I visited the Registry of Deeds in Binangonan a couple of weeks ago and on my way there, I noticed something that every real estate investor or anyone buying a property should watch out for as part of due diligence, BEFORE buying a property in any area – floodlines!

Floodlines are the stains that remain on the walls, fences, gates, etc., after an area gets flooded. It can mean an area is flood-prone and can be a sign of things to come, unless something concrete was done to prevent future flooding.

I’ll let the pictures do the talking

How about the graffiti or “art work”? Those are things you should also avoid, but that’s another story!

These may look like ordinary pictures of floodlines. However, these were the same floodlines I saw in the same area in Pasig just after Ondoy. Yes, the floodlines caused by Ondoy exactly 2 years ago as pictured above are still very visible.

Where do you look for floodlines?

Obviously, you won’t see any floodlines if a property’s walls, fences, gates, etc. got repainted or cleaned up already. So you should look for them at the following:

• Concrete walls, fences,  of VACANT LOTS. Those that have rough surfaces that would retain the dirt and mud after a flood has receded would be a good place to start.
• Unoccupied  properties. Since these are unoccupied, it is less likely that they are maintained, hence you will see the floodlines, even after several years have passed.
• Public or private properties that are not well maintained. Just look at the pictures above!

What if you don’t see any floodlines?

If you don’t see any floodlines, you should still ask around the area. For sure you will find people who are more than willing to share their flood-related stories. Check out sari-sari stores, barangay halls, or even the property owners in the same street or area.

While banks will disclose any info they have with regard to flooding, don’t rely solely on them or their caretaker who lives in the foreclosed property as they might not know exactly how high the flood was, if any, or they may simply not know if it was indeed flooded.

For FSBO (for sale by owner) properties, the seller might be hesitant to disclose any information with regard to flooding, as it might make you lose interest on their property. Just ask anyway and confirm by asking others who live in the same area, as mentioned above.

Online resources for flooding in the Philippines

You can also check out the following online resources  with regard to flooding in the Philippines.

• Typhoon Ondoy Maximum Flood Height interactive map

Typhoon Ondoy Maximum Flood Height interactive map(Click to visit)

• Map of Potential Flooding in Philippines - http://globalfloodmap.org/Philippines

• Philippine flood hazard maps - http://www.nababaha.com

A solution to flooding in Metro Manila?

Has the MMDA found the ultimate solution to the flooding problem in Metro Manila? Check out the picture below and tell me what you think!

If you know other resources that can help determine if an area is flood-prone, or if you have more pictures of floodlines here in the Philippines, please share them here by leaving a comment below. Thanks!

~~~

To our success and financial freedom!

Jay Castillo

Real Estate Investor
PRC Real Estate Broker Registration No. 3194
Blog: http://www.foreclosurephilippines.com
Follow me in Twitter: http://twitter.com/jay_castillo
Find us in Facebook: Foreclosure Investing Philippines Facebook Page

Text by Jay Castillo and Cherry Castillo. Copyright © 2008-2011 All rights reserved.

Full disclosure: Nothing to disclose.

P.S. I am helping a fellow real estate investor market a  Quezon City Townhouse for sale located in Kamuning. This is also available through a rent-to-own scheme.  Please call/txt 09157603090/5059259 for more details. A video of the townhouse can be seen below.

Watch out for floodlines when inspecting foreclosed properties! is a post from: Foreclosure Investing Philippines

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While there are so many real and legitimate opportunities out there, there are also a lot of scams. Sooner or later, you will encounter what may seem to be a very enticing investment opportunity, but you need to be prepared to discern what is real and what is not.

Be ready to ask the right questions, as part of due diligence.

Failure to do so can mean saying goodbye to your hard earned money… forever!

Real or Scam?

BEFORE you part with your hard earned money, be ready to ask the following…

7 questions you need to ask to avoid investment scams

1. Who is offering the investment?

Do you really know the person or corporation offering the investment? If the one offering the investment is an individual, do you know him/her personally or do you know someone who can vouch for his/her integrity?

Ask for his/her NBI clearance. If the offeror is a corporation, get its Articles of Incorporation (AOI) and latest General Information Sheet (GIS) from the Securities and Exchange Commission (SEC) to check if the company is operating and to check who are behind the corporation. Check the track record of the persons involved, and trust your instincts.

Let me tell you a story.

Once upon a time, a bunch of people that included some friends of mine formed a team of real estate investors. One of those who joined the group, who looked like your average, harmless person, had apparently started inviting other members of the team to invest in her agency, and she promised the investment will give a 5% return of investment per week.

Thanks to some of the team members that confided to the rest, they all found out what this person was up to. Part of her modus operandi was to present the AOI of her company to would-be investors to make it appear as legit. Being very trusting people, some of them actually invested in her agency.

After comparing notes, they learned that at first, she was able to pay the return she stated. However, after some time, the payments stopped.

It appears she was just using the money from new investors to pay the old investors, and there was really no investment that would earn the promised interest, much like a ponzi scheme. When they learned about her scheme, they had her NBI records checked – Lo and behold, she had a BP 22 (Bouncing Checks Law) record that was filed several years back!

What is sadder is that some of the team members had already told their friends and family members about the “investment opportunity” and thus unwittingly helped the con artist perpetuate her scam! This was before they found out about her ponzi scheme.

It just goes to show that there are good people and there are bad people in this world, and there will always be people who will try to entice you to part with your hard-earned money. Scams and scammers come in many different, harmless-looking forms.

In the example above, the mess could have been avoided if an NBI clearance was asked at the very start. In addition, there is wisdom in not being too trusting. I also believe it would help to pray for guidance and discernment.

2. What are the supporting documents?

There should be supporting documents and you need to read them carefully to determine the nature of the transaction – whether it is an investment or a loan or some other contract. Read the document(s) carefully as you need to know what’s in store for you. Remember that an investment may be lost completely – as in you get zero – but a loan needs to be repaid with interest.

3. If it is a loan, what is the collateral?

One example of a collateral is real estate. The collateral is what you will get in case the debtor defaults. That’s where the real estate mortgage contract comes in. More on this later.

3.a Is the collateral just post dated checks?

Post dated checks are simply not enough (checkout this article from AttyAtWork.com and find out why)! Sure, a bouncing check will result in penalties, but you will have to enforce your rights through the courts. Thus, it will take time for you to recover your money, if ever.

3.b If the collateral is real estate, will it be mortgaged to you?

You need a deed of mortgage or a mortgage contract to ensure that you are holding on to something, just in case the loan becomes in default. Through the mortgage, the loan will be secured by real estate.

4. How exactly will your money earn the promised interest?

You have a right to know exactly how will your hard-earned money earn more money. Will it be used to buy real estate, and then the real estate will be sold to buyers for a profit? If the proposed investment does not even say where your money will be invested in, how will you know if it will be capable of earning the interest you desire?

In the story above, my wife actually could not believe how a small agency will be able to earn more than enough to give 5%  interest per week. That point alone should have alerted the potential investors already. Being the good persons they are, however, they just assuaged themselves by probably saying, “Di naman siguro sya manloloko diba?” (“She can’t possibly be a con artist right?!”).

If the investment really has the capability to bring in the money, with a solid basis among other things, then that should be the only time for you to invest.

5. If the money will be invested in real estate, will the property to be purchased really be a worthy investment?

You need to see the property’s prospectus so you can check the numbers. Do the numbers make any sense?

6. If it is an an investment contract, is it classified as a form of securities?

Section 3.1 of the Securities Regulation Code (SRC) or RA 8799 defines “securities” as

“shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character. It includes: xxx

(b) Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription; xxx”

7. If it is indeed an investment contract, is it duly registered as mandated by Section 8.1 of the SRC?

Section 8.1 of the SRC states that:

“Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser.”

Furthermore, section 3.1(G) of the SRC Implementing Rules and Regulations (“IRR”) defines an investment contract as:

“…a contract, transaction or scheme (collectively “contract”) whereby a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others.

1. An investment contract is presumed to exist whenever a person seeks to use the money or property of others on the promise of profits.

2. A common enterprise is deemed created when two (2) or more investors “pool” their resources, creating a common enterprise, even if the promoter receives nothing more than a broker’s commission.”

If it is not registered and approved by the SEC, then my advice would be for you to just walk away. If I were you, I would rather wait for the Philippine REITs to become available.

I’ve said it before and I’ll say it again, we all need a healthy dose of skepticism, while keeping an open mind.

Learn to discern and don’t let yourself fall for “get rich quick” schemes.

If something does not feel right, or it sounds too good to be true, then it probably is.  But the only way to be sure is to do your due diligence.

Lastly, don’t be afraid to ask the right questions!

~~~

To our success and financial freedom!

Jay Castillo

Real Estate Investor
PRC Real Estate Broker Registration No. 3194
Blog: http://www.foreclosurephilippines.com
Follow me in Twitter: http://twitter.com/jay_castillo
Find us in Facebook: Foreclosure Investing Philippines Facebook Page

Text by Jay Castillo and Cherry Castillo. Copyright © 2011 All rights reserved.

Full disclosure: Nothing to disclose.

PS: I would like to share this update dated June 2, 2011 – After much thought, I have decided to leave Trace Trajano‘s local coaching program and my role as one of the local coaches. I would also like to inform everyone that I am not part of Trace’s other programs.

For those who don’t know, I was once a student of Trace, and I was also part of the team that won his first apprentice challenge, although I decided to leave the RYP team last September 2010. I became one of the local coaches as part of the now defunct Terrific Trio University. I also helped promote his seminars in the past including TRQ 1.0, TRQ 2.0, TRQ Cebu, his quick cash seminars, and the last one was TRQ 3.0.

It has also come to my attention that some materials that Trace used in marketing some of his seminars might make it appear that I am one of his partners. I would like to make it clear that I am not a business partner of Trace Trajano.

Things did not turn out as planned, but lessons have been learned, and I feel it is time for me to move on. ~ end of update ~

7 questions you need to ask to avoid investment scams is a post from: Foreclosure Investing Philippines

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Do you really wan’t to know the bad side of real estate investing? Although I believe it’s not a good idea to focus on the bad because we attract more of what we focus on, we should still be aware of the risks  in order to be able to effectively avoid or manage them.

Photo credit: kyz through flickr

That’s exactly my aim here, to help you to be aware of the most common risks involved with real real estate investing that most beginning investors fear the most, and what you should do so that you will only see the good side.

This came about through a good question I received through a comment and I believe a lot of you out there have the same question, but are probably afraid or just too shy to ask.

Anyway, the following is the question from Citizen Patrol, which I will reformat a bit so that it will be easier to read, just like what I did to Foreclosure Investing Philippines.

Comment submitted by citizen_patrol February 17, 2011 at 4:22 pm

Hi Jay,

I found your articles very informative, insightful, and enlightening! Keep up the good work! As I browsed through your articles, there is one topic I think that you have not yet written about. You’ve focused on the good side of investing in real estate, but can you come up with a write-up that focuses on the risk of venturing into this business?

The opportunities that you highlighted do sound and look promising but I sense there are also risks involved. These questions cropped up when I read some of your articles:

1. Do I need to take this ‘business’ full-time?, because you have lots of homework to do, and maintaining an 8-5 job can take so much of your time;

2. buy and hold strategy looks lucrative but the challenge is looking for tenants, which sometimes take time, and if you get tenants, you have to make sure they are prompt/regular payers;

3. the increase of interest (rates) in the bank loan after the fixed-rate period may also be a challenge, and other questions. I hope you can make a write-up which summarizes the risks when venturing into real estate.

thanks

*Actually, I already answered the comment (found here) but I will post my answers again below with additional inputs.

Hi Citizen Patrol,

Thanks again for the comment. Yes, there are definitely a lot of risks involved with real estate investing which is why due diligence is a must, among other things, which one should keep in mind to minimize risks. Let me answer your questions which I have paraphrased below.

“Does one need to do real estate investing full time?”

I can definitely say “no!”. Real estate investing can be done part time and I for one have done this. For those who don’t know, I used to work for a multinational company as the IT department manager.

It was during a time when the IT department was grossly undermanned when I decided to pursue a number of real estate deals and I did it while making sure I was fulfilling my duties and responsibilities as the IT manager, database administrator/developer, network security specialist, help-desk staff, systems administrator, etc. Get the picture?

The stress was just too much and after three years, I said to myself enough is enough. This made me take massive action and as they say, the rest is history. I believe Sha Nacino has a good idea of my story as this was one of the memorable questions she asked when she interviewed me for her book “Think Rich Yuppies”. Anyway, I’ll share more details about my story in another post soon.

“How do ensure I will find tenants which are good payers?”

As for tenants, looking for them is not really a problem if one is able to buy a property at a right price. If you bought a property at the right price, meaning you did not pay too much for it, you can also rent it out at the right price. This can be equal to or even below the current rental rates in that area, and you should still make a profit.

As for finding good tenants, screening or pre-qualifying them is a must. Get their proof of income, bio-data, NBI clearance, interview them, etc. Pretend you are a bank doing a background/credit investigation on one of your prospective borrowers. You can never be too careful! Just be pleasant, considerate, and always talk to tenants in a nice way.

“What about the risk associated with interest rates going up?”

As for increases in monthly amortizations due to interest rates going up, the best way to avoid this is by availing of a fixed rate for the whole loan duration, for the longest period possible. Checkout my article about the crazy low home loan rates available right now.

Here are a few other things beginning investors should keep in mind (and avoid):

1. Risking it all – It is unwise to risk everything for one deal. When I say risking it all, it means risking one’s entire life savings, with little room for mistakes like cost over-runs, unexpected expenses, delayed completion of repairs which can lead to delayed selling/renting of a property etc. Sometimes people make the ultimate example of risking it all, when they quit from their jobs without first having enough successful deals that produce income that can replace one’s salary. One should also have a plan b or a fallback.

2. Not doing proper due diligence – This can lead to paying too much for a property where it is virtually impossible to sell it for a profit, or have it tenanted with a nice positive cashflow.

Another example of lack of due diligence would be if incomplete checking was done on the legal condition of a property and problems arise later on that can lead to the property being not sellable(for example, the title has problems), or has unexpected costs (arrears for electrical, water, real property taxes, etc.) that will wipeout any profits and lead to losses.

Other problems can lead to a longer time to get the property market ready or tenanted (for example, repair duration is under estimated).

3. Tenants from hell – One may fall into the trap of getting anyone as a tenant by not screening them, and tenants from hell not only fail to pay on time, they may also destroy the property and turn a would-be cashflow generating property into a money pit.

Most of the points I have raised above are mentioned in this article on How NOT to invest in foreclosures, although there are more risks that one should consider. I’ll write more articles about doing due diligence in the future.

Thanks again for the feedback and question Citizen Patrol!

What do you fear most about real estate investing?

I believe the questions above only covered the tip of the iceberg.

How about you, what are your fears when it comes to real estate investing? What’s stopping you from taking the first step?

Let me know through the comments section and we’ll answer them next. Thanks!

Happy real estate investing!

Jay Castillo
Real Estate Investor
Real Estate Broker License #: 20056
Blog: http://www.foreclosurephilippines.com
Follow me in Twitter: http://twitter.com/jay_castillo
Find us in Facebook: Foreclosure Investing Philippines facebook page

Text by Jay Castillo and Cherry Castillo. Copyright © 2011 All rights reserved.

PS. Don’t be the last to know, subscribe to e-mail alerts and get notified of new listings of bank foreclosed properties, public auction schedules, and real estate investing tips. Mailbox getting full? Subscribe through my RSS Feed instead!

The risks of real estate investing and how to manage them is a post from: Foreclosure Investing Philippines

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Real estate investing is a numbers game and one such number that a real estate investor who is into flipping properties needs to determine before buying a property is the ARV. ARV can stand for Approximate Retail Value, After Rehab Value, but the common term often used is After Repair Value.

Isn’t ARV the same as Market Value?

I believe market value is technically the same as ARV except that ARV refers to a future market value, which is the market value of a property after it has been repaired and is already in Ready For Occupancy(RFO) condition to be exact.

Market Value on the other hand is the value of a property at its present condition or the “as-is” value. In my opinion, this “as-is” market value is synonymous to a property’s appraised value.

The obvious difference between the “as-is” market value and ARV is the repair cost plus the added gain in value due to the repairs, if any.

When to use ARV

I find ARV to be quite useful when trying to determine how much one can increase the market value of a property by simply repairing it, provided a property’s value has declined due to deterioration, lack of maintenance, etc. This is very applicable to foreclosed properties where a lot are in dire need of repair, which is good because this helps lower their selling price, well, most of the time.

By repairing a property, an investor can bring back a property’s value to it’s full market value, which is the ARV. However, the repair cost and the selling price of a property needs to be considered to determine if a profit can really be made because if the selling price or the repair cost or both are too high, this can translate to zero profit.

How to compute for ARV

Based on my definition above that ARV is just the future market value of a property after it has been repaired, then one can simply use the same approaches I talked about in my post “How I estimate market values of foreclosed properties”, excluding the calculation for any depreciation of a property, more on this later.

As mentioned in my article on market values, we can use the market approach and the cost approach. Income approach is more appropriate to multi-unit properties.

Market approach

1. Look for “comparable” houses that got recently sold in the immediate vicinity of the foreclosed property you are evaluating. They should be very similar in terms of lot area, floor area, number of bedrooms, number of toilets and bath, capacity of garage or parking slots, age of property, etc.

2. Ask around the vicinity, or you can get the telephone numbers of all the “for sale” signs that you see and for sure you will find a number of a broker that specializes in that vicinity who will know the current going rates in that area. The same tactic can and should be done online.

Added on September 16, 2010. If you only find sellers and their properties remain unsold, just ask them what is their absolute lowest selling price if you paid in cash, that would be your ARV. If you find sellers that say their properties are already sold, then ask for how much they got sold. If they tell the true selling price, this would be the most accurate ARV, provided the property is really very similar to the one you are evaluating.

For example, you were able to get the price of 3 comparable properties that got sold within the vicinity of the foreclosed property you’re evaluating and their average price is Php2.5M, then Php2.5M is your ARV.

If you found sellers and the absolute lowest price you got from them was Php2.6M, then that would be your ARV, although it’s possible they have overpriced it a bit which would help explain if the property has been unsold for months.

What if the closest comparable property is still quite different, for example, the lot area  is bigger by more than  10% or the comparable property has a corner lot, etc.?

In these cases, you will have to compensate. In the example above, you can subtract the cost for the discrepancy in lot area(just get the going rates for lots per square meter and multiply by the difference), and you can also subtract the premium for corner lots (a broker that specializes in that area can help you with this).

Cost approach

1. Determine the average price per square meter of lots in the same vicinity of the foreclosed property you are evaluating.

2. Multiply the price per square meter you got above with the lot size of the property you are evaluating. The result is the approximate cost of the lot. For example, if a lot near a foreclosed property in Marikina has a price of Php5,000 per square meter, then the approximate cost of the lot of a foreclosed property that has a size of 300sqm would be about Php1,500,000 (300sqm x 5,000pesos/sqm)

3. The cost of the improvement is equal to the usable floor area multiplied by the current going rates for construction of improvements per square meter of floor area. I currently use a conservative construction cost of Php15,000 per sqm of floor area. For example, if a house has a usable floor area of 100sqm, then the cost for the improvement is about Php1,500,000 (100sqm x 15,000p/sqm)

4. Add the cost of the lot and the improvement to get the total cost. Following our examples above, the total cost shall be Php3,000,000 (Php1,500,000 + Php1,5000,000).

Using the cost approach, the ARV is Php3,000.000. We no longer needed to compute for any depreciation cost as we are looking for the cost for the house and lot in brand new condition, not its “as-is” condition.

The cost approach obviously has it’s limitations. You can only apply this approach to house and lots. I believe it wold not be an accurate tool for condos, buildings, etc.

Which ARV should I use?

A prudent real estate investor should of course use the lower ARV which is based on the market approach in this example. At this point, if you can see that the ARV is smaller then the selling price of the foreclosed property and the estimated repair costs combined, then that property is not a good deal.

A promising property should have enough room for profit even if you consider holding costs.

What next?

The ARV is just one of the numbers one has to get when “doing the numbers” and due diligence. You will need the ARV to calculate for your Maximum Allowable Offer or MAO, which is basically the maximum price you can pay for a property that will still allow you to achieve you target profit. MAO will be discussed next.

Happy investing!

To our success and financial freedom!

Jay Castillo
Real Estate Investor
Real Estate Broker License #: 20056
Blog: http://www.foreclosurephilippines.com
Follow me in Twitter:http://twitter.com/jay_castillo
Find us in Facebook:Foreclosure Philippines facebook page

Text by Jay Castillo and Cherry Castillo. Copyright © 2010 All rights reserved.

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How to compute for the ARV of foreclosed properties is a post from: Foreclosure Investing Philippines

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Update dated June 2, 2011 – After much thought, I have decided to leave Trace Trajano‘s local coaching program and my role as one of the local coaches. I would also like to inform everyone that I am not part of Trace’s other programs.

For those who don’t know, I was once a student of Trace, and I was also part of the team that won his first apprentice challenge, although I decided to leave the RYP team last September 2010. I became one of the local coaches as part of the now defunct Terrific Trio University. I also helped promote his seminars in the past including TRQ 1.0, TRQ 2.0, TRQ Cebu, his quick cash seminars, and the last one was TRQ 3.0.

It has also come to my attention that some materials that Trace used in marketing some of his seminars might make it appear that I am one of his partners. I would like to make it clear that I am not a business partner of Trace Trajano.

Things did not turn out as planned, but lessons have been learned, and I feel it is time for me to move on. ~ end of update ~

One of my mentors, Trace Trajano, recently posted a story about Anna, who bought a property in a foreclosure auction in the US. Take note that some of the things in the story might not be applicable here in the Philippines. Nevertheless, there are lessons here that are applicable to real estate investors  no matter where our locations may be. Before that, here’s the story of Anna…

The Story of Anna
Posted by Trace Trajano on October 15, 2009 at 8:31am

Let me tell you the story of Anna…

Anna excitedly attended a foreclosure auction because she read a book saying that you can get a good deal at auctions.

She bid at the auction and won – wow. “Now I am going to be rich”, she told herself.

She needed 10% down – so she withdrew her life savings and use that as downpayment. Her credit is very good so she was able to qualify for a loan. She pulled it off.

Now it’s time to rent out the property.

BUT, there is a problem. In FORECLOSURE auction, there is very limited time to inspect the property. In fact, she bought it because the outside looks good and she figured the inside should be in good condition also.

There is termite damage at the joints and it’s an additional $5,000 repairs that she couldn’t afford. She pulled out her credit card and got a cash advance – payable with 24% interest. She figured she can rent the property for $1,000 a month so that will more than cover it, right?

She got a tenant. She did not pre-screen her properly. She got a bad tenant. A tenant from hell in fact. Her tenant only paid the first month’s rent and now does not return her phone calls. She optimistically said, “No problem – I’ll get her evicted”. Her tenant from hell is a professional tenant. He (the tenant from hell) accused Anna of being a slumlord. The eviction was delayed.

Two months of no income…then three months. Now Anna had to skip paying her credit card because she cannot even afford the minimum payments. Anna had to fire her eviction attorney because he couldn’t handle the eviction against the professional tenant.

Wan’t to know the rest of the story? Read the rest here: http://buyfirstdeal.ning.com/forum/topics/the-story-of-anna

Real estate investing lessons learned

Let me try to dissect Anna’s story and share lessons learned with regard to real estate investing.

1. Invest for the right reasons
After Anna won the auction, one of her immediate thoughts was “Now I am going to be rich”.  There really is  nothing wrong with wanting to get rich, who doesn’t! However, I can’t help but feel that money was her biggest motivating factor.

Besides, once you win your first auction, becoming rich is usually the last thing on one’s mind, at least that’s how I often felt when I won on my bids during auctions.

I usually had thoughts like “Oh no, I won… what did I get myself into?”, “Now you’ve got a lot of work ahead of you Jay…”, and “I did my due diligence right, so this deal should work!”. That’s why I can’t help but feel there’s something lacking here based on the story because her focus was on the money.

Just remember that if you are going into real estate investing just for the money, something is definitely missing! Personally, I always try to keep in mind that my decision to go into foreclosure investing is not really just about the money, it’s about financial freedom!

2. Don’t risk everything when investing!
Anna withdrew her life savings and used that as down payment. Don’t ever do this, it is not a good idea to risk it all for one deal!

You should at least have an emergency fund intact somewhere safe. I don’t believe in putting everything on the line like my entire life savings as I would rather set aside money for the specific purpose of investing and only use that.

I refer to this as my “Financial Freedom Account” or FFA which is just one of my “money jars” which I learned from T. Harv Eker and you can read more about it here: Manage your finances by becoming your own Chief Financial Officer.

Some of you may be thinking “But maybe Anna did not have enough money so she needed to use her life savings?”. Just a word of advice, if one cannot manage his/her money in order to set aside enough money to put down for a real estate investment, then one is not yet ready to start investing.

There should really be no need to use one’s entire life savings if one is able to manage their finances well. I believe that financial literacy is a prerequisite to real estate investing.

3. Always do your home inspections as part of due diligence
Anna bought the property because the outside looks good and she figured the inside should be in good condition also. Argh! Never buy a property without first doing a thorough inspection and getting estimates from reliable contractors.

I made this mistake once, but I was lucky that property’s  after repair value (ARV) was more than enough to cover the actual repair cost that I underestimated by Php100,000.

In Anna’s case, had she done her inspections well, she could have discovered the termite damage and avoided buying the property since she could not afford the termite damage repair.

Actually it would be okay to buy properties that have similar problems as long as they are discovered before purchasing the property, the costs are considered and justified after analysis, and the additional cost is reasonable and affordable.

With regard to the very limited time to inspect properties being sold in foreclosure auctions, this is very true, even here in the Philippines. This is the reason why I would rather buy bank foreclosed properties or bank acquired assets, which are also often referred to as ROPOA or ROPA.

In contrast, properties being sold in foreclosure auctions are those that have just gone through foreclosure proceedings, they are often for sale on cash basis only, it is hard to inspect these properties as they are often still occupied, and they still have a 1-year redemption period, just like tax foreclosures.

My point here is, foreclosure auctions are different from bank foreclosed property auctions, although in general, both are often referred to as “foreclosures”.

4. Always Pre-qualify tenants
Anna did not screen her tenants well. Without pre-qualifying tenants, one is inviting trouble. By Pre-qualifying tenants, you basically want to ensure that your tenants not only have the capacity to pay but are also good payers. A simple interview or a questionnaire and some background checks would have helped her avoid that tenant from hell.

Anna’s problems snowballed into something she could no longer handle but the sad thing about it is all of these could have been avoided had she done her homework. This is really one story which outlines how one should NOT invest in foreclosures and all real estate investors should learn from it as it contains perfect examples of what NOT to do.

Did I miss anything? Any reactions? Please share your comments below. Thanks!

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To our financial freedom!

Jay Castillo
Real Estate Investor
Real Estate Broker License #: 20056
Blog: http://www.foreclosurephilippines.com

Text by Jay Castillo. Copyright © 2009 All rights reserved.

P.S. – If you are a new visitor, please start here to learn more about foreclosure investing in the Philippines.

P.P.S – If you feel that anyone else you know might benefit from this post, please do share this to them and don’t forget to subscribe to e-mail alerts and get notified of new listings of bank foreclosed properties, public auction schedules, and real estate investing tips. If your inbox is getting full, you may subscribe instead to my RSS Feed.

How NOT to invest in foreclosures is a post from: Foreclosure Investing Philippines

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I just realized something when I inspected a foreclosed property recently and I would like to share it here. While doing inspections of foreclosed properties as part of due diligence, always check the condition of the service entrances for utilities like the electricity and water.  I failed to do this twice for foreclosed properties I have acquired recently, and only learned about these after I had already acquired those properties. However, I would like to spare all beginning real estate investors out there from the potential problems that may happen if you overlook this.  Let me try to run through the potential problems below.

No signs of the Meralco meter…

If the Meralco meter does not exist, most probably you will have to apply for a new connection and you need to consider the lead time for this along with the actual installation time. Yes, you will need to spend time and money applying for a new connection and all the hassles associated with it like visiting the concerned Meralco branch to apply for the connection, waiting for the inspection, securing the electrical inspection certificate at the city hall, submission of the final electrical inspection certification to the concerned Meralco branch,  paying for a new deposit, waiting for the installation of the meter base, etc. This may sound intimidating for some but I enjoyed doing it, because I like learning new things and getting out of my comfort zone.

Imagine this scenario: you bought a foreclosed property, started fixing it up, found a buyer, and closed the deal with an agreement that they will move in once the repairs are finished – BUT, there is no electricity. Do you think the buyer will move in? I don’t think so. Do you think this can be a deal breaker? Maybe. This almost happened to me but thankfully the electricity was installed just in time because it just so happens that the Meralco Branch that covers the area where the property was located gave very fast service (Kudos to the Meralco Cainta branch where I applied for a new connection and the Masinag branch where the inspector was based!). It helped that when I applied for the new connection, I had with me one of the billing statements that I found on the floor of the foreclosed property. I gave it along with other requirements to the person handling my application and he said that since the house was already in the system, they will just update the records to reflect that I was the new owner and I should expect their inspector to visit the property the next day. Yes, they were that fast as the inspector really did come the next day. I was very glad that electricity was up and running in less than three weeks unlike in Dinah’s case where it took 122 days.

If the Meralco meter is intact

In contrast, if the Meralco meter did exist, then there is a high probability that all you have to do is just settle the arrears left by the previous owner. Before, I used to depend on the bank to find out just how much exactly the arrears would be but I realized that an alternative source for this information was literally under my nose, lying on the floor to be exact. If you have inspected a foreclosed property before, one of the first things you would notice are the bills and mails that are scattered all over the place. If you are just like me, you would often just stay clear from them and would not even consider looking at them. I realized that these bills can actually give you a wealth of information such as: who was the previous owner, how long have the bills been left unpaid based on the earliest notice of disconnection you may find, and most importantly, how much are the arrears which are sometimes for the account of the buyer. Sure, the bills lying around might not be up to the current month but you can always bring it to the Meralco branch covering the area and ask for an updated statement of account (SOA).

In fact, this was exactly what I did a few days ago, with the help of my broker. She picked up a bill lying on the floor, gave it to me and told me to just pay the arrears. I was very lucky because I no longer had to apply for a new connection. I then went to the nearest Meralco branch and asked for an updated SOA. Lo and behold, it was higher than I anticipated but was still just about the same amount I would need to pay as a non-refundable deposit if I was to apply for a new connection. Not bad.

On a lighter note, when I gave the bill to the cashier, she said “Ah sir, check ko lang ulit kasi mukhang disconnected na kayo… oo nga disconnected na kayo, hindi ho bagay sa inyo” (“Ah sir, I’ll just double check as it seems your account has been disconnected… yes I have confirmed that it has been disconnected, you don’t seem to look like someone who would have his electricity disconnected”). I couldn’t help but smile. I just said that “I have just purchased the property and as the new owner, I just want to settle the arrears”. With electricty intact, the renovation can proceed anytime.

I wish I can say the same for the water connection but that’s another story.

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Happy Real Estate Investing!

To our financial freedom!

Jay Castillo
Real Estate Investor
REBL#: 20056
Blog: http://www.foreclosurephilippines.com
Social Network: http://foreclosurephilippines.ning.com
Mobile: +639178843882
E-mail: ph.investor@gmail.com

Text by Jay Castillo. Copyright © 2009 All rights reserved.

Always check service entrances when inspecting foreclosed properties! is a post from: Foreclosure Investing Philippines

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Have you ever tried calling up a bank to inquire about a foreclosed property that interests you and you found yourself forgetting a lot of questions that you were supposed to ask? You then quickly say thanks and just hang up but when you finally compose yourself and remember what you wanted to ask, you have second thoughts because you feel too embarrassed to make another call. I’ve been there and I know how it feels. However, there is a solution for this. All you need is practice and a ready set of questions that can serve as your script so you can ask questions like a seasoned real estate investor.

Here goes…

1. What are the payment terms? You need to find out what’s the minimum down payment, how long are the payment terms, interest rates, and whether the interest rates are fixed, and the monthly amortization.
2. Can you give details about the property like the type of property (single detached, town house, multi-door apartment etc.) number of bedrooms, toilet and bath, parking slots, etc?
3. Can I buy the property without the need to go through a public auction? This is an offshoot of my experience with pre-auction bids.
4. Is the property occupied?
5. If there are occupants, have they already agreed in writing that they are leaving the property by the time it gets sold? If not, move on to your next property or say thank you and hang up. Trust me on this!
6. If the occupants will be leaving, what is the buyer’s assurance? You need to determine if the seller will give back all the money you may have paid by then like your show money and down payment if in case the occupants don’t honor the agreement to leave.
7. Does the property have a clean title?
8. Can I have a copy of the Title? You will need this to get a certified true copy at the registry of deeds plus trace-back (a trace-back is the previous TCT or CCT which has been cancelled and replaced by the current one due to a transfer of ownership), including a copy of the mother title if the title is a CCT. When you get a certified true copy, check for any annotated mortgages, liens, encumbrances, adverse claims, etc. The new TCT/CCT should be clean while the trace-back would normally include the mortgage amount, which is what the bank needs to recover. Hint: This helps when deciding how much you are willing to pay when submitting an offer. If the title is still under the name of the previous owner, the bank is most probably still in the process of consolidating the title(examples: Buena Mano Yellow Tag and Red Tag Properties)
9. Who shoulders the Capital Gains Tax (CGT) or Creditable Withholding Tax (CWT)?
10. If the buyer shall be shouldering the CGT or CWT, how much would it be? You should ask the bank or the seller to come up with the computation so that there will be no surprises and you can include this in your analysis. To learn more about CGT and CWT, you may want to read my previous posts about CGT and CWT.
11. How much is the Documentary Stamp Tax? Ask for a computation and verify if it’s correct.
12. How much is the annual real property tax and is it updated?
13. If the real property tax is not updated, Who shall shoulder the updating of the real property tax up to the time you buy the property? Usually, real property taxes of foreclosed properties are left unpaid for a number of years resulting in a significant amount in arrears and penalties. Normally the seller does the updating but you should verify this.
14. Are there any other taxes applicable to the purchase of the property like VAT, etc? If yes, how much? Again, you should avoid any surprises that could eat up all your profits and could even result in a loss for you.
15. If the property you are looking at is a condo, are there any arrears in the monthly dues?
16. If there any arrears in monthly dues, who shoulders the updating?
17. How much are the monthly dues per square meter of floor area and how much per month in total?
18. For properties in subdivisions or villages, Are there any arrears in the homeowners’ association dues and who shoulders this?
19. Aside from homeowners’ association dues, are there any other expenses you will have to pay and how much?
20. Are there any arrears for utilities like water/electricity?
21. If there are arrears for utilities like water/electricity, who shall shoulder the updating of the arrears?
22. Are electricity/water connections available for the property to begin with?
23. If electricity/water connections are not available, How much would it normally cost for a connection to become available for your property?
24. If electricity/water connections are available, how much would a reconnection cost?
25. When shall the buyer be given authority to renovate the property or take control of it? The earlier you can renovate a property and have it ready for occupancy so it can be sold or leased, the better. Some banks give control of the property once the Contract-To-Sell (CTS) has been finalized or when the title has been transferred to the name of the buyer in case bank financing is through a mortgage.
26. How much can I have the property rented out or what are the rentals for comparable properties in the same area?
27. How old is the property? Of course a newer property is more desirable but an old property that is in good shape could also indicate a high build quality that could mean the property is built to last.
28. What is the condition of the property? You need to find out early on if major repairs are needed.
29. Is the property accessible? You can also ask for a copy of the vicinity map and directions.
30. Are there any schools, churches, markets, hospitals, etc. nearby? You can verify this using the info you’ll get from question #29.
31. Ask for any details about the property that may affect finding tenants or buyers, etc. For example, has there been a murder/suicide on the premises of the property, etc. I got this tip from my broker. She told me her experience in having difficulty selling one foreclosed property where someone had died and she swore she will avoid such cases in the future. I made sure that she was not talking about the property I got through her. =)

Take note that this is the set of questions I use as part of my due diligence, I just added some more after reviewing my recent acquisition of a foreclosed property and noticed that I overlooked some of the details. I’m just lucky that things turned out okay for me. You can use this list of questions as is or you may choose to add or remove questions to suit your needs, just print this and have it handy when you call the bank to inquire. Don’t forget to take down the answers you get and always ask questions while smiling. Try to keep the conversation free flowing and the call would only take about 10 to 15 minutes.

I really believe this list of questions would be a big help especially to new real estate investors, I just wish I had a similar list when I was starting.

Do let me know if I may have left out anything by leaving a comment so I may add it here. Thanks.

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31 Questions you need to ask when inquiring about a foreclosed property is a post from: Foreclosure Investing Philippines

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