

Zillow.com (Zillow estimated prices appear to lag behind reality by approximately one year. Excellent resource for recently sold and listed properties.)

http://www.realtytrac.com/trendcenter/ (prices and foreclosure activity by state)

Search local tax assessor's office, which is usually available through the city or county Web site

All of these resources are free. Web sites that require payment or monthly subscription are usually not worth the price and generally provide lists already available at no cost.

Home Inspection Checklist

If you are asking your buyer's agent or paying someone fifty dollars from a Craigslist post to inspect an out-of-town property, don't expect a thorough job. You are not looking at a property that has been lovingly maintained; it has been vacant for up to a year; it may have been vandalized, appliances may have been stolen, or a leaking pipe could have ruined the floor. You want to make sure the property is standing and doesn't need extensive repairs. A perfect property will look bad, discouraging most prospective buyers, but be structurally sound.

Generally, because you have limited your search to houses built after 1985, you will avoid some of the issues related to older houses such as lead paint or collapsing roofs. If you are considering a home built during the Chinese drywall era, verify that the wallboard is made in America.

Outside

Roof: The ridge (peak) should be straight and level. There should be no evidence of sagging between trusses. Any deterioration of asphalt shingles should be noted. Flashings around the chimney should be secure and without signs of cracking. If the roof is sagging, do not consider the property.

Chimney: Any bricks or mortar missing? Is the chimney leaning? If the chimney is leaning, do not consider the property.

Siding/outside walls: If brick, look for missing mortar or cracked bricks; if wooden or pressboard, look for evidence of rot by tapping on the wood, particularly near the bottom few rows or corners. If the exterior wood is rotten, do not consider the property. Vinyl siding can hide underlying rot. Pull up the bottom row and make sure the wood beneath is dry and rot free. If there is significant rot, do not consider the property.

A word about stucco. In the 1990s and early 2000s, stucco was a popular façade for larger houses and McMansions. Stucco belongs in the desert, not the humid east. Many stucco houses had small cracks or poorly sealed joints. Moisture would migrate between the stucco façade and wooden house frame and insulation, and begin the rotting process. Avoid stucco houses in the eastern part of the country.

Foundations: Look for cracked bricks or damaged masonry. White or chalky substances on the bricks could be a sign of water intrusion. If the foundation is cracked, do not consider the property.

Inside

Basement: If there is any sign of water stains, mildew, mildew odor, or standing water, do not consider the property.

Floors: Ideally the carpets will be stained from spills and wear. Unsightly flooring can discourage prospective buyers but is very inexpensive to replace. On the other hand, look for sagging or sloping floors. If the floor sags, do not consider the property.

Walls: Verify the wallboard was not made in China. Look under the sink, in the attic, furnace room, or plumbing access ports to find unpainted wallboard. If there are any Chinese characters, do not consider the property. Make sure doors open, close, and latch. Make sure the walls are vertically straight.

Kitchens and Bathrooms: The water will be turned off so you cannot test faucets. Look for water damage, mold, or cracked tiles or calking. Make sure the toilets and sinks exist and appear to be in good shape. List the appliances that are in the kitchen. Budget missing appliances or fixtures accordingly. All kitchen appliances can be replaced for about $1,500 and bathrooms redone for less than a thousand.

Electrical, Plumbing, and Utilities: Look at the house plumbing. If the property has Qwest pipes, do not consider the property. If the plumbing is copper, make sure it has not been stolen. Look at the electrical service. Are the circuit breakers in place and appear to be the original installation? If the electric panel, circuit breakers, or wiring is missing, do not consider the property. Check the water heater for signs of rust or corrosion. A replacement water heater can run up to $1,000 installed. Make sure the furnace is in place and the outside unit is not missing. Thieves tend to steal outside units of heat pumps on foreclosed houses. Replacing a heat pump system can cost $5,000.

If the property does not have deal-breaker issues, set your bid with enough margin to make repairs and pay any transaction costs; then sell below current market value and make a profit.

 Preeti Vissa, "Is Redlining Back? Evidence Grows That Qualified Borrowers Can't Get a Loan," Huffington Post, accessed 12/23/11,  http://www.huffingtonpost.com/preeti-vissa/qualified-minority-buyers-denied-loans_b_873947.html.

 FHLB Web site, accessed 2009, http://www.fhlb-of.com/ofweb_userWeb/pageBuilder/mission--history-29.

 William Wyler, director, The Best Years of Our Lives (1946).

 Charles Dickens, A Christmas Carol, (London: Chapman and Hall, 1843) 104.

 Press release, Federal Housing Finance Agency, Department of Housing and Urban Development and Department of the Treasury, Aug.10, 2011.
