Avoiding The Domino Effect

August 25, 2011 By Leave a Comment

Why buying investment property is much easier than home buying

The domino effect is probably the greatest reason buying investment property is much easier than purchasing a home.  You simply don’t have to worry about timing your purchase or sale with another purchase.   Another key stress reducer is the absence of emotionalism in the buying process. This simple fact is borne out in the reduction of several other stressors normally experienced when home buying.

For one, no investment property purchase should be a “life or death” decision. You just don’t invest yourself with the same sort of emotion as you would where you will be purchasing your own home. So when issues of time delays or title issues come up, you can look dispassionately at whether to continue going through with the deal or not.

Natural stressors reduced – no domino effect

When it comes time to sell your investment property, you don’t have to worry about coordinating a home purchase with it, which is usually fraught with anxiety-producing considerations. Issues such as waiting for your buyer to get their loan commitment while also trying to obtain your own loan commitment on the buy side are avoided when you’re involved in only one side of an investment property sale.

It’s also easier to disengage early on in the process, if, for example, the buyer in your investment house sale asks for more time to seek a loan commitment (especially after possibly being turned down by a lender initially). You’ll find it’s a quicker break to nix the first buyer and go with another potential buyer, rather than wasting your time and waiting for the first buyer to obtain a different lender’s commitment.

Build delays into your budget

Another less painful aspect of property investing relative to home buying, is that when delays in the buying or selling process arise (and they usually do), you can plan ahead of time for them, and build in any additional time costs into your overall budget. For example, if you’re on the purchasing side and you find out just before setting a closing date that there are Certificate of Occupancy issues the seller did not know about, and must rectify in order to close, you’ll be better able to take the delay in stride if you’ve planned on an extra few weeks or month in which to close on the property. But in home buying, you may not have that luxury. Especially if you are trying to coordinate the sale of your property concurrently. Basically, this “domino effect” is greatly lessened in ay investment property scenario.

Avoid conditionally pre-approved buyers

So in the current tight credit real estate market, as a seller of investment property, it’s best to find a buyer with a strong lender pre-approval already obtained. Just be sure they are not relying on the sale of their property to make your deal work. This is known as a conditional sale, and will produce many of the same potential headaches as if you yourself were buying a home yourself, Be sure not to get caught in the middle of this crippling domino effect.

 

photos courtesy of  wallpapers-diq.com, thebiblicalworld.blogspot.com, homedit.com, corazondelbosque.us

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The Purpose of Title Insurance on Investment Property

May 30, 2011 By Leave a Comment

The Big Protector:  Simply put, title insurance helps protect the lender and the property investor in any property transfer.

It ensures that the investor will own the property with no past claims (encumbrances) already on it, or at least none that the buyer doesn’t know about and has agreed to allow upon the purchase of the house.

Title insurance is obtained through title companies. First-time investors, not used to the closing process, are usually baffled by the “stranger” at the closing table: the title company representative.

To explain title insurance better, let’s take a step-by-step look at how a title company operates – and what their involvement is in the closing process.

The process begins

The whole process starts when the attorney for the purchasing investor places an order for title insurance for his client. This order generally takes place after the investor receives a written mortgage commitment from a lender, or in the case of an all cash deal, upon execution by the parties of a contract of sale.

More costs?

The investor’s attorney wants to protect his client from incurring any costs or fees for title work until there is a reasonable certainty that the deal will take place.

At the time of ordering, the title company is provided with a great deal of information: the names of the buyer and seller, the identity and requirements of the lender, and the names of the attorneys representing the various parties to the transaction, along with the legal description of the subject property. The title company then prepares a confirmation of the order, and sends it to the parties involved in the sale for verification purposes.

In the event there are no changes needed, the title company orders the search of the records in the county clerk’s office where the property is located.

This search is essentially a review of the deeds, mortgages, liens, legal proceedings, easements, restrictions and other encumbrances on record that may affect the title to the subject property. Basically, if there’s been an ownership problem in the past, this search will pick it up.

What a search covers

These searches often cover all activity involving the property for about 50 to 60 years or more. Title searches also include records filed with the municipality where the property is located. This is done to check any outstanding tax bills, water and/or sewer charges, special assessments, tax liens and other items which may affect the title. Records filed with the building, fire, highway and other municipal departments may be searched for records of violations, building permits and the like.

Results

The results of these searches are then reviewed by the title company. A report is prepared and sent to all attorneys involved in the sale. This report will show the identity of the owners of record of the property, the source of the title, and a listing of mortgages, liens, easements, restrictions and encumbrances that may affect the title to the property.

The report will also contain any additional information and/or requirements that will need to be obtained and addressed prior to the closing. So, for example, if the title report comes back showing there is an outstanding (open) building permit on the property, the seller will need to complete the work required to obtain that permit and receive their Certificate of Occupancy, prior to the closing.

Obtaining clear title

Attorneys will also want to ascertain that the seller can provide “clear” title, to the extent agreed to in the contract of sale.  The attorney for the seller will want to know what steps have to be taken to provide such title by the closing date.  The attorney for the lender will want to be certain that the lender receives the title that is required by the mortgage commitment, as well as by the requirements of the secondary lender’s market.  This stage can be marked by a great deal of discussion and negotiation by all concerned.

After the attorneys agree on which documents are to be obtained and delivered to whom, a closing date is usually set.  At the closing, the required documents are delivered, the buyer becomes the new owner, the lender becomes the mortgage holder, and everyone goes home – safe and secure in their investments.

Transferring ownership

The title policy provides that the buyer is given an insurance policy that insures that title ownership has been successfully transferred, subject only to the conditions set forth in the policy.  These can include items such as easements, driveway maintenance agreements and the like.

The lender is given insurance that the mortgage it holds on the property is a valid, enforceable lien against the premises, again, subject to the various items found by the title company (and not disposed of prior to the closing).

Taking the deed

The title company representative leaves the closing table with the deed and mortgage (for filing with the appropriate county clerk’s office).  This representative will also leave with checks to pay any “open” items, such as back taxes for example.  In addition, they will bring to the clerk’s office whatever evidence had been required earlier (to clear some of the title defects uncovered in the search and review phase of the deal).

One time premium

For the title company work and insurance policy, there is usually a one-time premium paid to the title company at the closing by the borrower, as well as certain search fees for various municipal searches which were requested or required by the various attorneys.

Finally, the closing documents, after filing and recording, are then sent to the respective attorneys for all the parties to the sale.

Complex, yet essential

Though title insurance is yet another closing cost for the property investor, it’s a cost that is absolutely essential in protecting your investment.

photos courtesy of  toonpool.com, massrealestatelawblog.com, salelahome.com, rmbescrow.com, ocasturkiye.com

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When To Obtain A Building Permit

May 30, 2011 By Leave a Comment

The Importance of the Building Permit

Almost any renovation, whether interior or exterior, will usually require a building permit in your municipality. Two major exceptions to this would include re-shingling a roof, as well as any house painting project. Both of these types of improvements would not usually require a permit.

To paraphrase from “Oklahoma!,” the building inspector and the investor should be friends. A common misconception seems to be that building inspectors (from any locale) love to deny permits or will give the property investor a hard time.

It makes for a nice myth though.

When you consider that the building department of any town is there for the overall protection of the community, and it is ultimately responsible for the overall safety of dwellings and therefore individuals who live in that community, the building inspector can be looked on in quite a different light.

Safety and savings

Besides safety, they can actually end up saving the investor money in the long run as well. If, for example, your contractor is cutting corners on a particular project without you knowing, be it in time or expense, the building inspector can usually spot it – and will make sure the job is done correctly according to local building code standards.

Some points in a town’s building code can be open to interpretation, so it’s best to check with the building department prior to starting any work on any investment project you may be considering.

Many building departments made their building codes more stringent about twenty years ago, to reflect increasing pressure for town safety. The departments are charges with two main duties: to make the community safer for all, and to make sure that house renovations are performed correctly, whether done by a contractor or the house owner themselves.

As an example of their combined commitment to code enforcement and also being there for the property investor, building inspectors may, for example,  point out when a house owner is trying to install a sheet rock ceiling themselves incorrectly.  Upon close inspection, they will offer the “tip” that the sheet rock requires more screws lined up closer together to make sure there will be no future sags or warping in the ceiling.

Problem solved

Of course that advice was taken, and more screws were added, and the job was made much safer prior to the investor obtaining his Certificate of Occupancy (usually called the C/O) for the completed work.

Without the inspection, the property investor could have been facing a potentially dangerous situation somewhere down the road.

Building Permit fees

In general, the estimate of the cost of construction will determine the building permit fee that’s set by the building department. These fees tend to be reasonable, running (on average) about 1% of the total estimated project cost.

Develop a relationship

As a property investor, it’s always a good idea to get to know and develop a relationship with your local building inspector. You’ll find they can be quite supportive and helpful. Ultimately, they can become great advice-givers on potential projects in your town, helping you decide if a given project is even worth your investment dollars.

photos courtesy of  thetimes-tribune.com, danvillevt.com, sheetsdesignbuild.com, alwaltershomeinspection.com

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