Anyone who spends enough time watching HGTV could be forgiven for believing that flipping houses is their dream job, but what you won’t see on TV are the often overlooked costs and complications that are involved with flipping a property.
Renovations typically run over budget and behind schedule, construction permits and regulations can delay and even stop work altogether, noise ordinances can restrict certain work to specific hours of the weekday further pushing back the completion date, and eating away at an investor’s ROI.
Furthermore, when buying an REO or bank-owned property from a sheriff or trustee sale, oftentimes the property is sold sight unseen, meaning it can be nearly impossible to know how much a renovation will cost before closing on the property. Additionally one needs to factor in closing costs and any liens or obligations linked to the property title when buying, brokerage fees and tax obligations when selling, and utilities used during remodeling.
Even if the renovation is completed on time and within budget, market fluctuations can reduce local property values, the property may take longer than expected to sell, and should you choose to rent the property, there inlies an entirely different slew of headaches, from qualifying tenants, property maintenance, and even evicting, should said tenants stop paying, which can cost 1000’s of dollars and months of time, all while the property isn’t generating any income.
Bad for your Bottom Line
All of these costs, which are nearly impossible to accurately estimate beforehand, can leave you with close to 0 or even negative ROI, which is a major risk that savvy investors aren’t willing to take. Most successful house flippers only see profits in their market due to having befriended an extensive network of professionals, ie. realtors, accountants, lawyers, and contractors, to name a few, who streamline the process from start to finish, generally in exchange for preference or a commission.
What if there were a better way to Invest in real estate?
What is Flipping Cap?
As opposed to flipping houses, flipping cap (capital) is a much simpler process, which involves “flipping” a real estate note, or mortgage. For a more in depth look at the Real Estate Note Investing process, take a look at our other articles on the subject.
Flipping cap can be summed up as the following: An investor purchases a non performing note (which is guaranteed by the property) in the early stages of foreclosure, holds on to the note until the legal foreclosure proceeding is almost complete, then sells the note at double or nearly triple what they originally paid for it.
Alternatively, the entire legal process can be skipped by making a “cash-for-keys” offer to the defaulted borrower, and the note holder now owns the property title and has physical possession, enabling the note holder to sell the property at full market value.
Just like that, the investor has “flipped” the note for an exceedingly high margin. ROI’s of 150%, 200% are not unheard of but rather a frequent occurrence among Urban Capital’s investors.
Purchasing Real Estate Notes
While real estate investors have the option to buy performing notes, resulting in steady monthly payments, many often prefer to purchase non-performing notes, because they are sold at a significant discount, as banks and lending institutions are looking to recuperate as much of their original investment as they can, as soon as possible. It’s this difference between the discounted note price and the actual purchase price of the property that makes note investing such a profitable approach to real estate investing.
Where can I buy mortgage notes?
Notes can be purchased through a variety of mediums, such as online marketplaces or portals, independant note brokers, directly through the bank or lending institution (however this often requires buying entire portfolios of notes). Furthermore, the trusted partners at Urban Capital offer a wide variety of highly discounted non-performing mortgage notes for sale.
Why invest in Real Estate Notes?
The key to the investment strategy; after a certain duration of non-performance, the property goes into foreclosure, and there is a huge potential for outstanding returns. The property being foreclosed upon guarantees the real estate note, which is issued by a lending institution, so it is impossible for the note to depreciate or lose its value.
The note can only appreciate, as the value of the mortgage note is determined by the commercial value of the investment property and the progression of the foreclosure legal process. Even if the legal process makes no advances, the property value still appreciates equivalent with inflation, or higher depending on the rate the surrounding area appreciates.
The only risk involved is time, as there could be a strong legal defense that delays the process, or in the worst of cases, there are errors in the filing of the foreclosure documents, and the process needs to be re-initiated.
Flipping cap involves buying the note at the start of the legal process, when the property is considered a pre-foreclosure (the note is valued around 30% – 40% of property value) and selling right before the process is complete, just before it becomes a bank-owned, or REO property (at which point the note is valued around 70% – 90% of the property value).
Flipping cap, instead of houses, circumvents the need to pay tax liabilities such as capital gains tax when selling the property (25% of gross income or 35% of net income from the sale), or the Property Acquisition Tax (ISAI, or impuesto sobre adquisición de inmueble which ranges from 2% – 5% depending on the state) or find tenants to rent out the property.
Furthermore, as the note is sold before the title transfer, there’s no need to pay for renovations (while about 10% of the cost of similar repairs in the States, is necessary in about 40% of foreclosure cases) as the note has appreciated without even having seen the interior.
Additionally, If you’d like to learn how to buy a house in Mexico using real estate notes, Urban Capital has all the resources you need to make a well informed decision.
Why Invest with Urban Capital?
Urban Capital has revolutionized real estate investing in Mexico, with over 120 successful foreclosure cases resulting in title transfers to clients and a staggering $5,513,800 USD in profit generated for clients through flipping cap, there remains little doubt that Urban Capital is an industry leader.
We are the only players in the game to offer guaranteed note buy-backs; if at any point in time our client wishes to sell their note, we will buy it back no questions asked.
We conduct all necessary due diligence with every property, and our team of specialized foreclosure lawyers handles all court filings, ensuring there are no unnecessary delays.
Urban Capital also covers legal costs for notes guaranteed by properties valued over 1,500,000 MXN, as it is much more likely that a foreclosure of such high value properties will turn litigious.
We are proud to present the Urban Capital Experience, our proprietary platform where our clients can watch how their investments are performing directly from their mobile device, anywhere in the world, anytime.
These are just a few of the assurances we take pride in providing to our investors, and if you’re interested in learning more or investing with foreclosures in Mexico, please don’t hesitate to get in touch.