The Current State of Investment Property Mortgages

September 19, 2012 By Leave a Comment

It ain’t all that pretty…

If you are actively searching for investment real estate, it’s a good idea to be aware of the current state of the investment property mortgages market.  While credit remains relatively much more difficult to obtain compared to several years ago, new banking regulations have made things even tighter in the mortgage arena since the beginning of the year.  So you’ll need to have your creditworthiness all lined up before you try to close on any deal.  You certainly don’t want to waste your time searching for a good investment property deal, only to find you can’t obtain the requisite financing.

Increased credit tightening

The most notable change in the credit markets this past year has been an intense scrutiny (and concomitant tightening of documentation) required on all residential  investment property mortgages.  Private investment from Wall Street has all but dried up completely for  riskier loans, and as such, lending in most areas of the country will not allow for any form of  “no documentation” (also known as “stated income” or “low documentation”) types of mortgage financing.  Pejoratively, these loans have been called “liar loans,” mainly because one could lie about one’s income with impunity in order to qualify for the loan.

Currently, even stated income investment property mortgages that can be had allow lenders to audit your past federal tax returns (usually in case of default) to prove you were not truthful on your loan application.  This further places more protection into the banking system to further avoid the wide use of fraud that contributed so strongly to the real estate collapse of the recent past.

Make your mortgage lender your ally

Armed with this investment property information, it is always advisable to discuss your financial situation with a mortgage lender before you start to locate your next investment property deal.  This way, if you are self-employed, for example, you’ll be able to prepare in advance what documentation you’ll need for the future.  You’ll know what amount of mortgage you can comfortably qualify for, and be able to plan for future financing as well.  You can also get prequalified and preapproved for any investment property mortgage loan now, rather than waiting until you have a great deal in place, and then finding you don’t qualify.  In that scenario, you could end up potentially losing out on the deal (and all the work you put in on it) since you couldn’t secure your financing in a timely manner.

So try to work with a local lender you’ve worked with before, get to know them, and let them advise you on your best plans of action for qualifying for your next investment property mortgage.  Once you, do, you’ll be able to return to them, and cut through much red tape in the process for all subsequent investment property loans you will be trying to obtain.

photos courtesy of worldpropertychannel.com, allstate.com, realtybiznews.com,  socalfools.org

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The FED and you

September 12, 2012 By Leave a Comment

Economics 101

The latest reports from Washington point to an anticipation of new actions on the part of the Federal Reserve System to help alleviate the current stagnation in the U.S. economy.  Currently, chairman Ben Bernanke is looking at the possibility of having the FED pump huge amounts of money into the economy through the buying of trillions of dollars of bonds.  What will the net effect be for property investors down the road if this were to occur?  A brief review of some basics of monetary policy  will be helpful in deciphering this type of investment property information…

What happens when the FED prints money?

One of my early teachers in Economics at Syracuse University was a gentleman named Melvin Eggers.  When I took his upper level class in monetary policy, he had been Chancellor of the university for several years, and because of his “day” job, never taught classes any more.  But he did come back to teach this course, and I remember jumping at the opportunity to learn from the master.   Basically, I considered him the Milton Friedman of Northern New York.

Eggers espoused a number of key axioms about monetary theory that I hold as gospel to this day.  One  tenet was that when the FED prints money to prop up a sagging economy, there will always be a time when the economy has to “pay the piper.”  In physics, I believe the corresponding law is known as “every action has an equal and opposite reaction.”  When the FED prints money to pay for bonds –  the types of bonds that spur growth through accelerated borrowing (for example,  when government borrows to fund the repaving of a highway, or to build or maintain a bridge) - these bonds will have o be repaid overtime.  Just like when you, as a property investor, have to repay your mortgage over a long term – say 15 or 30 years.

Pay it forward economics

The key element of course, is that this source of borrowing has to get repaid.  Eggers liked to joke that businesses grew only though increased borrowing.  Just like property investing.  But, he would add, if you were really into risk and making easy money – just build up your credit –  then use it, and fly off to South America to start your new life – preferably in a non-extradition country.

What a kidder…

The fact remains, when the FED eases monetary policy by pumping trillions into the U.S. economy – there will definitely come a time  somewhere down the road – maybe not in a few years, but within our lifetime, where the rent’s gonna come due.  It’s only hoped that the next generation can shoulder the financial burden.  Right now, it ain’t lookin’ too good.  As can be seen by the fiasco that the Social Security  system  has created.  (And now some plans call for the privitization of social security with a cut-off at age 55.    So much for governmental social contracts. )

Loose monetary policy effects

But loose monetary policy is kind of the same concept.  The central component is that you institute the plan now to help alleviate an immediate strain on the economy, in return for shouldering a lot of pain on the same economy down the road (on the collective backs of the next generation).

So how does this help dictate what you as an individual property investor should be doing right now?  Well, you’ll obviously want to try to grow your business, your little fiefdom of rental properties, utilizing the easy money policies being put into effect right now.  Through these FED actions, borrowing costs for the Central FED banks will be lowered, which in turn will lower borrowing costs for all lending institutions in the country.  The net result of this investment property information is that you benefit – when you borrow – for your next mortgage, for example.

The piper is always paid

Just know that your individual real estate portfolio, while set up to help fund the mid-to long term (like retirement), will also have to “pay the piper” somewhere down the road.  Consider things a very long time away – like when your properties, as part of your overall estate when you die, get subject to all new sets of inheritance taxes that invariably will be passed on to your kids or grandchildren…the next generation.  You may have set it up during this period of easy money, but  as I mentioned above,  there is always an equal and opposite reaction in the financial markets.  Over time, that is.  And you can certainly expect your heirs to pay the price after you’re gone.

Or, feel free to borrow up to your neck in debt.  And abscond to a sunny beach down South America way…

 

photos courtesy of thelastembassy.blogspot.com, declineoftheempire.com, gazelleindex.com, theswash.com, business.time.com, csmonitor.com

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Partnership Property Investing 101

August 14, 2012 By Leave a Comment

Do you have the right temperament?

If you have the personality type that works extremely well with others, doesn’t have to have “their way,” and can compromise in order to realize a common goal of higher profits – then partnership property investing may be perfect for you.  You’ll find it’s a great way to finance investment property.  In any business partnership, there will be several key basics you’ll need to understand in order for the concept to work well.

The basic partnership agreement

You’ll need to fully delineate in a formal partnership agreement what each partner is responsible for – that is, who will do the scouting ,searching and locating of properties, who will do the negotiating, who will do the legal work, who will proscribe the repair work to be done, who will do the budgeting and accounting, and then who will actively manage the property.  This part would include finding tenants who are qualified, collecting rents and making all necessary ongoing repairs and maintenance.  Also spelled out should be who will receive tenant emergency calls, as well as make rent collections.

Of course, ultimately, there needs to be a decision process created and set down in writing.  In addition, a plan detailing how much capital in total each partner will be putting up in this new enterprise, as well as whether all the partners will have equal shares or not will need to be laid out.  You may all decide all the partners would like to participate in the locating of potential investment properties for the group to acquire.  That’s fine too.  Just make sure it’s written down exactly how you’re going to individually and collectively locate – and then actually decide – which properties to go after for purchase.

The grand payoff of a partnership

Using a partnership will allow you to create the seed money (that is, down payments) to bankroll either bigger projects, or larger individual projects than you could if you were investing on your own.  It’s truly a nifty way to help finance investment property.  Profits (or losses) will be shared pro rata amongst the partners.  And a good partnership agreement will also spell out the mechanics for when a partner wants to leave the company, when the other partners want to push a partner out, or how to add a new partner to the mix.  Certainly, each alternative requires a detailed written plan to avoid potential litigation down the road.

Creating synergy

Like with any business partnership,  you’ll be able to utilize your unique set of partners’ synergy, and make the whole greater than the sum of its parts.  You’ll be lessening overall financial risk in the process, whilst still maintaining the ability to utilize leverage on any property your company acquires and rents out.

If you don’t already have an accountant and/or a lawyer as one of your initial partners, then you truly must seek out their respective professional help in setting up the partnership, writing the partnership agreement, as well as creating a basic set of bookkeeping standards for you to follow.  Of course, if the partnership decides to hire a separate property management firm to  manage all its  acquired investment properties, then the property manager will be doing all the bookkeeping functions for you.  Certainly, a property manager will also remove all the day to day responsibilities for running your properties as well.  In the case of a partnership, a good property management company can really help free up the principal partners for the locating, financing and acquiring functions of the business.

Consider all the advantages

Again, partnerships are a good way to gain entrée into the world of property investing by lessening overall risk while still allowing for complete leverage of limited assets.  And the same real estate tax advantages will be afforded to the partnership as well.   Borrowing funds may be a bit trickier – but then again, all the partners’ separate income and assets will be considered in making a loan to the partnership.   But once a particular lender starts working exclusively with the partnership and writes all the mortgages, acquiring properties will become much easier than if you were to do so on your own since you’ll already have a strong working relationship with one banker.  As mentioned before, it can be a much more powerful way to help finance investment property.

 

photos courtesy of fairfaxcountypartnerships.org, thinkglink.com, accounting-financial-tax.com, blog.guidantfinancial.com, managementspecialistsinc.com, dmp.com

 

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In Search Of The Elusive Owner-Financed Property

July 10, 2012 By Leave a Comment

Looking for the diamond in the rough

When searching to buy investment property, it is a rarity to come upon a residential house where the seller will offer some form of owner financing.  It is more common in commercial real estate, especially for rental buildings with over five units.  However, whenever you come across the opportunity, by all means avail yourself of the chance to obtain some amount of paper being given by the owner to sweeten a deal.

The key advantage to owner financing

Any money you don’t have to put up yourself when you buy investment property offers you the opportunity to increase your leverage on the purchase.  And if you don’t have to borrow from a bank (or worse, a hard money lender) then you will be saving your credit line possibilities for further down the road.  And if an owner is willing to take back mortgage paper for at least some part of the purchase price, you will be ahead of the game.  Even if that amount is small, or not a first mortgage, it will benefit you.  Every little bit of leverage goes a long way.  Of course, if you can obtain a first mortgage from the seller, even better still.

Costs to obtain owner financing

You can expect to pay for the seller’s attorney’s fees for preparing the mortgage.  However, you’d be doing the same thing (paying attorney fees) if a bank was involved in granting you a mortgage.  If a seller is willing to offer a first mortgage, you can expect to negotiate a break in interest rate if you are paying market rate or slightly more for the property’s purchase price.  Conversely, if you have negotiated a great price on the building, expect to pay a slightly higher interest rate on the loan than a conventional bank mortgage would currently offer.

The leverage game

While owner financing helps you greatly in increasing your overall financing leverage and future options, don’t waste your time making it your number one pursuit when searching to buy investment property.  It is still an elusive task and will take an inordinate amount of your time.  It would be better to use your time more wisely – time that could be spent on more fruitful property searching.    Don’t pass up a great deal simply holding out to obtain seller financing.  But if you do manage to come across a willing seller offering some amount of owner financing, by all means, don’t pass it up.  

You’ll negotiate just as hard as you would normally –  but now you’ll be negotiating not just on price, but overall terms of the mortgage as well:  interest rate, amortization schedule, and payoff term.  Expect any owner financing to be short term – usually 1 to 5 years, but with amortization based on 15 or 30 years, with a balloon payment at the end of the overall term.  Like with commercial paper, you’ll eventually have to refinance the overall remaining mortgage amount at the end of the term.

 

photos courtesy of awarenesshomefunding.wordpress.com, 4thavenuepropertymanagement.com, inside-real-estate.com, ehow.com, greateraustinhomes.com

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Banco Not-So-Pop-u-lar

May 28, 2012 By Leave a Comment

Don’t invest in a vacuum

Let’s face it – we live in a world-wide economy.  And property investing in the United States requires being cognizant of the potential pitfalls that await us from overseas markets.  It seems like every day there are new, gloomy reports of impending financial disaster coming out of Europe.  The latest news comes this week from Spain, as their banking industry seems poised to collapse.  Banco Popular, as well as Bankia and Bakinter, three of the largest banks in Spain, have been downgraded by the credit ratings agency Standard & Poors.  S & P lowered their ratings to near-junk standards, as these banks have been hit hard by increasingly bad loans, especially mortgages.

In addition, Bankia, which is Spain’s largest mortgage maker, announced on Friday that it required an infusion of an additional 24 billion dollars to stay afloat.  Spain had seized the bank earlier this month, due to the bank’s huge portfolio of delinquent mortgage loans.  The greatest fear is that Spain will not have the ability to raise the funds to keep Bankia alive.  If this mammoth lender were to collapse, the entire European banking community will be rocked to its core.  Of course, the reverberations will be felt here in the states, much like a financial tsunami hitting our shores.

The bursting of their bubble

Spain is currently experiencing the same bubble burst in real estate that began here several years ago.  However, their central government may have waited too late to try to repair the rupture to their economy.  There is a double whammy on the horizon for them:  the genuine threat of a run on Spain’s banks, combined with the government’s inability to raise funds to cover all the bank losses in the short term.  Currently, short term debt is being offered by the government there at a whopping 7 percent in order to entice foreign investors.  It’s a very ugly situation indeed.

Will Germany have to come to the rescue again, as they have several times already with Greece?  It’s looking more and more like a strong possibility.  But at some point, Germany itself will be simply unable to financially take the lead as the main country in helping to bail out weaker European Union countries.  The writing’s on the European wall – and it’s not looking very positive in the long term.

For this reason, property investors here in the Unites States should be extremely concerned about the negative consequences that lie in wait for us.  What exactly does this mean for the small investor in our country and the ability to obtain an investment property mortgage? Will the overseas crisis come to our shores? And if so, when?

The tsunami ahead

As I’ve written before, I think this financial tsunami will occur in some form, and will be making its way over the Atlantic to our shores by late this year. And the net effect for small property investors will be a further tightening of credit. It will be

much harder to get an investment property mortgage later this year and going forward well into next year as the crisis in Europe develops and intensifies.

So the end result is that you should be planning your buys of investment property accordingly. If you haven’t already this year, be sure to speed up your property purchases as soon as possible, and do not wait till the end of the year to try to go out searching for property and locking up an investment property mortgage. By the end of this year banks in the United States will be feeling the crippling effects of what is going on overseas. Banks here will try to tighten their credit in order to ensure mortgage repayments, ratcheting up their standards for lending in the process.  Small investors will be hit with higher FICO scores in order to qualify for a mortgage, as well as much lower loan-to-value ratios on all new mortgages.

A new bottom line

The new bottom line is that it will be much more difficult to increase leverage on your properties. More stringent qualifying standards will apply not only when you try to purchase new investment property by obtaining an investment property mortgage, but also when you refinance any of your existing properties. So your ability to leverage will plummet, and that will mean more cash out of pocket in order to help finance your new purchases. With less leverage of course, you will not be able to grow your real estate investment holdings as quickly. It will also create a scenario where your returns on investment will be substantially reduced as well.

So be aware of all that’s going on in Europe right now.  Banco Popular, Bankia and Bankinter are not merely names of distant lenders – their failure would have far-reaching effects on how you purchase your investment property here in the states.  To protect yourself, purchase and lock in an investment property mortgage now, well in advance of the end of this year. And plan accordingly. You should be planning your next year’s purchases based on the assumption that higher credit scores will be necessary to obtain that investment property mortgage, and your ability to leverage will be lessened. Also prepare for a reduction in mortgage loan-to-value ratios offered by lenders here. This means you’ll have to make up the difference utilizing your own cash on any new investment purchase.

 

photos courtesy of  flickr.com, telegraph.co.uk, economicnoise.com, bloomberg.com, colourbox.com, dmciphilippines.wordpress.com, kelsocartography.com

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A New Type Of Investment Property Loan

April 10, 2012 By Leave a Comment

A unique wraparound loan

For many years now investors have had only one choice when it comes to investment property loans that allowed for renovation cost wraparound financing. These types of loans are used so you can incorporate the fix up costs to renovate the property into the total mortgage for the house. This type of loan is called the FHA 203K renovation loan. The problem in the past with this form of loan is that you had to occupy at least one of the units in the building you were purchasing.

Homestyle Renovation Loan

Therefore, for most investors, if you were not going to live in the investment property, this type of loan would not be available to you. In addition even if you were purchasing a multi-family house under five units, and if you were not going to live there, this type of loan would not be for you. It would only work if you’re going to live in one of the units. Now Fannie Mae has come out with their Homestyle Renovation loan. This loan is a sign of the times, as the federal government tries to help banks lessen their inventory of foreclosed properties. Now as an investor, you can purchase a property and wrap the renovation costs in with the total mortgage. And you don’t have to live there.

Increasing your leverage

This type of loan is great news for investors who really want to leverage properties. Instead of sinking a great deal of your available cash into renovation costs, you can now wrap a large portion of those renovation costs into the mortgage. This frees up your other capital for purchasing other properties. This Fannie Mae Homestyle Renovation loan can be used to purchase basically any house, condo or townhome, or multifamily property,. And the property can be in any condition, and loans will typically carry loan to value ratios in the 50 to 75% range, depending on the property.

Licensed contractors

Like the FHA 203K type of renovation and purchase loan, you’ll need to use a licensed contractor. The contractor will have to be familiar with what Fannie Mae requires, It will be helpful to use a contractor who has had a great deal of experience dealing with the FHA and its paperwork requirements. Ultimately the contractor is responsible for generating all the paperwork as to the renovation work to be performed, in order to get the loan approved.  Just like the 203K, you’ll need to use a contractor that’s been approved by Fannie Mae.

Nevertheless, this is still an exciting proposition for property investors. Now you’ll be able to truly leverage multiple properties at a time using this type of loan. Again the only caveat is that you will ultimately have to bring a tenant to the table in order to get the loan. As with the 203K type loan, you’ll have a window of time in which to get the unit occupied, after the renovation work has been completed.

Types of repairs

Some of the repairs usually done in loans like these include major work like roof repairs or replacements, new heating units, new air-conditioning , as well as complete kitchen and bath remodeling. Unlike the old FHA 203K loan however, where only one property could be financed at a time. This new Homestyle Renovation loan can be used to finance multiple properties.  This makes it a gold mine for investors looking for new investment property loans.

Create a team

Before looking for more investment properties, you really want to create a team to help you buy these kinds of distressed properties. You want to find real estate professionals with experience dealing with foreclosures and short sales. You’ll also want to get recommendations for mortgage loan people who are familiar with this new style of loan from Fannie Mae. It’s very important that these mortgage people can close on a loan like this in the shortest time possible.

You want to find mortgage loan officers who can put you at ease that a loan can close within 30 to 45 days, much like the time it takes for most average non-FHA loans to close. Otherwise you’re going to have a big problem on your hands if the loan takes forever to get approved, and you can’t close on time. It’s also a good idea to have your contractor on board as you look at properties that need a lot of work. If your contractor has done work with the FHA 203K type loan before, all the better.

Searching for distressed properties using investment property loans

So if you go out searching for investment properties these days, and if you look at a lot of distressed and or foreclosed properties or short sales, make sure you have your team all set to go: your contractor, your mortgage person, as well as your real estate agent. Make sure they’re all familiar with this new Fannie Mae Homestyle Renovation loan. Because once you see something you like, you’ll really want to jump on it as quickly as possible and put in a bid on it immediately.

And after a bid has been accepted and a contract executed, you want to get the paperwork rolling as quickly as possible for this type of investment property loan. That way the whole process will run smoothly, and you can then concentrate on your next project.

 

photos courtesy of 203konline.com,  lendersoup.com, 203krehabnow.com, moneypress.com, workaway.info, brokersbestmtg.com, buildingmoxie.com

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President Obama’s Latest Proposal and It’s Effect On Investment Property Loans

January 25, 2012 By Leave a Comment

Some potentially good news for those looking to refinance existing investment property loans

In his State of the Union speech last night, President Obama offered up a new proposal for helping the current housing crisis. While designed specifically for home owners, property investors who rent out part of their homes could take advantage of the new legislation if it were to get Congressional approval.

The hallmark of the new law would be to help out those whose mortgage debts are greater than the value of their properties. The program would benefit those who have continued to make payments on their existing mortgages, whose properties are not already in foreclosure proceedings, and who currently do not have loans backed by the government.

A potential windfall for some property investors

On the surface, Obama’s latest proposal appears to be a boon for property investors already living in their own multi-family homes that are currently under water, whose mortgages are held by private companies. Eligibility for refinancing existing loans that are held by either Freddie Mac or Fannie Mae was increased last October to help those property owners whose homes were already under water. And those changes did not require any Congressional approval. However, this proposal does, since the loans will be backed by the Federal Housing Administration (FHA).

Many owner-occupied property investors have taken advantage of historically low mortgage rates by refinancing their investment property loans in the past year. But others are still unable to do so because they don’t qualify for refinanced mortgages, due to their mortgages exceeding the value on their properties.

Requiring legislation

The new proposal by Obama will require legislation since the FHA is currently prohibited from making refinanced loans on properties that exceed the value of the owner-occupied property investor’s house. These types of loans are inherently of greater risk, mainly because the property owner has no further equity remaining in his house. So if the FHA were to not be paid back on any new loan due to this proposed legislation, taxpayers would have to bail out the FHA.

As part of the new law, and since the FHA currently has so few reserves, Obama is proposing that any potential default costs due strictly because of this program be covered through new fees to be levied on the banking industry. The Republican-controlled Congress will be a large obstacle in getting this legislation passed given the current antagonistic political climate in Washington.  For now, it’s wait and see…

 

photos courtesy of outcomemag.com, articles.sfgate.com, justinperry.net, myweathertech.com

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Investment Property Finance Update: Easy Credit Score Tune-Ups

January 17, 2012 By Leave a Comment

Keeping score of the game – the FICO score

With the average 30-year fixed rate mortgage  hovering around a 3.65 percent interest rate right now for investors with the highest FICO (Fair Isaac Corp.) scores, it’s a good time to review how to tune up your credit score to help qualify for the best rates.

As a reminder, FICO scores were created to measure an individual’s financial fitness.  The score ranges between 300 and 850, and is used by the vast majority of lenders in the U.S.  While there are other scores used by banks, FICO is the lending industry standard for assessing overall credit risk.  The main use of this scoring tool is to simply show the risk of possible default by any individual borrower.

Who qualifies for the best mortgage rates

Before the financial meltdown of the last several years, FICO scores of 720 and above were considered uniformly as the scores that would qualify borrowers for a bank’s best mortgage rate.  But more recently, that number has been pushed upwards, and now 750 and above tends to be the new standard for qualifying excellence.  About a third of U.S. consumers fall into this top-ranked category, while the median FICO score was 711 last year.

So naturally, as part of your overall investment property finance plan, you’ll want to check your credit score to see where you’re positioned before applying for any new mortgage.   You can find yours through sites like freecreditscore.com or freescore.com.  If you’re already at 750 or above, trying to improve your score will be a pretty fruitless endeavor, since lenders don’t really create a pecking order of default riskiness once you’re in the top echelon, and you’re showing the least borrowing risk.  However, the goal for most will be to try to take some easy steps to help improve your overall FICO number.

Try these simple, easy credit score tune-ups:

Pay your credit card bill early

That is, pay your bill several days before your statement closing date each month.  (This is not the statement due date!)  Paying early will ensure you show a zero balance going into your next statement period.

Try to get any late payments removed

First, make sure there are no errors, and second, if you did unfortunately make a late payment, simply ask to have it removed as a “one-time-only” courtesy.  If your credit card company says no, well, at least you tried…

See if your credit card company will increase your credit line

Remember, you’re seeking an increase to ultimately boost your FICO score – not to actually use the increased credit line!  This is accomplished by helping your “utilization” ratio, which weighs the amount of actual debt you have outstanding with the total amount of credit you can actually use on any given card.

Apply for new credit cards sparingly

Each time you apply for new credit, your FICO score will drop a little bit.  So avoid applying for a credit card for every store you walk into that’s offering a “10% off” promotion if you sign up for one of their store cards on the spot.

Don’t close old, unused accounts

Even if you haven’t used a credit card in some time, do not close the account.  By remaining open, the available credit line helps to effectively lower your utilization ratio (mentioned above), and your FICO score won’t be adjusted downward.

Set up automatic bill payments

Good, on-time payments can help bump up your FICO score, by as much as 50 points if done regularly on all your cards for at least six months.  If you don’t like the concept of automatic deductions, you can arrange for your credit card company to send you timely email alerts as payment reminders.

Pay down some debt

If you receive a windfall, tax refund, bonus or the like, consider making a sizeable dent in your debt load.  Any outstanding debt over 35% of your existing credit line on any one credit card will drag your score down.  However, paying the debt down to get the ratio under 35% will yield a nice boost to your FICO score.

The key to your bottom line

Try utilizing some or all of these credit score tune-up tips, and get your FICO score up over that 750 mark.  That way, when you next apply for investment property financing, your score will help qualify you for the bank’s best mortgage rates, ultimately either saving you money on a monthly basis, or allowing you to purchase more house for the money.

photos courtesy of anchoragehomesearch.com, lgfcunewsworks.org, infinitecredit.com, southwaterfront.com, credit-qna.com, money.cnn.com

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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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Short Sales 101

August 22, 2011 By Leave a Comment

Some Short Sale Basics

Put simply, a short sale occurs when the value of a property goes down from when an owner first purchased it, and the current market value has fallen below the amount remaining on the owner’s mortgage. When the owner decides to sell the property, assuming he’s not going to make up the difference with his own funds, he must get permission from his lender, who has some financial exposure, and must approve any sale price, since that price will dictate the amount the bank will ultimately be losing.

Recent history of short sales

As the financial crisis deepened after 2007, and property values decreased precipitously nationwide, while concurrently initially low-rate adjustable rate mortgages adjusted upwards, an increasingly larger number of homeowners began to default on their loans. With this double whammy occurring in the marketplace, more people fell behind enough in their mortgages that many had to place their properties up for sale. Unfortunately, because there was usually a shortfall in what their properties would fetch in the current realty market and what they owed on their mortgages, a large number of properties fell into this short sale category.

Short sale considerations

When finding a potential deal as an investor in a short sale, you need to be aware of the pros and cons associated with this type of transaction. Consider that you can usually pick up a bargain in the short sale process, though not necessarily a steal. Since the seller has no equity in the property any more, they will be amenable to almost any offer. The bigger issue, of course, is what the owner’s bank who holds their mortgage will allow for a sale price. This is directly related to how much of a loss the bank is willing to take. And banks don’t appreciate taking huge losses if they can be avoided.

So the banks set limits on any given property in their portfolio subject to a short sale, as to what price level, and their potential loss, they are willing to allow. Do not make the mistake of thinking you’ll be able to negotiate much with any lender on this point. Just know what amount you need to acquire the house for to make the deal happen in a positive manner for yourself.

Additionally, banks notoriously are slow in their response time, especially in relation to the overall size of their portfolio of short sale homes. So while an average house sale may take 2 to 3 months from accepted offer to closing, a short sale could take at least twice as long – or 4 to 6 months on average. Sometimes longer. So you need to be extremely patient when considering making an offer on any short sale.

More considerations…

Also, consider the fact that short sales may have greater competition than the average house on the market, mainly due to their initial market pricing being somewhat lower than like homes on the market, to help induce a quicker sale. But also because buyers are naturally drawn to the enticement of a “sweet deal” – which as I’ve already mentioned, isn’t necessarily true.

Another key point to take into account when bidding on short sales, is that investors as a whole will be drawn to them, because, as a pool of buyers, investors don’t require a quick closing, and they are more prepared to wait out the length of time necessary in closing on a property. In addition, investors are also more prepared to offer all cash (or remove mortgage contingencies from the deal) in order to entice the seller and their lender to accept their offer. With more investors making these all cash offers, your advantage over the general population is severely reduced. And lenders, naturally, will want to accept an all cash offer, further reducing their risk and overall exposure on any given property in their short sale portfolio.

Another negative to consider, is that you’re uniformly purchasing any short sale in “as is” condition. So once you get an accepted offer, make sure your house inspector’s report is quite thorough, and you can anticipate a sufficient amount for fix-up and/or maintenance issues with the property. Certainly, the seller and their lender will not be making any further improvements.

How best to find short sales

One can find short sales easily enough looking through your local Multiple Listing Service. Their will be a category for short sales where you can run a search based on this criteria, and meld it with your other search criteria, such as price and location as well. Your local Realtor can also provide assistance in your search.

Who short sales work best for

Short sales work best for more experienced investors with deep pockets, who can make all cash offers, and, having crunched their numbers properly, are prepared to wade through the bureaucratic red tape that lenders throw at you when bidding on their portfolio of short sale properties.

Who should avoid short sales

If you don’t have the time and patience to negotiate, then wait for 6 months or so, then short sales are not for you. In addition, if you’re not prepared for the increased competition from other investors, as well as running into many counter bids that are all cash offers, stay away from short sales.

 

photos courtesy of orlandorealtyexperts.com, massrealestatevoice.com, orlandorealtyexperts.com, iconarchive.com, donnygamble.com, bar-nauctions.com, library.thinkquest.org

 

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