The mortgage business is a complicated and ever-changing industry. It is important that you understand how the mortgage market works and how the lenders make their profit. In doing so, you will gain an appreciation of loan programs and why certain loans are offered by certain lenders.
INSTITUTIONAL LENDERS
The first broad category of distinction is institutional versus private. Institutional lenders include commercial banks, savings and loans, credit unions, mortgage banking companies, pension funds, and insurance companies. These lenders generally make loans based on the income and credit of the borrower, and they generally follow standard lending guidelines. Private lenders are individuals or small companies that do not have insured depositors and are generally not regulated by the federal government.
PRIMARY VERSUS SECONDARY MARKET
First, these markets should not be confused with first and second mortgages. Primary mortgage lenders deal directly with the public. They “originate” loans, that is, they lend money directly to the borrower. Often referred to as the “retail” side of the business, lenders make a profit from loan processing fees, not the interest paid on the loan.
Primary mortgage lenders generally lend money to consumers, then sell the mortgage notes (in large packages, not one at a time) to investors on the secondary mortgage market to replenish their cash reserves.
The largest buyers on the secondary market are the Federal National Mortgage Association (FNMA or “Fannie Mae”), the Government National Mortgage Association (GNMA or “Ginnie Mae”) and the Federal Home Loan Mortgage Corporation (FHLMC or “Freddie Mac”). Private financial institutions such as banks, life insurance companies, private investors, and thrift associations also buy notes.
MORTGAGE BROKERS VERSUS MORTGAGE BANKERS
Many consumers assume that “mortgage companies” are banks that lend their own money. In fact, a company that you deal with may be either a mortgage banker or a mortgage broker.
A mortgage banker is a direct lender; it lends you its own money, although it often sells the loan to the secondary market. Mortgage bankers (also known as “direct lenders”) sometimes retain servicing rights as well.
A mortgage broker is a middleman; he does the loan shopping and analysis for the borrower and puts the lender and borrower together. Many of the lenders through which the broker finds loans do not deal directly with the public (hence the expression, “wholesale lender”).
CONVENTIONAL VS. NON-CONVENTIONAL
“Conventional” financing, by definition, is not insured or guaranteed by the federal government. Conventional loans are generally broken into two categories: “conforming” and “non-conforming.” A conforming loan is one that conforms or adheres to strict Fannie Mae/Freddie Mac loan underwriting guidelines.
Conforming loans are a low risk to the lender, so they offer the lowest interest rates. Conforming loans also have the strictest underwriting guidelines.
Conforming loans have three basic requirements:
1. Borrower Must Have a Minimum of Debt: Lenders look at the ratio of your monthly debt to income. Your regular monthly expenses (including mortgage payments, property taxes, insurance) should total no more than 25 to 28% of gross monthly income (called “front end ratio”). Furthermore, your monthly expenses, plus other long-term debt payments (e.g., student loan, automobile, alimony, child support) should total no more than 36% of your gross monthly income (called “back end ratio”). These ratios can sometimes be increased if the borrower has excellent credit or puts more money down.
2. Good Credit Rating: You must be current on payments. Lenders will also require a certain minimum credit score called a “FICO” (http://www.myfico.com).
3. Funds to Close: You must have the requisite down payment (generally 20% of the purchase price, although lenders often bend this rule), proof of where it came from, and a few months of cash reserves in the bank.
NON-CONFORMING LOANS
Non-conforming loans have no set guidelines and vary widely from lender to lender. In fact, lenders often change their own non-conforming guidelines from month to month.
Non-conforming loans are also known as “sub-prime” loans, because the target customer (borrower) has credit and/or income verification that is less-than-perfect. The sub-prime loans are often rated according to the creditworthiness of the borrower – “A,” “B”, “C” and “D.”
The sub-prime loan business has grown enormously over the past ten years, particularly in the refinance business and with investor loans. Every lender has its own criteria for sub-prime loans, so it is impossible to list every loan program available on the market. Suffice it to say, the guidelines for sub-prime loans are much more lax than they are for conforming loans.
Excerpt from William Bronchick's highly acclaimed book,
"Financing Secrets of a Millionaire Real Estate Investor"
William Bronchick, CEO of Legalwiz Publications, is a Nationally-known attorney, author, entrepreneur and speaker. Mr. Bronchick has been practicing law and real estate since 1990, having been involved in over 700 transactions. He has trained countless people all over the Country to become financially successful.
William Bronchick has served as President of the Colorado Association of Real Estate Investors since 1996. He is admitted to practice law before the bars of New York and Colorado.
You may contact Mr. Bronchick for consultation by phone, fax, e-mail or correspondence at:
Bronchick & Associates, P.C.
2821 S. Parker Rd. Suite 405
Aurora, Colorado 80014
Tel 303-398-7032
Fax 303-671-0516
www.legalwiz.com
http://www.totalrealestatesolutions.com/articles/disp.cfm?aid=226&typeid=1&winpop=0&nav=1
Saturday, May 19, 2007
A Single's Game of Real Estate
This discussion leans toward answering questions asked most often by our youthful men and women in there early twenties. They often begin to ask themselves the question, "Should I consider buying a home, condo/town-home or some other type of real estate that I can call my own?" Due to the fact that housing has up to this point always been provided for or lived in on a rented basis we tend to find that our newest contributing members of society find themselves at a loss for the most beneficial and advantageous way to enter this next phase of self-sufficiency.
Due to the fact that most of us grow up in either a rented apartment or our parent's single family home, it stands to reason that most people, when beginning to ask themselves the question of purchasing their own dwelling, will come to the conclusion that a condo or small house is probably the way to go. That's a result of conditioning and it's a hard mindset to break! After taking the time to talk to or personally guide a respectable number of people in their twenties, I have come to find that firm, direct and accurate information can really adjust the reality of how real estate can be acquired and used to their best advantage starting with property that sets the tone for a much more profitable and rewarding future.
Everyone understands the concept of paying rent, so to begin with a great opening question to our real estate student is, "How would you like to collect that rent as opposed to pay it!" Naturally this question gets their attention and we can begin to open the door of enlightenment. I like to use the duplex example to illustrate the two homes under one roof concept. Some people are unfamiliar with what exactly a duplex is and how it works, so I simply state that quite often you find duplexes composed of one building that has two bedrooms and one bath on each side, all under one roof, some larger, some smaller.
These are as easy to finance as a single family home and in many cases allow you to qualify for a larger loan amount which leads to using leverage and more of other people's money to get ahead faster in life. Using an example lets say you find a duplex for $150,000 (California is higher), your loans interest rate is 6% that would cost $899.33 a month to pay principle and interest back on a 30 year loan. They would have to insure it, so we use an average of $5 per $1000 of home value to average insurance costs. So $5.00 x $150.00 = $750.00 a year for insurance. We divide that by 12 months to get a figure of $62.50 a month for insurance. We also have annual taxes that are based on what the home is worth multiplied by a millage, or mill rate. Let's use a tax rate of $11.00 per $1,000 of the homes assessed value: $11.00 x 150 = $1,650.00 a year. Now divide that by 12 months to get a monthly tax of $137.50 and by adding principle, interest, taxes and insurance (P.I.T.I), we get a total monthly mortgage payment of $1099.33.
Now when you rent one side out for (in many cases, approximately $750.00 a month) you are left to pay only $349.33 out of your own pocket every month. When I get this point firmly affixed to the gray matter of their brain, it becomes clear that this amount is much lower than the amount of rent they are now paying to live under someone else's roof and rules. Now the questions start coming in the following order. Well? How do I buy something like this? The answer most often begins with, "By getting pre-qualified for a loan," and I go on to say you will need to gather and bring the following things to the bank loan officer to get started:
1. Copies of three years of tax returns for first time buyers + schedules and W2 forms
2. Copies of most recent pay stubs within the last 30 days
3. Copies of your most recent three months of bank statements
4. A list of all creditors with name, address and account numbers
With these initial documents the lender can begin to process your application for a loan. They will determine your assets and liabilities (net worth) as well as verify where you live now, your credit history and a host of other information that begins to validate your existence and ability to borrow money now and in the future.
Once they've had a chance to review and verify your information they can pre-approve you for a certain loan amount. Once your approved you can begin your search for a home of your own, typically as a first time home buyer you will find that there are programs that let you put as little as 3-5% percent down in order to buy a home that satisfies the lender's guidelines according to its value and conformity. Now on a $150,000 loan the down payment can be anywhere from $4500.00 - $7500.00.
There are ways to lower these costs and a great place to start is by attending a first time home buyer's class. These classes introduce you to the basics and give you further information on programs that are currently available that may offer you the opportunity to buy with nothing down! So with that said, the next step is to get to a free class and get familiar with the process. Often I recommend going to the class before going to see a lender so you don't appear so green and unprepared upon your initial introduction.
Since I usually find these poor souls wondering and wandering in the land of the lost, the next frown I see come over them is the realization that they just don't have the money required to start. So the question comes up as to where to get it. I usually ask about savings, whether parents or grandparents can help, if they can sell valuable possessions or take second jobs, get grants, gifts, use trust funds, personal loans or co-signers, or a combination of these alternatives with a complimentary loan program usually gets the ball rolling. Options and hard money lenders usually come later as alternative funding and acquisition sources, so I won't confuse any one with those now.
The bottom line is this: If someone wants something bad enough there is always a way! The nice thing about duplexes is that the lender will take into account the fact that 75% of the rental income from the other side of the property can be used to offset your qualifying ratios, so in this case they can use 75% of the rentals $750.00 income to reduce the amount you must earn to qualify for what appears to be an unaffordable loan. Seventy-five percent of $750.00 equals $562.50. Now subtracting that amount from the original mortgage payment of $1099.33 leaves you with a payment of $536.83 which the bank says you must be able to repay every month out of your own pocket. You can do this!
Can you begin to see how with a little information, effort and belief you can actually own something and pay less than what you are currently paying in rent?
Let's continue on with the way things begin to unfold once you begin the journey. Starting with the day you close the deal and become the new owner you will see that you now have just created a passive income stream that gives you an extra $750.00 a month without you having to punch a clock or trade a certain amount of hours to earn the money. Your new asset works for you day in and day out constantly generating income for you while you go and do other things. This is leveraging your time and money in a very beneficial way!
You also will notice that at the closing of your purchase that the old owners who sold you this property had to prorate or give you a share of the rents due and any security deposits that the tenants had given to them. Now add to that the likelihood that your first house payment won't come due until about a month and a half after you move in and you find yourself with, low and behold, extra money, probably for the first time in quite a while!
Let's calculate it using simple math. Assuming you close on the 15th of the month, you will have 45 days before your first payment comes due, you will be credited with 15 days of rent, you will receive all security deposits of the tenant and you will receive another month's rent on the first of the month from your tenant and you yourself will have no rent or house payment of your own to make for another whole month. What does all that add up to? Let's break it down:
1. Fifteen days of rent equal to $375.00
2. A half month's rent as a security deposit equal to $375.00
3. A full month's rent in another 15 days equal to $750.00
4. No payment to the bank for another 30 days and you're not paying rent to anyone any longer, so you keep whatever you normally would have had to give to someone else as rent that month (let's say that was $500.00).
5. Another payment to you for $750.00 from your tenant as well as you having to make your first mortgage payment of $1099.33 on the 1st of the month which comes 45 days later.
Side note: If you decided to rent your second bedroom to a roommate, they would pay $500.00 a month and half your utilities as well, thus your basically living and owning this property for free. Say goodbye to all those student loans as you divert all these freed up funds to pay off loans instead of a landlord!
Adding these up, we get $375.00 + $375.00 + $750.00 + $750.00 + 500.00 not paid to your old landlord. That equals $2,750.00 that you will now have as a result of your first month and a half of ownership. Now subtract your mortgage payment of $1099.33 and you are left with a reserve fund of $1,650.67 in your account. Take your parents out to a steak dinner and celebrate - you've earned it!
Let's review: You decided to buy your own home, you made the choice early to offset expenses by looking at a multiple income property, you went to the homebuyer's class, you went to see a lender and got pre-approved for a loan, you saved or arranged to have the necessary amount required to buy and you hunted, searched and analyzed more than a few properties in order to find a good one that would satisfy your criteria.
Your next phase is to begin to realize that you are now responsible for the welfare of another family or person due to your willingness to become a landlord. Your tenants pay rent and expect you to take care of their housing needs. If you chose a good property by carefully looking at plumbing, heating & A/C, electrical, foundation, structure, roof, location and price, then you should be well positioned to be able to successfully manage these duties. Often, you as the new owner will begin to make improvements to the property such as painting, installing new carpet and doing some inexpensive landscaping and repairs. These are the things that add value to your property and keep your tenants happy while at the same time not breaking the bank!
With $1,650.67 in your bank account, you're not exactly Donald Trump just yet, but you're getting there! Smart landlords establish 6 month reserve accounts and/or contingency funds, which protect them in times of vacancies or when expensive unforeseen repair bills pop up in addition to regular planned-for maintenance items. What I'm saying is don't spend your reserves frivolously. In my case, a steak dinner is a tradition but the major portion of your funds should only be used to build, protect and enhance your asset's ability to produce and sustain income generation.
By taking on responsibility in the housing market at such a young age, you will have some added benefits and opportunities coming to you. Let's look at what starts happening: the first thing is you have overcome fear and lack of understanding by acquiring your first property. In addition, you have begun to offset expenses while saving more money, you are establishing excellent credit while building assets, and you're gaining tax advantages while getting management, home buying and repair education at an early age. These are outstanding life skills that you can employ for the rest of your life and the longer the period of time that you have to use them, the further the compounding effects will help you to go.
This type of initial home-buying strategy can and does lead to further opportunities to grow and achieve further benefits besides those already mentioned. Individuals who learn to accept responsibility early will by nature grow more mature throughout the process and in effect create for themselves a higher status in the minds of others by being looked upon as a current homeowner and landlord. Once established, you will become known for what you can do. If you were single when you undertook these challenges, then you will appear and become more self-sufficient to the opposite sex.
What do I mean by that? What I'm saying is when you meet someone who may become your spouse in the future, they will recognize your ability to provide for their safety and protection and they won't question or complain about your fooling around with wild ideas of becoming educated in real estate now. They will accept that this is something you do and will respect your ability to manage this part of your life.
As time passes on and you find this love of your life and the eventual marriage proposal ensues, the time will come when you're going to want to separate business from pleasure. As a young couple the time will come when you may want to start a family or at least separate yourself from your tenants while moving up to a nicer single family home that suits your changing needs more appropriately. Perfect, because now is the time to consider renting out both sides of the duplex while you begin to investigate your new single family home.
How does this phase work? Hold on, I'm getting there! Okay, let's assume its two years later and you have been living in and improving your duplex all along. Now taking into account that you bought a decent property in a good neighborhood and inflation and appreciation has been adding value in addition to your improvements, your $150,000 duplex should command a new appraised value of $175,000. Let me explain how the value grows: 3% annual inflation multiplied by $150,000 equals $4500.00 the first year. Let's also say that appreciation due to demand also adds 5%, so 5% x $150,000 equals $7500.00. Now $150,000 + $7500 + $4500 = $162,000, which represents the new value for year one. The second year we do the same math on $162,000 and we get $12,960 for year two. Adding that to $162,000 equals $174,960. Okay, I was off by $40.00. Don't forget any improvements and that you may have bought it at a discount because the old owners where motivated and you might find its worth even more.
Now over those two years you have also been paying that old mortgage of $1099.33 each month and the principle amount that you owe on your loan has been reduced by an additional $3,965.96, leaving you with a loan balance of $146,034.04. The difference between the new appraised value of $175,000 and the current amount of $146,034.04 which you owe equals $28,965.96. This number represents the equity, or value, that you currently own in the home. Knowing this, it is entirely possible to apply for and receive a home equity line of credit up to the full value of the new appraisal! If you haven't gone overboard on buying cars, boats and running up other revolving debt while at the same time your significant other or spouse-to-be has a job and good credit with manageable debt, than the bank is going to approve this line of owner-occupied credit.
Now what you have done is set up a line of credit which can be used to buy a $145,000 single family home with a 20% down payment. This allows you to avoid paying private mortgage insurance (PMI), thereby creating a very affordable new mortgage on your new family residence.
NOTE: Do not confuse homeowner's insurance with private mortgage insurance. PMI protects the lender while homeowner's insurance protects you. When you put down 20% of value on a home's purchase in the form of a down payment, you are in effect protecting the lender from yourself because if they foreclosed on you for non-payment, they could sell the home fast for less than full value and still be paid in full.
Don't pay for private mortgage insurance if you can avoid it!
Let's not forget that as the value of your duplex has risen the rents should also be increasing along the same lines. Now instead of $750.00, you should reasonably expect to get $800.00 per month, per side, which now delivers $1600.00 a month to your bank account. Unfortunately you still have to pay for 28 more years on the original loan amount, so you will make that good old $1099.33 payment as usual. That leaves you with $500.67 left over to pay that new equity line back with. Your new $29,000 equity line which you used as a down payment on your new home costs you $336.71 @ 7% for 10 years. Now $500.36 minus $336.71 leaves you with $163.96 left over to maintain a nice little reserve account for vacancies and maintenance/repairs. This is a good example of how to transition to a secure lifestyle while using your existing asset base to buy more.
Review:
1. Break the mold and look at multiple income property to start.
2. Go to a first time home buyer class to get ready.
3. Go to a lender prepared to qualify for an affordable loan amount.
4. Focus your effort on learning how real estate works.
5. Realize the sooner you start, the better off you will be.
6. Offset expenses by renting to others.
7. Manage tenants, deposits and property responsibly.
8. Plan for the future using assets and equity lines to start.
9. Keep reading and learning how to do new things with real estate.
10. Find mentors and use knowledgeable people to help you along the way.
I hope this little plan of entering into homeownership has given you some ideas in your quest for independence. Wishing you all the best! Your investment pal, Dan
Dan Auito is a dual-licensed real estate agent and appraisal assistant. Founder of a non-profit drug prevention corporation, a real estate consulting group and is the author of “Magic Bullets Real Estate.” This 300-page power-packed book (due out in early July 2004 comes with a website that further supports its readers.
Dan may be reached at magicbullets@alaska.com or by visiting www.magicbullets.com
Call 1 907 481-6300 or write
1619 Three Sisters Way
Kodiak AK 99615
http://www.totalrealestatesolutions.com/articles/disp.cfm?aid=229&typeid=1&winpop=0&nav=1
Due to the fact that most of us grow up in either a rented apartment or our parent's single family home, it stands to reason that most people, when beginning to ask themselves the question of purchasing their own dwelling, will come to the conclusion that a condo or small house is probably the way to go. That's a result of conditioning and it's a hard mindset to break! After taking the time to talk to or personally guide a respectable number of people in their twenties, I have come to find that firm, direct and accurate information can really adjust the reality of how real estate can be acquired and used to their best advantage starting with property that sets the tone for a much more profitable and rewarding future.
Everyone understands the concept of paying rent, so to begin with a great opening question to our real estate student is, "How would you like to collect that rent as opposed to pay it!" Naturally this question gets their attention and we can begin to open the door of enlightenment. I like to use the duplex example to illustrate the two homes under one roof concept. Some people are unfamiliar with what exactly a duplex is and how it works, so I simply state that quite often you find duplexes composed of one building that has two bedrooms and one bath on each side, all under one roof, some larger, some smaller.
These are as easy to finance as a single family home and in many cases allow you to qualify for a larger loan amount which leads to using leverage and more of other people's money to get ahead faster in life. Using an example lets say you find a duplex for $150,000 (California is higher), your loans interest rate is 6% that would cost $899.33 a month to pay principle and interest back on a 30 year loan. They would have to insure it, so we use an average of $5 per $1000 of home value to average insurance costs. So $5.00 x $150.00 = $750.00 a year for insurance. We divide that by 12 months to get a figure of $62.50 a month for insurance. We also have annual taxes that are based on what the home is worth multiplied by a millage, or mill rate. Let's use a tax rate of $11.00 per $1,000 of the homes assessed value: $11.00 x 150 = $1,650.00 a year. Now divide that by 12 months to get a monthly tax of $137.50 and by adding principle, interest, taxes and insurance (P.I.T.I), we get a total monthly mortgage payment of $1099.33.
Now when you rent one side out for (in many cases, approximately $750.00 a month) you are left to pay only $349.33 out of your own pocket every month. When I get this point firmly affixed to the gray matter of their brain, it becomes clear that this amount is much lower than the amount of rent they are now paying to live under someone else's roof and rules. Now the questions start coming in the following order. Well? How do I buy something like this? The answer most often begins with, "By getting pre-qualified for a loan," and I go on to say you will need to gather and bring the following things to the bank loan officer to get started:
1. Copies of three years of tax returns for first time buyers + schedules and W2 forms
2. Copies of most recent pay stubs within the last 30 days
3. Copies of your most recent three months of bank statements
4. A list of all creditors with name, address and account numbers
With these initial documents the lender can begin to process your application for a loan. They will determine your assets and liabilities (net worth) as well as verify where you live now, your credit history and a host of other information that begins to validate your existence and ability to borrow money now and in the future.
Once they've had a chance to review and verify your information they can pre-approve you for a certain loan amount. Once your approved you can begin your search for a home of your own, typically as a first time home buyer you will find that there are programs that let you put as little as 3-5% percent down in order to buy a home that satisfies the lender's guidelines according to its value and conformity. Now on a $150,000 loan the down payment can be anywhere from $4500.00 - $7500.00.
There are ways to lower these costs and a great place to start is by attending a first time home buyer's class. These classes introduce you to the basics and give you further information on programs that are currently available that may offer you the opportunity to buy with nothing down! So with that said, the next step is to get to a free class and get familiar with the process. Often I recommend going to the class before going to see a lender so you don't appear so green and unprepared upon your initial introduction.
Since I usually find these poor souls wondering and wandering in the land of the lost, the next frown I see come over them is the realization that they just don't have the money required to start. So the question comes up as to where to get it. I usually ask about savings, whether parents or grandparents can help, if they can sell valuable possessions or take second jobs, get grants, gifts, use trust funds, personal loans or co-signers, or a combination of these alternatives with a complimentary loan program usually gets the ball rolling. Options and hard money lenders usually come later as alternative funding and acquisition sources, so I won't confuse any one with those now.
The bottom line is this: If someone wants something bad enough there is always a way! The nice thing about duplexes is that the lender will take into account the fact that 75% of the rental income from the other side of the property can be used to offset your qualifying ratios, so in this case they can use 75% of the rentals $750.00 income to reduce the amount you must earn to qualify for what appears to be an unaffordable loan. Seventy-five percent of $750.00 equals $562.50. Now subtracting that amount from the original mortgage payment of $1099.33 leaves you with a payment of $536.83 which the bank says you must be able to repay every month out of your own pocket. You can do this!
Can you begin to see how with a little information, effort and belief you can actually own something and pay less than what you are currently paying in rent?
Let's continue on with the way things begin to unfold once you begin the journey. Starting with the day you close the deal and become the new owner you will see that you now have just created a passive income stream that gives you an extra $750.00 a month without you having to punch a clock or trade a certain amount of hours to earn the money. Your new asset works for you day in and day out constantly generating income for you while you go and do other things. This is leveraging your time and money in a very beneficial way!
You also will notice that at the closing of your purchase that the old owners who sold you this property had to prorate or give you a share of the rents due and any security deposits that the tenants had given to them. Now add to that the likelihood that your first house payment won't come due until about a month and a half after you move in and you find yourself with, low and behold, extra money, probably for the first time in quite a while!
Let's calculate it using simple math. Assuming you close on the 15th of the month, you will have 45 days before your first payment comes due, you will be credited with 15 days of rent, you will receive all security deposits of the tenant and you will receive another month's rent on the first of the month from your tenant and you yourself will have no rent or house payment of your own to make for another whole month. What does all that add up to? Let's break it down:
1. Fifteen days of rent equal to $375.00
2. A half month's rent as a security deposit equal to $375.00
3. A full month's rent in another 15 days equal to $750.00
4. No payment to the bank for another 30 days and you're not paying rent to anyone any longer, so you keep whatever you normally would have had to give to someone else as rent that month (let's say that was $500.00).
5. Another payment to you for $750.00 from your tenant as well as you having to make your first mortgage payment of $1099.33 on the 1st of the month which comes 45 days later.
Side note: If you decided to rent your second bedroom to a roommate, they would pay $500.00 a month and half your utilities as well, thus your basically living and owning this property for free. Say goodbye to all those student loans as you divert all these freed up funds to pay off loans instead of a landlord!
Adding these up, we get $375.00 + $375.00 + $750.00 + $750.00 + 500.00 not paid to your old landlord. That equals $2,750.00 that you will now have as a result of your first month and a half of ownership. Now subtract your mortgage payment of $1099.33 and you are left with a reserve fund of $1,650.67 in your account. Take your parents out to a steak dinner and celebrate - you've earned it!
Let's review: You decided to buy your own home, you made the choice early to offset expenses by looking at a multiple income property, you went to the homebuyer's class, you went to see a lender and got pre-approved for a loan, you saved or arranged to have the necessary amount required to buy and you hunted, searched and analyzed more than a few properties in order to find a good one that would satisfy your criteria.
Your next phase is to begin to realize that you are now responsible for the welfare of another family or person due to your willingness to become a landlord. Your tenants pay rent and expect you to take care of their housing needs. If you chose a good property by carefully looking at plumbing, heating & A/C, electrical, foundation, structure, roof, location and price, then you should be well positioned to be able to successfully manage these duties. Often, you as the new owner will begin to make improvements to the property such as painting, installing new carpet and doing some inexpensive landscaping and repairs. These are the things that add value to your property and keep your tenants happy while at the same time not breaking the bank!
With $1,650.67 in your bank account, you're not exactly Donald Trump just yet, but you're getting there! Smart landlords establish 6 month reserve accounts and/or contingency funds, which protect them in times of vacancies or when expensive unforeseen repair bills pop up in addition to regular planned-for maintenance items. What I'm saying is don't spend your reserves frivolously. In my case, a steak dinner is a tradition but the major portion of your funds should only be used to build, protect and enhance your asset's ability to produce and sustain income generation.
By taking on responsibility in the housing market at such a young age, you will have some added benefits and opportunities coming to you. Let's look at what starts happening: the first thing is you have overcome fear and lack of understanding by acquiring your first property. In addition, you have begun to offset expenses while saving more money, you are establishing excellent credit while building assets, and you're gaining tax advantages while getting management, home buying and repair education at an early age. These are outstanding life skills that you can employ for the rest of your life and the longer the period of time that you have to use them, the further the compounding effects will help you to go.
This type of initial home-buying strategy can and does lead to further opportunities to grow and achieve further benefits besides those already mentioned. Individuals who learn to accept responsibility early will by nature grow more mature throughout the process and in effect create for themselves a higher status in the minds of others by being looked upon as a current homeowner and landlord. Once established, you will become known for what you can do. If you were single when you undertook these challenges, then you will appear and become more self-sufficient to the opposite sex.
What do I mean by that? What I'm saying is when you meet someone who may become your spouse in the future, they will recognize your ability to provide for their safety and protection and they won't question or complain about your fooling around with wild ideas of becoming educated in real estate now. They will accept that this is something you do and will respect your ability to manage this part of your life.
As time passes on and you find this love of your life and the eventual marriage proposal ensues, the time will come when you're going to want to separate business from pleasure. As a young couple the time will come when you may want to start a family or at least separate yourself from your tenants while moving up to a nicer single family home that suits your changing needs more appropriately. Perfect, because now is the time to consider renting out both sides of the duplex while you begin to investigate your new single family home.
How does this phase work? Hold on, I'm getting there! Okay, let's assume its two years later and you have been living in and improving your duplex all along. Now taking into account that you bought a decent property in a good neighborhood and inflation and appreciation has been adding value in addition to your improvements, your $150,000 duplex should command a new appraised value of $175,000. Let me explain how the value grows: 3% annual inflation multiplied by $150,000 equals $4500.00 the first year. Let's also say that appreciation due to demand also adds 5%, so 5% x $150,000 equals $7500.00. Now $150,000 + $7500 + $4500 = $162,000, which represents the new value for year one. The second year we do the same math on $162,000 and we get $12,960 for year two. Adding that to $162,000 equals $174,960. Okay, I was off by $40.00. Don't forget any improvements and that you may have bought it at a discount because the old owners where motivated and you might find its worth even more.
Now over those two years you have also been paying that old mortgage of $1099.33 each month and the principle amount that you owe on your loan has been reduced by an additional $3,965.96, leaving you with a loan balance of $146,034.04. The difference between the new appraised value of $175,000 and the current amount of $146,034.04 which you owe equals $28,965.96. This number represents the equity, or value, that you currently own in the home. Knowing this, it is entirely possible to apply for and receive a home equity line of credit up to the full value of the new appraisal! If you haven't gone overboard on buying cars, boats and running up other revolving debt while at the same time your significant other or spouse-to-be has a job and good credit with manageable debt, than the bank is going to approve this line of owner-occupied credit.
Now what you have done is set up a line of credit which can be used to buy a $145,000 single family home with a 20% down payment. This allows you to avoid paying private mortgage insurance (PMI), thereby creating a very affordable new mortgage on your new family residence.
NOTE: Do not confuse homeowner's insurance with private mortgage insurance. PMI protects the lender while homeowner's insurance protects you. When you put down 20% of value on a home's purchase in the form of a down payment, you are in effect protecting the lender from yourself because if they foreclosed on you for non-payment, they could sell the home fast for less than full value and still be paid in full.
Don't pay for private mortgage insurance if you can avoid it!
Let's not forget that as the value of your duplex has risen the rents should also be increasing along the same lines. Now instead of $750.00, you should reasonably expect to get $800.00 per month, per side, which now delivers $1600.00 a month to your bank account. Unfortunately you still have to pay for 28 more years on the original loan amount, so you will make that good old $1099.33 payment as usual. That leaves you with $500.67 left over to pay that new equity line back with. Your new $29,000 equity line which you used as a down payment on your new home costs you $336.71 @ 7% for 10 years. Now $500.36 minus $336.71 leaves you with $163.96 left over to maintain a nice little reserve account for vacancies and maintenance/repairs. This is a good example of how to transition to a secure lifestyle while using your existing asset base to buy more.
Review:
1. Break the mold and look at multiple income property to start.
2. Go to a first time home buyer class to get ready.
3. Go to a lender prepared to qualify for an affordable loan amount.
4. Focus your effort on learning how real estate works.
5. Realize the sooner you start, the better off you will be.
6. Offset expenses by renting to others.
7. Manage tenants, deposits and property responsibly.
8. Plan for the future using assets and equity lines to start.
9. Keep reading and learning how to do new things with real estate.
10. Find mentors and use knowledgeable people to help you along the way.
I hope this little plan of entering into homeownership has given you some ideas in your quest for independence. Wishing you all the best! Your investment pal, Dan
Dan Auito is a dual-licensed real estate agent and appraisal assistant. Founder of a non-profit drug prevention corporation, a real estate consulting group and is the author of “Magic Bullets Real Estate.” This 300-page power-packed book (due out in early July 2004 comes with a website that further supports its readers.
Dan may be reached at magicbullets@alaska.com or by visiting www.magicbullets.com
Call 1 907 481-6300 or write
1619 Three Sisters Way
Kodiak AK 99615
http://www.totalrealestatesolutions.com/articles/disp.cfm?aid=229&typeid=1&winpop=0&nav=1
Mortgage Broker vs. Mortgage Banker
Many consumers assume that “mortgage companies” are banks that lend their own money. In fact, a company that you deal with may be either a mortgage banker or a mortgage broker.
A mortgage banker is a direct lender; it lends you its own money, although it often sells the loan to the secondary market. Mortgage bankers (also known as “direct lenders”) sometimes retain servicing rights as well.
A mortgage broker is a middleman; he does the loan shopping and analysis for the borrower and puts the lender and borrower together. Many of the lenders through which the broker finds loans do not deal directly with the public (hence the expression, “wholesale lender”).
Using a mortgage banker can save the fees of a middleman and can make the loan process easier. A mortgage banker can give you direct loan approval, whereas a broker gives you information second-hand. However, many mortgage banks are limited in what they can offer, which is essentially their own product. In addition, if you present your loan application in a poor light, you’ve already made a bad impression. I am not suggesting you lie or mislead a lender, but understand that presenting a loan to a lender is like presenting your taxes to the IRS; there are many ways to do it, all of which are valid and legal. Using a mortgage broker allows you to present a loan application to a different lender in a different light (and you are a “fresh” face).
A mortgage broker charges a fee for his service, but has access to a wide variety of loan programs. He also may have knowledge of how to present your loan application to different lenders for approval. Some mortgage bankers also broker loans. As an investor it is wise to have both a mortgage broker and a mortgage banker on your team. SIDENOTE: MORTGAGE BROKERING. Keep in mind that mortgage brokering is an unlicensed profession in many states. If there is no licensing agency to complain to in your state, make sure you have personal references before you do business with a mortgage broker.
Choosing A Lender
Choosing a lender that you want to work with involves several factors, not the least of which is an open mind. You need a lender that can bend the rules a little when you need it and get the job done on a deadline. You need a lender that is large enough to have pull, but small enough to give you personal attention. And, most of all, you need a lender that can deliver what it promises.
1. Length of Time in Business
Since the mortgage brokering business is not highly regulated in most states, there are a lot of “fly-by-night” operations. Bad news travels faster than good news in business, so bad mortgage brokers don’t last too long. Look for a company that has been in business for a few years. Check out the company’s history with your local Better Business Bureau. If mortgage brokers are licensed with your state, check to see if any complaints or investigations were made against them. Also, ask for referrals from other investors and real estate agents.
2. Company Size
A company that is too big can be problematic because of high employee turnaround. Also, the proverbial “buck” gets passed around a lot. If you are dealing with a mortgage broker, it is often a one-person operation. Dealing with a one-man operation may be good in terms of communication if he or she is a “go-getter.” On the other hand, the individual may be hard to get a hold of, since he or she is answering the phone all day.
A small to mid-sized company is a good bet. You will be able to get the boss on the phone, but he or she will have a good support staff to handle the minor details. Also, a mid-sized company may have access to more wholesale lenders than a one-person company.
3. Experience in Investment Properties
It is important to deal with a mortgage broker or banker that has experience with investor loans. Owner-occupant loans are entirely different than investor loans. And, it is important that the broker or lender you are dealing with has a number of different programs. It is often the case that you find out a particular loan program won’t work, in which case you need to switch lenders (or loan programs) in a heartbeat to meet a funding deadline.
Excerpt from William Bronchick's highly acclaimed book,
"Financing Secrets of a Millionaire Real Estate Investor"
William Bronchick, CEO of Legalwiz Publications, is a Nationally-known attorney, author, entrepreneur and speaker. Mr. Bronchick has been practicing law and real estate since 1990, having been involved in over 700 transactions. He has trained countless people all over the Country to become financially successful.
William Bronchick has served as President of the Colorado Association of Real Estate Investors since 1996. He is admitted to practice law before the bars of New York and Colorado.
You may contact Mr. Bronchick for consultation by phone, fax, e-mail or correspondence at:
Bronchick & Associates, P.C.
2821 S. Parker Rd. Suite 405
Aurora, Colorado 80014
Tel 303-398-7032
Fax 303-671-0516
www.legalwiz.com
http://www.totalrealestatesolutions.com/articles/disp.cfm?aid=225&typeid=1&winpop=0&nav=1
A mortgage banker is a direct lender; it lends you its own money, although it often sells the loan to the secondary market. Mortgage bankers (also known as “direct lenders”) sometimes retain servicing rights as well.
A mortgage broker is a middleman; he does the loan shopping and analysis for the borrower and puts the lender and borrower together. Many of the lenders through which the broker finds loans do not deal directly with the public (hence the expression, “wholesale lender”).
Using a mortgage banker can save the fees of a middleman and can make the loan process easier. A mortgage banker can give you direct loan approval, whereas a broker gives you information second-hand. However, many mortgage banks are limited in what they can offer, which is essentially their own product. In addition, if you present your loan application in a poor light, you’ve already made a bad impression. I am not suggesting you lie or mislead a lender, but understand that presenting a loan to a lender is like presenting your taxes to the IRS; there are many ways to do it, all of which are valid and legal. Using a mortgage broker allows you to present a loan application to a different lender in a different light (and you are a “fresh” face).
A mortgage broker charges a fee for his service, but has access to a wide variety of loan programs. He also may have knowledge of how to present your loan application to different lenders for approval. Some mortgage bankers also broker loans. As an investor it is wise to have both a mortgage broker and a mortgage banker on your team. SIDENOTE: MORTGAGE BROKERING. Keep in mind that mortgage brokering is an unlicensed profession in many states. If there is no licensing agency to complain to in your state, make sure you have personal references before you do business with a mortgage broker.
Choosing A Lender
Choosing a lender that you want to work with involves several factors, not the least of which is an open mind. You need a lender that can bend the rules a little when you need it and get the job done on a deadline. You need a lender that is large enough to have pull, but small enough to give you personal attention. And, most of all, you need a lender that can deliver what it promises.
1. Length of Time in Business
Since the mortgage brokering business is not highly regulated in most states, there are a lot of “fly-by-night” operations. Bad news travels faster than good news in business, so bad mortgage brokers don’t last too long. Look for a company that has been in business for a few years. Check out the company’s history with your local Better Business Bureau. If mortgage brokers are licensed with your state, check to see if any complaints or investigations were made against them. Also, ask for referrals from other investors and real estate agents.
2. Company Size
A company that is too big can be problematic because of high employee turnaround. Also, the proverbial “buck” gets passed around a lot. If you are dealing with a mortgage broker, it is often a one-person operation. Dealing with a one-man operation may be good in terms of communication if he or she is a “go-getter.” On the other hand, the individual may be hard to get a hold of, since he or she is answering the phone all day.
A small to mid-sized company is a good bet. You will be able to get the boss on the phone, but he or she will have a good support staff to handle the minor details. Also, a mid-sized company may have access to more wholesale lenders than a one-person company.
3. Experience in Investment Properties
It is important to deal with a mortgage broker or banker that has experience with investor loans. Owner-occupant loans are entirely different than investor loans. And, it is important that the broker or lender you are dealing with has a number of different programs. It is often the case that you find out a particular loan program won’t work, in which case you need to switch lenders (or loan programs) in a heartbeat to meet a funding deadline.
Excerpt from William Bronchick's highly acclaimed book,
"Financing Secrets of a Millionaire Real Estate Investor"
William Bronchick, CEO of Legalwiz Publications, is a Nationally-known attorney, author, entrepreneur and speaker. Mr. Bronchick has been practicing law and real estate since 1990, having been involved in over 700 transactions. He has trained countless people all over the Country to become financially successful.
William Bronchick has served as President of the Colorado Association of Real Estate Investors since 1996. He is admitted to practice law before the bars of New York and Colorado.
You may contact Mr. Bronchick for consultation by phone, fax, e-mail or correspondence at:
Bronchick & Associates, P.C.
2821 S. Parker Rd. Suite 405
Aurora, Colorado 80014
Tel 303-398-7032
Fax 303-671-0516
www.legalwiz.com
http://www.totalrealestatesolutions.com/articles/disp.cfm?aid=225&typeid=1&winpop=0&nav=1
Mortgage Broker vs. Mortgage Banker
Many consumers assume that “mortgage companies” are banks that lend their own money. In fact, a company that you deal with may be either a mortgage banker or a mortgage broker.
A mortgage banker is a direct lender; it lends you its own money, although it often sells the loan to the secondary market. Mortgage bankers (also known as “direct lenders”) sometimes retain servicing rights as well.
A mortgage broker is a middleman; he does the loan shopping and analysis for the borrower and puts the lender and borrower together. Many of the lenders through which the broker finds loans do not deal directly with the public (hence the expression, “wholesale lender”).
Using a mortgage banker can save the fees of a middleman and can make the loan process easier. A mortgage banker can give you direct loan approval, whereas a broker gives you information second-hand. However, many mortgage banks are limited in what they can offer, which is essentially their own product. In addition, if you present your loan application in a poor light, you’ve already made a bad impression. I am not suggesting you lie or mislead a lender, but understand that presenting a loan to a lender is like presenting your taxes to the IRS; there are many ways to do it, all of which are valid and legal. Using a mortgage broker allows you to present a loan application to a different lender in a different light (and you are a “fresh” face).
A mortgage broker charges a fee for his service, but has access to a wide variety of loan programs. He also may have knowledge of how to present your loan application to different lenders for approval. Some mortgage bankers also broker loans. As an investor it is wise to have both a mortgage broker and a mortgage banker on your team. SIDENOTE: MORTGAGE BROKERING. Keep in mind that mortgage brokering is an unlicensed profession in many states. If there is no licensing agency to complain to in your state, make sure you have personal references before you do business with a mortgage broker.
Choosing A Lender
Choosing a lender that you want to work with involves several factors, not the least of which is an open mind. You need a lender that can bend the rules a little when you need it and get the job done on a deadline. You need a lender that is large enough to have pull, but small enough to give you personal attention. And, most of all, you need a lender that can deliver what it promises.
1. Length of Time in Business
Since the mortgage brokering business is not highly regulated in most states, there are a lot of “fly-by-night” operations. Bad news travels faster than good news in business, so bad mortgage brokers don’t last too long. Look for a company that has been in business for a few years. Check out the company’s history with your local Better Business Bureau. If mortgage brokers are licensed with your state, check to see if any complaints or investigations were made against them. Also, ask for referrals from other investors and real estate agents.
2. Company Size
A company that is too big can be problematic because of high employee turnaround. Also, the proverbial “buck” gets passed around a lot. If you are dealing with a mortgage broker, it is often a one-person operation. Dealing with a one-man operation may be good in terms of communication if he or she is a “go-getter.” On the other hand, the individual may be hard to get a hold of, since he or she is answering the phone all day.
A small to mid-sized company is a good bet. You will be able to get the boss on the phone, but he or she will have a good support staff to handle the minor details. Also, a mid-sized company may have access to more wholesale lenders than a one-person company.
3. Experience in Investment Properties
It is important to deal with a mortgage broker or banker that has experience with investor loans. Owner-occupant loans are entirely different than investor loans. And, it is important that the broker or lender you are dealing with has a number of different programs. It is often the case that you find out a particular loan program won’t work, in which case you need to switch lenders (or loan programs) in a heartbeat to meet a funding deadline.
Excerpt from William Bronchick's highly acclaimed book,
"Financing Secrets of a Millionaire Real Estate Investor"
William Bronchick, CEO of Legalwiz Publications, is a Nationally-known attorney, author, entrepreneur and speaker. Mr. Bronchick has been practicing law and real estate since 1990, having been involved in over 700 transactions. He has trained countless people all over the Country to become financially successful.
William Bronchick has served as President of the Colorado Association of Real Estate Investors since 1996. He is admitted to practice law before the bars of New York and Colorado.
You may contact Mr. Bronchick for consultation by phone, fax, e-mail or correspondence at:
Bronchick & Associates, P.C.
2821 S. Parker Rd. Suite 405
Aurora, Colorado 80014
Tel 303-398-7032
Fax 303-671-0516
www.legalwiz.com
http://www.totalrealestatesolutions.com/articles/disp.cfm?aid=225&typeid=1&winpop=0&nav=1
A mortgage banker is a direct lender; it lends you its own money, although it often sells the loan to the secondary market. Mortgage bankers (also known as “direct lenders”) sometimes retain servicing rights as well.
A mortgage broker is a middleman; he does the loan shopping and analysis for the borrower and puts the lender and borrower together. Many of the lenders through which the broker finds loans do not deal directly with the public (hence the expression, “wholesale lender”).
Using a mortgage banker can save the fees of a middleman and can make the loan process easier. A mortgage banker can give you direct loan approval, whereas a broker gives you information second-hand. However, many mortgage banks are limited in what they can offer, which is essentially their own product. In addition, if you present your loan application in a poor light, you’ve already made a bad impression. I am not suggesting you lie or mislead a lender, but understand that presenting a loan to a lender is like presenting your taxes to the IRS; there are many ways to do it, all of which are valid and legal. Using a mortgage broker allows you to present a loan application to a different lender in a different light (and you are a “fresh” face).
A mortgage broker charges a fee for his service, but has access to a wide variety of loan programs. He also may have knowledge of how to present your loan application to different lenders for approval. Some mortgage bankers also broker loans. As an investor it is wise to have both a mortgage broker and a mortgage banker on your team. SIDENOTE: MORTGAGE BROKERING. Keep in mind that mortgage brokering is an unlicensed profession in many states. If there is no licensing agency to complain to in your state, make sure you have personal references before you do business with a mortgage broker.
Choosing A Lender
Choosing a lender that you want to work with involves several factors, not the least of which is an open mind. You need a lender that can bend the rules a little when you need it and get the job done on a deadline. You need a lender that is large enough to have pull, but small enough to give you personal attention. And, most of all, you need a lender that can deliver what it promises.
1. Length of Time in Business
Since the mortgage brokering business is not highly regulated in most states, there are a lot of “fly-by-night” operations. Bad news travels faster than good news in business, so bad mortgage brokers don’t last too long. Look for a company that has been in business for a few years. Check out the company’s history with your local Better Business Bureau. If mortgage brokers are licensed with your state, check to see if any complaints or investigations were made against them. Also, ask for referrals from other investors and real estate agents.
2. Company Size
A company that is too big can be problematic because of high employee turnaround. Also, the proverbial “buck” gets passed around a lot. If you are dealing with a mortgage broker, it is often a one-person operation. Dealing with a one-man operation may be good in terms of communication if he or she is a “go-getter.” On the other hand, the individual may be hard to get a hold of, since he or she is answering the phone all day.
A small to mid-sized company is a good bet. You will be able to get the boss on the phone, but he or she will have a good support staff to handle the minor details. Also, a mid-sized company may have access to more wholesale lenders than a one-person company.
3. Experience in Investment Properties
It is important to deal with a mortgage broker or banker that has experience with investor loans. Owner-occupant loans are entirely different than investor loans. And, it is important that the broker or lender you are dealing with has a number of different programs. It is often the case that you find out a particular loan program won’t work, in which case you need to switch lenders (or loan programs) in a heartbeat to meet a funding deadline.
Excerpt from William Bronchick's highly acclaimed book,
"Financing Secrets of a Millionaire Real Estate Investor"
William Bronchick, CEO of Legalwiz Publications, is a Nationally-known attorney, author, entrepreneur and speaker. Mr. Bronchick has been practicing law and real estate since 1990, having been involved in over 700 transactions. He has trained countless people all over the Country to become financially successful.
William Bronchick has served as President of the Colorado Association of Real Estate Investors since 1996. He is admitted to practice law before the bars of New York and Colorado.
You may contact Mr. Bronchick for consultation by phone, fax, e-mail or correspondence at:
Bronchick & Associates, P.C.
2821 S. Parker Rd. Suite 405
Aurora, Colorado 80014
Tel 303-398-7032
Fax 303-671-0516
www.legalwiz.com
http://www.totalrealestatesolutions.com/articles/disp.cfm?aid=225&typeid=1&winpop=0&nav=1
The Three-to-Five-Year Holding Plan (Military Strategy)
The Three-to-Five-Year Holding Plan (Military Strategy)
by Dan Auito
With this report, I hope to spare our military members from the agonizing decision of whether to put their lives on hold for one more tour or to go ahead and take the plunge into homeownership. As a result of speaking to countless military members whom I find kicking themselves while grimacing at the realization of blown opportunities, I would like to offer those brave souls an alternative method to getting hold of the American dream. For the civilian population who will only be staying in one certain location for the short term of three to five years, then this method will work for you as well.
The issue at hand is whether buying real estate and having to sell it within three to five years would in fact be enough time to recoup and actually make a profit, while at the same time ensuring that when they did sell they would be relatively comfortable in knowing that they indeed would make a fair profit for taking the supposed risk.
For the above reasons I would like to slant this segment towards the military, as it really can help nail down some important concepts for our 3.2 million military members and their families. This strategy can certainly be used by everyone, however, our military members can really maximize this strategy as they often are moved an average of five times throughout a twenty-year career.
Let's kick off our story's scenarios, insights and strategies by saying the sooner you begin to buy real estate, the better your odds will be of accumulating more assets, equity, tax advantages and wealth. Granted most readers of this report will be civilian but don't count yourself out, as the national average says that most people tend to move every five years. Yes, that's an average, so between grandparents who have lived in the same home for fifty years and the young and mobile moving annually, we actually find that 20% of the general population will be on the move each year.
The above fact alone can be a comfort in itself as it says that a fair percentage of people will constantly be in the market to either buy or sell real estate. July 4th weekend is traditionally the hottest home sales period of the year, so with that in mind you'll want to really turn on the sales program to get those bidding wars started. The national averages tend to fluctuate, however, a fair figure to use regarding occupancy per household can be, for our purposes, 2.5 persons per household. I know you're asking how you can have half a person living in a home. Remember, it is the result of averaging, i.e. two in one, three in another, resulting in 2.5.
Using a city of 1,000,000 people divided by 2.5 people per household would equal 400,000 housing units. Dividing that by 5 gives us the 20% average of homes that will be experiencing new occupants due to people moving; 20% of 400,000 equals 80,000 units available. Now we can further adjust our estimates using census data that says 28 % of the population lives in rented housing which leaves us with the pseudo-figure of 72% or 57,600 homes that will most likely be bought and sold in that year.
Using all the weird science above we can simplify this and say that for every one hundred dwellings existing, 400,000 divided by 57,600 equals 6.94 houses per hundred that will be put on the market annually for sale. You could also divide that 57,600 into 365 days of the year and say that on average 158 homes are being bought or sold per day in that city. Remember, though, that spring and summer are the hot-selling months and the majority of homes will sell within the five best selling months: May, June, July, August and September. What does all this information tell us? I believe it justifies our reasons to buy, as you can well see that a market does exist on a continual basis and when we have a clear idea on how to operate in that environment, we can capitalize on it by having a plan!
So what's the plan? I have executed the following plan many times and have also encouraged and facilitated many more for individuals who were at first confused, hesitant, and to varying degrees, uninformed. Here is one plan that I know works, so we won't be guessing on this one! The first thing that you need to do is make up your mind that upon arrival to your new location, you will not rent or accept subsidized housing. Once you have made up your mind that buying is the way to go, then determine what type of real estate will satisfy your family's needs. The standard and most sought after housing product is the traditional 3 bedrooms, 2 baths, and 2-car garage home. If you can afford it, then you should, at the very least, consider it; the main reason being is it will sell faster when you decide that it is time to sell!
Beware! You may have competition in finding these hot properties but don't get discouraged. Keep hunting until it turns up because you will build in a measure of safety by having that same in-demand property when it comes time to sell. Another key element is to visit or contact a local lender in the community in which you will be buying, in order to get pre-qualified for a certain loan amount before you go house hunting. This is virtually a free service that lenders perform in order to determine how much house you can afford. By getting pre-qualified, the sellers will take you seriously as they know you can afford the property and are ready to move fast.
In the armed forces, the service member is often offered base housing instead of a pay increase in the form of B.A.H. (basic allowance for housing) that would otherwise be used to sustain housing off base. Pay scales are uniform throughout the services, however housing allowances vary according to local costs associated with housing. On average, an E-5 petty officer or sergeant will receive around $1,000 extra a month if they choose to buy instead of going into base housing. That $1,000 a month often qualifies people to be able to afford a house in the range of $150,000.
The same goes for civilians. Why throw that money away on rent or lost entitlements when you could be using it to create equity, tax advantages and appreciation? On top of that, service members automatically qualify for a Veterans Administration Loan (VA) guarantee, which means they can buy with virtually no money down! Civilians can get 3%-5 % down loans in many cases.
By making up your mind to buy upon arrival to a new location, you maximize the time you have to look for, buy, remodel and sell the home in the dreaded three-to-five-year time period. If you buy under market price and methodically rehabilitate the home while you live there, history tells us that an adequate profit is often the result when you sell it. Paint, carpet, tile, landscaping, fences, sheds, shelving, wallpaper, new faucets, cabinets and vanities can indeed make your home worth considerably more than you paid for it.
Don't forget that an average inflation rate of 3% compounded over three years will add $13,909.05 to your home's value alone, making it worth $163,909 if you did no improvements and just maintained it in good order. Let's also remember that you may have bought a 3 bedroom, 2 bath, 2 car garage home under market value and your mortgage has been paid down a little, while at the same time you have been methodically improving the property with the intent to sell it for top dollar at the peak of the feeding frenzy in early July. Come on gang, this ought to be illegal - with me telling you how it's done, you're going to have a huge advantage over the folks that don't have this strategy!
Remember to buy in good neighborhoods to protect your values. You also want to buy homes with sound, plumbing, electrical, heating, solid foundations, structural integrity and a solid roof in desirable locations, at below market rates. This puts you in a cosmetic "rehab", not the classic money pit. You want real estate that needs cosmetics, not expensive hidden defects that call for a repairman. Go to www.inspectamerica for free inspection sheets.
The icing on the cake is to sell the home "by owner" when it's time for you to sell.. Here are a few quick basics on how to do it successfully on your own. First, since you have all this great information that I'm giving you, you will be well positioned to do this. If you get confused, pay a trusted real estate professional for just the specific service that you need, and not on a percentage fee but using a flat fee. The industry is headed in that direction already.
Here's the brief: You bought the house as soon as you could in the best area at the best price, with minimal major repairs needed. Over a three-to-five-year period, you methodically rehabilitated it with paint, carpet/floor coverings, landscaping, fencing, vanities, faucets, etc. You know that you are doing these repairs and improvements with the intent to sell, so you have used neutral colors and earth tones that generally everyone likes. Now your home should show very well when people come to see it, so your preparation is almost done. By organizing the details of your sale up to six months in advance, you can now wait for your higher sales price. You won't be in a rush and you won't have to discount your price in order to move on to your next destination.
Here are two very simple rules in selling any home:
1. Price it right; get your own appraisal before you advertise it for sale.
2. Advertise it properly, widely and often, via newspapers, internet, bulletin boards, word of mouth, yard signs, corner signs, open houses, brochures, fact sheets, flyers, etc.
Now keep the house sparkling clean and box up all clutter and stack the boxes neatly down the center of the garage. Clear out closets, remove framed photos from the walls and get rid of old furniture in a moving sale, which you should organize a couple of months before you move. Note: Let moving sale attendees know your home will be for sale soon!
Not everyone will attempt to sell "by owner"; the percentages are small, so my fellow real estate agents really have no reason to be upset here. If you will use a real estate attorney to handle your sales contracts and related disclosure documents, you can usually have the whole thing done for about $750.00. On a sale like the one we have been talking about here, you may also offer the same deal to a real estate agent to see if they would be willing to match the attorney's price. By using an attorney, a title company, staying in contact with lenders, and getting your own home inspection and appraisal beforehand, you will find that your sale will go smoother than you might have thought possible. A $10,000 dollar commission can be saved if you're willing to do the work by preparing in these proficient ways.
At this point you need to have a little faith; you're smarter than the majority of homeowners. After all, you have had a plan since you bought the home. Believe me when I say that you will do an excellent job in selling this home and when you do, you will pay no capital gains on your profit unless you have already exceeded your individual lifetime capital gains deduction of $250,000, or $500,000 for married couples.
I must confess I feel as though I've been conservative on the profit potential, as I have consistently averaged an approximate $30,000 profit on most deals. If you repeat this process over twenty years and you move five times, $30,000 multiplied by five moves equals $150,000. When you sell that last house you can take the money with you and retire back home, and buy a $150,000 retirement home free and clear, thereby in the end, having Uncle Sam buy you a house instead of renting one for you! One final note: Due to a moderate 3% inflation rate compounding over those 20 years the same $150,000 dollar home today will cost $278,807.35 20 yrs from now, that's another reason to start buying today, as real estate is considered an inflation hedge
For the people who chose to rent or live in base housing for those twenty years, it is an unfortunate loss of opportunity, as they don't get the equivalent of a free house. You will if you begin to take steps now towards buying your home's using better methods, plans and strategies to achieve your long-term goals. DON'T WAIT!
The concept works if you work it!
Dan Auito is a dual-licensed real estate agent and appraisal assistant. Founder of a non-profit drug prevention corporation, a real estate consulting group and is the author of “Magic Bullets Real Estate.” This 300-page power-packed book (due out in early July 2004 comes with a website that further supports its readers.
http://www.totalrealestatesolutions.com/articles/disp.cfm?aid=230&typeid=1&winpop=0&nav=1
by Dan Auito
With this report, I hope to spare our military members from the agonizing decision of whether to put their lives on hold for one more tour or to go ahead and take the plunge into homeownership. As a result of speaking to countless military members whom I find kicking themselves while grimacing at the realization of blown opportunities, I would like to offer those brave souls an alternative method to getting hold of the American dream. For the civilian population who will only be staying in one certain location for the short term of three to five years, then this method will work for you as well.
The issue at hand is whether buying real estate and having to sell it within three to five years would in fact be enough time to recoup and actually make a profit, while at the same time ensuring that when they did sell they would be relatively comfortable in knowing that they indeed would make a fair profit for taking the supposed risk.
For the above reasons I would like to slant this segment towards the military, as it really can help nail down some important concepts for our 3.2 million military members and their families. This strategy can certainly be used by everyone, however, our military members can really maximize this strategy as they often are moved an average of five times throughout a twenty-year career.
Let's kick off our story's scenarios, insights and strategies by saying the sooner you begin to buy real estate, the better your odds will be of accumulating more assets, equity, tax advantages and wealth. Granted most readers of this report will be civilian but don't count yourself out, as the national average says that most people tend to move every five years. Yes, that's an average, so between grandparents who have lived in the same home for fifty years and the young and mobile moving annually, we actually find that 20% of the general population will be on the move each year.
The above fact alone can be a comfort in itself as it says that a fair percentage of people will constantly be in the market to either buy or sell real estate. July 4th weekend is traditionally the hottest home sales period of the year, so with that in mind you'll want to really turn on the sales program to get those bidding wars started. The national averages tend to fluctuate, however, a fair figure to use regarding occupancy per household can be, for our purposes, 2.5 persons per household. I know you're asking how you can have half a person living in a home. Remember, it is the result of averaging, i.e. two in one, three in another, resulting in 2.5.
Using a city of 1,000,000 people divided by 2.5 people per household would equal 400,000 housing units. Dividing that by 5 gives us the 20% average of homes that will be experiencing new occupants due to people moving; 20% of 400,000 equals 80,000 units available. Now we can further adjust our estimates using census data that says 28 % of the population lives in rented housing which leaves us with the pseudo-figure of 72% or 57,600 homes that will most likely be bought and sold in that year.
Using all the weird science above we can simplify this and say that for every one hundred dwellings existing, 400,000 divided by 57,600 equals 6.94 houses per hundred that will be put on the market annually for sale. You could also divide that 57,600 into 365 days of the year and say that on average 158 homes are being bought or sold per day in that city. Remember, though, that spring and summer are the hot-selling months and the majority of homes will sell within the five best selling months: May, June, July, August and September. What does all this information tell us? I believe it justifies our reasons to buy, as you can well see that a market does exist on a continual basis and when we have a clear idea on how to operate in that environment, we can capitalize on it by having a plan!
So what's the plan? I have executed the following plan many times and have also encouraged and facilitated many more for individuals who were at first confused, hesitant, and to varying degrees, uninformed. Here is one plan that I know works, so we won't be guessing on this one! The first thing that you need to do is make up your mind that upon arrival to your new location, you will not rent or accept subsidized housing. Once you have made up your mind that buying is the way to go, then determine what type of real estate will satisfy your family's needs. The standard and most sought after housing product is the traditional 3 bedrooms, 2 baths, and 2-car garage home. If you can afford it, then you should, at the very least, consider it; the main reason being is it will sell faster when you decide that it is time to sell!
Beware! You may have competition in finding these hot properties but don't get discouraged. Keep hunting until it turns up because you will build in a measure of safety by having that same in-demand property when it comes time to sell. Another key element is to visit or contact a local lender in the community in which you will be buying, in order to get pre-qualified for a certain loan amount before you go house hunting. This is virtually a free service that lenders perform in order to determine how much house you can afford. By getting pre-qualified, the sellers will take you seriously as they know you can afford the property and are ready to move fast.
In the armed forces, the service member is often offered base housing instead of a pay increase in the form of B.A.H. (basic allowance for housing) that would otherwise be used to sustain housing off base. Pay scales are uniform throughout the services, however housing allowances vary according to local costs associated with housing. On average, an E-5 petty officer or sergeant will receive around $1,000 extra a month if they choose to buy instead of going into base housing. That $1,000 a month often qualifies people to be able to afford a house in the range of $150,000.
The same goes for civilians. Why throw that money away on rent or lost entitlements when you could be using it to create equity, tax advantages and appreciation? On top of that, service members automatically qualify for a Veterans Administration Loan (VA) guarantee, which means they can buy with virtually no money down! Civilians can get 3%-5 % down loans in many cases.
By making up your mind to buy upon arrival to a new location, you maximize the time you have to look for, buy, remodel and sell the home in the dreaded three-to-five-year time period. If you buy under market price and methodically rehabilitate the home while you live there, history tells us that an adequate profit is often the result when you sell it. Paint, carpet, tile, landscaping, fences, sheds, shelving, wallpaper, new faucets, cabinets and vanities can indeed make your home worth considerably more than you paid for it.
Don't forget that an average inflation rate of 3% compounded over three years will add $13,909.05 to your home's value alone, making it worth $163,909 if you did no improvements and just maintained it in good order. Let's also remember that you may have bought a 3 bedroom, 2 bath, 2 car garage home under market value and your mortgage has been paid down a little, while at the same time you have been methodically improving the property with the intent to sell it for top dollar at the peak of the feeding frenzy in early July. Come on gang, this ought to be illegal - with me telling you how it's done, you're going to have a huge advantage over the folks that don't have this strategy!
Remember to buy in good neighborhoods to protect your values. You also want to buy homes with sound, plumbing, electrical, heating, solid foundations, structural integrity and a solid roof in desirable locations, at below market rates. This puts you in a cosmetic "rehab", not the classic money pit. You want real estate that needs cosmetics, not expensive hidden defects that call for a repairman. Go to www.inspectamerica for free inspection sheets.
The icing on the cake is to sell the home "by owner" when it's time for you to sell.. Here are a few quick basics on how to do it successfully on your own. First, since you have all this great information that I'm giving you, you will be well positioned to do this. If you get confused, pay a trusted real estate professional for just the specific service that you need, and not on a percentage fee but using a flat fee. The industry is headed in that direction already.
Here's the brief: You bought the house as soon as you could in the best area at the best price, with minimal major repairs needed. Over a three-to-five-year period, you methodically rehabilitated it with paint, carpet/floor coverings, landscaping, fencing, vanities, faucets, etc. You know that you are doing these repairs and improvements with the intent to sell, so you have used neutral colors and earth tones that generally everyone likes. Now your home should show very well when people come to see it, so your preparation is almost done. By organizing the details of your sale up to six months in advance, you can now wait for your higher sales price. You won't be in a rush and you won't have to discount your price in order to move on to your next destination.
Here are two very simple rules in selling any home:
1. Price it right; get your own appraisal before you advertise it for sale.
2. Advertise it properly, widely and often, via newspapers, internet, bulletin boards, word of mouth, yard signs, corner signs, open houses, brochures, fact sheets, flyers, etc.
Now keep the house sparkling clean and box up all clutter and stack the boxes neatly down the center of the garage. Clear out closets, remove framed photos from the walls and get rid of old furniture in a moving sale, which you should organize a couple of months before you move. Note: Let moving sale attendees know your home will be for sale soon!
Not everyone will attempt to sell "by owner"; the percentages are small, so my fellow real estate agents really have no reason to be upset here. If you will use a real estate attorney to handle your sales contracts and related disclosure documents, you can usually have the whole thing done for about $750.00. On a sale like the one we have been talking about here, you may also offer the same deal to a real estate agent to see if they would be willing to match the attorney's price. By using an attorney, a title company, staying in contact with lenders, and getting your own home inspection and appraisal beforehand, you will find that your sale will go smoother than you might have thought possible. A $10,000 dollar commission can be saved if you're willing to do the work by preparing in these proficient ways.
At this point you need to have a little faith; you're smarter than the majority of homeowners. After all, you have had a plan since you bought the home. Believe me when I say that you will do an excellent job in selling this home and when you do, you will pay no capital gains on your profit unless you have already exceeded your individual lifetime capital gains deduction of $250,000, or $500,000 for married couples.
I must confess I feel as though I've been conservative on the profit potential, as I have consistently averaged an approximate $30,000 profit on most deals. If you repeat this process over twenty years and you move five times, $30,000 multiplied by five moves equals $150,000. When you sell that last house you can take the money with you and retire back home, and buy a $150,000 retirement home free and clear, thereby in the end, having Uncle Sam buy you a house instead of renting one for you! One final note: Due to a moderate 3% inflation rate compounding over those 20 years the same $150,000 dollar home today will cost $278,807.35 20 yrs from now, that's another reason to start buying today, as real estate is considered an inflation hedge
For the people who chose to rent or live in base housing for those twenty years, it is an unfortunate loss of opportunity, as they don't get the equivalent of a free house. You will if you begin to take steps now towards buying your home's using better methods, plans and strategies to achieve your long-term goals. DON'T WAIT!
The concept works if you work it!
Dan Auito is a dual-licensed real estate agent and appraisal assistant. Founder of a non-profit drug prevention corporation, a real estate consulting group and is the author of “Magic Bullets Real Estate.” This 300-page power-packed book (due out in early July 2004 comes with a website that further supports its readers.
http://www.totalrealestatesolutions.com/articles/disp.cfm?aid=230&typeid=1&winpop=0&nav=1
"Big Brother" is Watching YOU! New (BAD) Legislation Coming Your Way
"Big Brother" is Watching YOU! New (BAD) Legislation Coming Your Way
by William Bronchick
Well, it seems that with everything you do right, there's always someone else doing it wrong, do it badly, or doing it illegally. Enter Big Brother... the "well-intentioned" leglislator who wants to get re-elected by passing a law that protects the innocent from bad people or from their own stupidity.
What am I talking about? Several states have passed or are about to pass a rash of laws that will make being a real estate investor a very difficult vocation. While I do understand the need for SOME guidelines and disclosures from the government to make sure that people are making informed choices and are protected from bad people, these laws are THROWING OUT THE BABY WITH THE BATH WATER and will likely cause financial harm to the real estate markets in those states.
The following is a review of some recent laws and bills that are pending.
IT IS IMPORTANT THAT YOU READ THIS EVEN IF YOU ARE NOT IN THESE STATES. When it comes to laws like these, it's "monkey see, money do", resulting in the domino effect. Your state can be next, so pay attention. Visit you state's website and review pending bills. Form a local political action committee. Be involved in the political process. If you are in one of these states, call, fax and email your representatives. Email all your friends and business associates. Picket in from of the state buildings. Contact your local news people. If you sit silent, you have no right to complain!
"We Deserve the Government We Elect"
Texas - Senate Bill 629
This bill is an amendment to an earlier law passed in 2001 that regulated installment land contracts. The current law calls these "executory contracts" and requires certain disclosures, most of which are not big deal. However, the penalties for non-compliance are SUBSTANTIAL and bear no relationship to the supposed harm the consumers would bear if the disclosures are not followed. It's basically a windfall for buyers who find a good lawyer to hammer a technicality that most investors are not aware of.
SB 629 take it up a notch classifying lease/options as "executory contracts", the same as land contracts. This is DEADLY for investors who want to keep the tax benefits ownership when selling on lease/option and taking advantage of capital gains rates. If Texas calls a lease/option an executory contract, it makes it a SALE, thus having a negative tax impact on the seller who may want to defer his gains through a 1031 exchange when the tenant exercises his option to purchase.
And, we're just getting started...
The bill further disallows an investor from selling a property by lease/option OR land contract if the seller has an underlying loan on the property. Since few, if any, investors have free and clear properties, this would effective ELIMINATE the process of buying a property, financing it, then reselling on a lease/option or land contract.
This is BAD because it hurts not just investors but ANYONE who has a house that they want to move. Builders often sell properties on a "rent-to-own" basis, and now will be prohibited from doing so if there is underlying financing on the property. What if you do a fix-and-flip, but are unable to resell the property for cash? Maybe the lease/option would be the solution so you can cover your mortgage payments while still getting a sale? It won't be possible in Texas if this bill passes.
And, it gets WORSE!
SB 629 states that you cannot sell a property under an executory contract unless you have title to the property. That means you cannot do a sandwich lease/option in Texas - PERIOD.
The bill also has a bunch of disclosures and regulations on lease/options, none of which are objectionable.
Read the bill here: Senate Bill 629
Then contact your representatives and MAKE SOME NOISE
http://www.senate.state.tx.us/75r/Senate/Members.htm
http://www.house.state.tx.us
NORTH CAROLINA - HOUSE BILL 725
House Bill 725 is a push from the North Carolina Attorney General's office, which has been on the rampage against investors for some time. The AG's office claims to have "hundreds of complaints" from people who were hurt by investors who bought properties "subject to" existing mortgage loans, then defaulted. I find it very hard to believe that more than a few complaints were ever filed. From the way the bill is written it's clear they just don't understand how these transactions work.
This bill is targeted against the investor who buys a property subject to an existing loan, the resells the property by lease/option or land contract to a consumer. The bill requires a number of disclosures to all parties involved, some of which are fine and some of which are absurd and irrelevant.
The proposed bill requires the seller to get express written permission from his lender before transferring a property subject to an existing deed of trust, which will never likely happen. And, even if it were possible, the time frame it takes for a seller to get his lender's permission while he is in foreclosure is wholly impractical. This will hurt the seller who is in foreclosure and seeking to simply "dump" his property for whatever he can get. If the investor can cure the seller's back payments and/or negotiate a short sale with the lender, everyone walks away happy. If a seller has no options, he is going to walk away from the property and the bank will have another REO. Everyone loses.
Now, admittedly, some dumb or unscrupulous investors have taken deeds from sellers, promised to pay, then defaulted, leaving the seller with the short end of the stick. The right thing to do is require disclosures so that the seller enters into the deal KNOWING THE RISK. Adjustable rate mortgages are very dangerous, too, which is why RESPA requires disclosures. The government didn't go off the deed end and outlaw ARM loans.
Curiously, the bill exempts real estate agents from the law, which means a licensed agent could theoretically buy a property subject to an existing deed of trust without lender permission and without the same disclosures as a non-licensed investor would be required to give. The suspicious side of me thinks that the real estate agents are also behind this bill, trying to corner the market on investing or requiring an agent's assistance on these deals so they can profit.
And, the most laughable porition of the bill addressed people like me, requiring all educational seminars to include a copy of the new law in our materials. I suppose the drafters of this bill failed to examine the first amendment, which prohibits the government from restricting the content of free speech.
I don't regularly give seminars in North Carolina, but I might consider it just so I can dare them to enforce it on me.
Read the bill here: House Bill 725
Then contact your representatives and MAKE SOME NOISE:
North Carolina House of Representatives
MARYLAND - HOUSE BILL 1288
House Bill 1288 which has passed the House and Senate, is now on its way to the governer's office for signature. This law is aimed at foreclosure investors and prohibits a whole littany of activities when dealing with a seller in foreclosure.
The 22 pages of requirements are very technical, so you should review it in detail with a local attorney. The basic idea of the law is to give the seller in foreclosure a 10 day right of recission when selling a property to an investor. In my experience, this does little more than give a seller a right to "shop" his agreement with you among various investors to see who offers the highest bid. It also restricts a "foreclosure conveyance" (an agreement to resell the property back to the owner) by limiting the amount of profit you can make if you resell the property. And, there's a dozen other various disclosures, requlations and rules that basically make the good old days of "getting the deed" impossible in Maryland.
If you are in Maryland, do not even THINK about buying a property from a seller in foreclosure without attorney representation in the transaction.
House Bill 1288 - Full Text in PDF Format
CONCLUSION
I have mixed feelings about these bills... on the one hand, they are rash responses the side effects of a strong real estate market, discouraging investors from getting involved in deals and resulting in more properties going to the bank.
On the other hand, some of these bills provide "safe harbors" for investors that follow the letter of the law. Since there are really few laws that relate to "creative" real estate investing, providing detailed rules make litigation by a disgruntled seller or tenant/buyer more difficult. It's hard to say, "you didn't disclose X, Y & Z" when in fact the law only requires "A, B & C". If investors in these states MAKE SOME NOISE by contacting their state representatives right away, a modified version of these bills may get passed, making everyone happy. And, if something comes up in your own state, get involved in the process before a bad piece of legislation puts you out of businesss.
TELESEMINAR ON THIS TOPIC
*CLICK HERE*
William Bronchick, CEO of Legalwiz Publications, is a Nationally-known attorney, author, entrepreneur and speaker. Mr. Bronchick has been practicing law and real estate since 1990, having been involved in over 700 transactions. He has trained countless people all over the Country to become financially successful.
William Bronchick has served as President of the Colorado Association of Real Estate Investors since 1996. He is admitted to practice law before the bars of New York and Colorado.
You may contact Mr. Bronchick for consultation by phone, fax, e-mail or correspondence at:
http://www.totalrealestatesolutions.com/articles/disp.cfm?aid=254&typeid=1&winpop=0&nav=1
by William Bronchick
Well, it seems that with everything you do right, there's always someone else doing it wrong, do it badly, or doing it illegally. Enter Big Brother... the "well-intentioned" leglislator who wants to get re-elected by passing a law that protects the innocent from bad people or from their own stupidity.
What am I talking about? Several states have passed or are about to pass a rash of laws that will make being a real estate investor a very difficult vocation. While I do understand the need for SOME guidelines and disclosures from the government to make sure that people are making informed choices and are protected from bad people, these laws are THROWING OUT THE BABY WITH THE BATH WATER and will likely cause financial harm to the real estate markets in those states.
The following is a review of some recent laws and bills that are pending.
IT IS IMPORTANT THAT YOU READ THIS EVEN IF YOU ARE NOT IN THESE STATES. When it comes to laws like these, it's "monkey see, money do", resulting in the domino effect. Your state can be next, so pay attention. Visit you state's website and review pending bills. Form a local political action committee. Be involved in the political process. If you are in one of these states, call, fax and email your representatives. Email all your friends and business associates. Picket in from of the state buildings. Contact your local news people. If you sit silent, you have no right to complain!
"We Deserve the Government We Elect"
Texas - Senate Bill 629
This bill is an amendment to an earlier law passed in 2001 that regulated installment land contracts. The current law calls these "executory contracts" and requires certain disclosures, most of which are not big deal. However, the penalties for non-compliance are SUBSTANTIAL and bear no relationship to the supposed harm the consumers would bear if the disclosures are not followed. It's basically a windfall for buyers who find a good lawyer to hammer a technicality that most investors are not aware of.
SB 629 take it up a notch classifying lease/options as "executory contracts", the same as land contracts. This is DEADLY for investors who want to keep the tax benefits ownership when selling on lease/option and taking advantage of capital gains rates. If Texas calls a lease/option an executory contract, it makes it a SALE, thus having a negative tax impact on the seller who may want to defer his gains through a 1031 exchange when the tenant exercises his option to purchase.
And, we're just getting started...
The bill further disallows an investor from selling a property by lease/option OR land contract if the seller has an underlying loan on the property. Since few, if any, investors have free and clear properties, this would effective ELIMINATE the process of buying a property, financing it, then reselling on a lease/option or land contract.
This is BAD because it hurts not just investors but ANYONE who has a house that they want to move. Builders often sell properties on a "rent-to-own" basis, and now will be prohibited from doing so if there is underlying financing on the property. What if you do a fix-and-flip, but are unable to resell the property for cash? Maybe the lease/option would be the solution so you can cover your mortgage payments while still getting a sale? It won't be possible in Texas if this bill passes.
And, it gets WORSE!
SB 629 states that you cannot sell a property under an executory contract unless you have title to the property. That means you cannot do a sandwich lease/option in Texas - PERIOD.
The bill also has a bunch of disclosures and regulations on lease/options, none of which are objectionable.
Read the bill here: Senate Bill 629
Then contact your representatives and MAKE SOME NOISE
http://www.senate.state.tx.us/75r/Senate/Members.htm
http://www.house.state.tx.us
NORTH CAROLINA - HOUSE BILL 725
House Bill 725 is a push from the North Carolina Attorney General's office, which has been on the rampage against investors for some time. The AG's office claims to have "hundreds of complaints" from people who were hurt by investors who bought properties "subject to" existing mortgage loans, then defaulted. I find it very hard to believe that more than a few complaints were ever filed. From the way the bill is written it's clear they just don't understand how these transactions work.
This bill is targeted against the investor who buys a property subject to an existing loan, the resells the property by lease/option or land contract to a consumer. The bill requires a number of disclosures to all parties involved, some of which are fine and some of which are absurd and irrelevant.
The proposed bill requires the seller to get express written permission from his lender before transferring a property subject to an existing deed of trust, which will never likely happen. And, even if it were possible, the time frame it takes for a seller to get his lender's permission while he is in foreclosure is wholly impractical. This will hurt the seller who is in foreclosure and seeking to simply "dump" his property for whatever he can get. If the investor can cure the seller's back payments and/or negotiate a short sale with the lender, everyone walks away happy. If a seller has no options, he is going to walk away from the property and the bank will have another REO. Everyone loses.
Now, admittedly, some dumb or unscrupulous investors have taken deeds from sellers, promised to pay, then defaulted, leaving the seller with the short end of the stick. The right thing to do is require disclosures so that the seller enters into the deal KNOWING THE RISK. Adjustable rate mortgages are very dangerous, too, which is why RESPA requires disclosures. The government didn't go off the deed end and outlaw ARM loans.
Curiously, the bill exempts real estate agents from the law, which means a licensed agent could theoretically buy a property subject to an existing deed of trust without lender permission and without the same disclosures as a non-licensed investor would be required to give. The suspicious side of me thinks that the real estate agents are also behind this bill, trying to corner the market on investing or requiring an agent's assistance on these deals so they can profit.
And, the most laughable porition of the bill addressed people like me, requiring all educational seminars to include a copy of the new law in our materials. I suppose the drafters of this bill failed to examine the first amendment, which prohibits the government from restricting the content of free speech.
I don't regularly give seminars in North Carolina, but I might consider it just so I can dare them to enforce it on me.
Read the bill here: House Bill 725
Then contact your representatives and MAKE SOME NOISE:
North Carolina House of Representatives
MARYLAND - HOUSE BILL 1288
House Bill 1288 which has passed the House and Senate, is now on its way to the governer's office for signature. This law is aimed at foreclosure investors and prohibits a whole littany of activities when dealing with a seller in foreclosure.
The 22 pages of requirements are very technical, so you should review it in detail with a local attorney. The basic idea of the law is to give the seller in foreclosure a 10 day right of recission when selling a property to an investor. In my experience, this does little more than give a seller a right to "shop" his agreement with you among various investors to see who offers the highest bid. It also restricts a "foreclosure conveyance" (an agreement to resell the property back to the owner) by limiting the amount of profit you can make if you resell the property. And, there's a dozen other various disclosures, requlations and rules that basically make the good old days of "getting the deed" impossible in Maryland.
If you are in Maryland, do not even THINK about buying a property from a seller in foreclosure without attorney representation in the transaction.
House Bill 1288 - Full Text in PDF Format
CONCLUSION
I have mixed feelings about these bills... on the one hand, they are rash responses the side effects of a strong real estate market, discouraging investors from getting involved in deals and resulting in more properties going to the bank.
On the other hand, some of these bills provide "safe harbors" for investors that follow the letter of the law. Since there are really few laws that relate to "creative" real estate investing, providing detailed rules make litigation by a disgruntled seller or tenant/buyer more difficult. It's hard to say, "you didn't disclose X, Y & Z" when in fact the law only requires "A, B & C". If investors in these states MAKE SOME NOISE by contacting their state representatives right away, a modified version of these bills may get passed, making everyone happy. And, if something comes up in your own state, get involved in the process before a bad piece of legislation puts you out of businesss.
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William Bronchick, CEO of Legalwiz Publications, is a Nationally-known attorney, author, entrepreneur and speaker. Mr. Bronchick has been practicing law and real estate since 1990, having been involved in over 700 transactions. He has trained countless people all over the Country to become financially successful.
William Bronchick has served as President of the Colorado Association of Real Estate Investors since 1996. He is admitted to practice law before the bars of New York and Colorado.
You may contact Mr. Bronchick for consultation by phone, fax, e-mail or correspondence at:
http://www.totalrealestatesolutions.com/articles/disp.cfm?aid=254&typeid=1&winpop=0&nav=1
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