By Paul E. Drecksler & Scott Mehlman
Second Edition – 2019
Chapter 1: Introduction
“The small landholders are the most precious part of a state.”Thomas Jefferson
Introducing Real Estate Investing Crash Course: A Beginner’s Guide To Purchasing Your First Investment Property & Avoiding Costly Mistakes. On this website, we are going to walk you through the process of buying your first investment property. The First Edition of this resource was published as an ebook in 2012, and this Second Edition we are offering for free on this site. There is no cost to read it and no sign-up required. We hope that this Second Edition is helpful for new investors and encourages you to take action and acquire your first property.
No amount of education beats TAKING ACTION and we hope that by providing the Second Edition of this book for free, it will encourage you to prioritize taking action and purchasing your first property over taking expensive real estate courses and seminars. While some offer great value, no investor will ever tell you that a seminar offered more value than getting through their first purchase.
Our goal with this resource is to maximize the value of your first real estate investment experience, which is something we do for ourselves as real estate investors. This resource will allow us to share our knowledge and experience with you to help you purchase your first investment property and avoid making costly newbie mistakes.
Having been in the industry since before the crash of the market in the 2000′s, we’ve seen people make a lot of mistakes, many which were caused by lack of preparation and education. We’ve heard our fair share of horror stories first hand from other investors, and hope that this resource helps you avoid making the same mistakes they did by being better educated about the real estate investment process.
Mistakes in this business can be costly. Whether a first time buyer or seasoned investor, you’re dealing with a changing real estate market and can benefit from up-to-date education and expert opinions.
Largely due to the abundance of information and tools available online, investors today are much more educated than a decade ago. Today’s investors know there isn’t a get rich quick method to real estate like people thought in early 2000′s. Our guide will teach our methods of educated investing, which will allow you to make responsible purchases with realistic return expectations.
Now… let’s get started!
Chapter 2: Benefits of Property Ownership
Throughout this resource, we’ll be talking a lot about the How To’s of real estate investment, but first we want to talk about the Why’s of property ownership. There are many benefits to being a property owner. Some might be obvious to you, others might not. Take a look at the list below before continuing to the next chapter.
Benefits of Owning Real Estate
Tax Write Off – You can write off the interest paid on your mortgage payment and the property taxes. At the beginning of an amortized loan, you will primarily be paying interest which can help offset some of the other initial costs of ownership.
Equity – Equity is the difference between the value of the home and the amount owned on it. If your home is worth $500,000 and there is $400,000 in debt (money owed on your loan), you have built $100,000 in equity. In most cases, the higher down payment you put on a home, the more beginning equity you have. Actual equity can fluctuate if the value of your home appreciates or depreciates.
Appreciation is the gain in your home’s worth over time due to natural market forces. Some examples of natural market forces include inflation, supply and demand, and rise in value of an entire area.
Borrowing Power – When you own a home and have built equity, you can borrow money against the equity in your own home with a home equity line of credit. A home is considered your greatest appreciable asset and in most cases you will receive the lowest interest rate borrowing against your home than say, your car which depreciates in value.
1031 exchanges allow real estate owners to exchange property and defer payment of capital gains taxes until a later date. 1031 exchanges are only allowed on similar type properties, meaning, you couldn’t upgrade your home to a commercial investment property.
Home Improvements – When you own a home, versus rent, you can do anything you want to the home, as long as you obtain the proper permits and follow local zoning and ordinances. These types of improvements can add new opportunities for cash flow and increase the value of your investment.
Selling Power – If you can get into a money crunch and have built equity in the property, you can either borrow against your equity as we mentioned above, or sell it. If possible, it’s usually better to borrow against your property’s equity.
As you’re already aware of because you’re reading this resource, there are many benefits to real estate ownership. Now let’s continue onward and learn more about the processes involved with real estate investment.
Chapter 3: Pre-Qualification vs Pre-Approval
“I had a couple come in with a negative amortization mortgage on a house that costs way too much relative to their income. They’re consuming real estate, not investing in it.”Chris Cooper
Like most investors, you will probably be paying for your property using financing of some sort. Before determining your price range and searching for properties, you need to know if you will be able to get the loan you desire for the amount you require.
If you are buying a property using financing, the first thing you should do is get Pre-Qualified or Pre-Approved.
What is “pre-qualification”? What does it mean to be pre-qualified?
Pre-Qualification is when a lender evaluates the credit history of a potential borrower to determine an estimated range that the person can afford to borrow. Most lending institutions or mortgage brokers offer free Pre-Qualification either in person or over the phone. You will give the lender information about your down payment, assets, debts and income and the lender will then determine an estimated loan amount you could potentially qualify for. The lender will not verify your income and they will not check your credit. A Pre-Qualification is NOT A COMMITMENT to give you a loan and is the bare minimum of what you should do prior to searching for real estate.
What is “pre-approval”? What does it mean to be pre-approved?
A Pre-Approval is a tentative commitment to give you a loan in a certain amount. For a Pre-Approval you will give the lender the same types of information as you would for a Pre-Qualification, only this time they will verify all of the information you provide them. The lender will contact your employer to verify your income and check your credit to see about your debts and history. A Pre-Approval is much more desirable to potential sellers as they can rest assured that you can financially qualify to purchase the property.
The Pre-Approval will be conditional. This means that they approve you based on certain criteria. The most typical are:
- An appraisal performed on the property that is satisfactory to the lender
- The lender reviews and is satisfied with the purchase contract
- A valid title review is performed and title insurance placed in effect
- The final approval be given by the lender’s underwriting department
Which is better — a pre-approval or a pre-qualification letter?
If serious about finding a property, always go the Pre-Approval route. Many people think financing does not affect the offer and that the only thing to consider is price. This is far from the truth. Real estate financing affects every offer. It’s better for both you and the seller to be prepared with financing before making offers.
What if I’m not pre-approved?
If you make an offer on a property that is contingent upon financing, but you do not have a loan Pre-Approval or even Pre-Qualification, the seller has no cause to actually believe that you can close. Unless you can prove substantial proof of funds (i.e. having more than 20%, probably closer to 50%), the seller basically has to take your word that you can qualify. They will not know if you have a bankruptcy or a foreclosure on your record which may preclude you from getting a loan. The seller risks turning down a more qualified offer or losing time (and therefore money) opening an escrow with a buyer who cannot close.
Chapter 4: Financing – It affects your offer.
We’ve seen a lot of transactions close, but we’ve also seen a lot of transactions fall apart at the 11th hour. The thing that we’ve seen cause the most transactions to be cancelled is financing.
In today’s markets, it’s not uncommon for lenders to pull final conditions, or things that must happen before they fund a loan, such as requiring repairs, or needing something on your credit report explained. In other situations, appraisals come in too low and buyers are unable to perform when loans are involved.
There are a few primary ways that deals are financed today, which we’ll list below. There are always different ways to finance a deal. These are just the most popular ones for new investors. The array of loans to acquire real estate is just as diverse as the real estate itself. Talk to a loan officer or mortgage broker to find out what options you have.
Examples of Real Estate Financing Options:
- VA Loan – Buyers can put down 0%. Property and buyer must be approved by VA. Buyer must be a veteran or active military. Property must pass appraisal and inspection.
- FHA Loan – Buyers can put down as little as 3.5%, and credits or gifts can be given to cover the 3.5%. Property must be approved by FHA. Mortgage insurance is required throughout the entire loan if putting down less than 10%. Property must pass appraisal and inspection. Usually there is a requirement to reside in the property for a certain period of time.
- Conventional Loan – Buyers put down anywhere from 0%-3.5%-5%-10%-20%. Property must pass appraisal and inspection. Mortgage insurance is required until the loan to value ratio is less than 80%, or in other words, until you have at least 20% equity in the property, including capital appreciation.
- Hard Money Loans – Typically issued by private investors or companies as an alternative to conventional loans for properties that would otherwise not qualify for conventional financing, and oftentimes at a higher rate.
- Cash – No loan involved to close the escrow.
Loans decrease the amount of money that a buyer has to put up to purchase a property. Like it or not, the more money a buyer puts up, the more attractive they are to sellers. A buyer with 3.5% down on an FHA loan may be much more serious about the property than a 100% cash offer, but the cash buyer is more attractive to the seller because they don’t run the risk of the deal falling through because of financing issues.
Unfortunately, most buyers cannot pay cash. Loans will always be involved in real estate, as its too expensive for most buyers without a loan. You can still make a very serious offer using a loan.
Here are some tips to making a strong offer with a loan.
- Have a pre-APPROVAL letter not a pre-QUALIFICATION letter. A pre-approval letter is a tentative commitment to fund a loan from a specific lender; a pre-approval requires you to give income and expense documentation to your lender. A pre-qualification is essentially an estimate of what you can afford, with no commitment to lend you any money.
- Offer list price, or even a little above. If the list price of the property is in your ballpark, and you’re competing against cash offers, see if the numbers work to be able to offer list price or above. At the end of the day, a few thousand dollars more for the property might not make that big of a difference on your bottom line when financing is involved.
- If repairs are needed, wrap them into your offer. If you do not have the money to pay to repair the property, just add the costs into your offer. If the property is listed at market price, offer market price. Have a contractor give you estimates to make any of the repairs you need to make. (These are not upgrades, these are repairs! Don’t ask for new granite countertops if the countertops that are there are in good shape). Include the repair estimates in your offer as back up. Ask for a credit or ask the lender to pay your contractor at closing.
- Be honest. Nothing is worse than getting into escrow with a buyer and finding out they cannot perform. Only go with the best intentions and be transparent about everything.
Submitting an offer with financing
When submitting your offer, send a copy of all financing documents including a copy of your Pre-Approval letter, proof of all funds needed to close, and a copy of your credit score.
Now you know the differences between and the importance of Pre-Qualifications and Pre-Approvals, it’s time to make this happen. The next step is choosing a loan officer.
Chapter 5: Loan Officers
“Never count on making a good sale. Have the purchase price be soWarren Buffett
attractive that even a mediocre sale gives good results.”
What does a loan officer do?
The job of a loan officer is to help you obtain a loan to purchase your property. Loan officers are the intermediary between lenders and borrowers. They can work directly for banks and credit unions, or as independent mortgage brokers.
The loan officer plays arguably the most important role in a real estate transaction with regards to closing escrow on time. The loan officer is the one responsible for telling you up-front whether or not the financing terms can be provided as requested, setting up the proper expectation for what kinds of paperwork you will need to provide during the process in order to qualify, and communicating with all parties in the transaction as to the status of the financing. A good loan officer needs to have knowledge of a wide variety of different loan products and guidelines while also being extremely detail-oriented and having excellent communication skills.
How to search for and choose a loan officer
Due to how close a role your loan officer will play in your real estate transaction, it’s important to build rapport and a good working relationship with the lender you choose. You should ask friends and coworkers for referrals and interview several loan officers before making a decision on who to work with. Another good place to start is your bank and your employer’s bank since a relationship is already established. You can also search Google for “loan officers” in your area because a credible loan officer will have a visible online presence in today’s day and age.
The loan officer you choose should be easy to talk to, readily accessible, and have a positive history of successful loan approvals. A successful loan officer has good relationships with their lenders and will look out for your loan from beginning to end, which is important to both of you.
Working with a loan officer is a mutually beneficial relationship. An independent loan officer is only going to get paid if they make a transaction happen, which is a win for you and a win for them.
When shopping for a loan, try not to get too hung up on the interest rate. Oftentimes the difference between one rate and another won’t have that large of an impact on your bottom line. For example, on a $300k loan, the difference on 1/8th point is only about $20/month. It’s more valuable to you to actually get the property than it is to save $20/month, so obtaining financing that you can confidently close should be a higher priority than the rate itself. Plus, you can always refinance down the road.
Every bank or lending institution has their own set of guidelines and loan criteria. Never assume that what any lender tells you is the standard.
With some exceptions, every lender is looking at 4 criteria for doing a loan:
- Collateral – the value of the home.
- Your Credit – not only your credit score, but also looking at overall credit history to see if you pay your bills on time.
- Assets – what else do you own that could be used as collateral, including cash on hand.
- Debt to income ratio – explained below.
Debt to income ratio is a lender’s way of determining that your cash flow is sufficient to pay them back each month with consideration of your other debts and expenses. Ultimately, this is what the lender is most concerned about. They lend you money and want you to pay them back on a regular basis. Yes, they can always foreclose if they need to, but they don’t really want more properties in their portfolio. Foreclosure is a last resort.
Demonstrating income is critical and is usually done with tax returns. If you’re owner or part owner of a company, they also want to look at corporate tax returns. Wage earners (people with regular jobs that receive a W2) are treated more leniently than a self-employed person. Most lenders criteria require that you be self-employed for more than 24 months before lending to you.
How do you choose the best loan officer for your needs?
First step is do research–look online, go to a bank, talk to a broker. Google “mortgage broker” in your area and you get a list of brokers. Early on, do a little research and talk to a few different lenders.
You should be aware of the differences between working directly with a bank versus an independent mortgage broker. When working directly with a bank, the loan officer is only going to be able to pull from loans available within their bank’s portfolio. However, they may have special programs available only to their banking customers. Whereas an independent mortgage broker is going to have access to a larger pool of loans to choose from.
There are pros and cons to either working with banks or independent mortgage brokers, and we can’t say that one is better than the other. It really comes down to the individual loan officer, as they are not all created equal. We recommend looking into both options.
Whichever route you choose, you need a great loan officer, because if things were to go awry during financing, you need someone who’s got your back and is going to help you solve that problem. And when it comes to financing, plenty can go wrong.
One more note about interest rates
The interest rate is often top of people’s minds when loan shopping. The problem with exclusively rate shopping is that they change. A quote at 1:30pm on Wednesday is not a guarantee and could change anytime. Nothing is locked in until you have the rate applied and the loan registered.
Secondly, getting a good rate is one thing; but closing a loan is everything! You should prioritize working with a lender who can help you reach the finish line over a lender who offers a lower rate but doesn’t have your back when problems arise.
What are Fannie Mae and Freddie Mac?
Most banks do not keep their loans–they sell their loans to the secondary market to recoup cash that they can lend again. Fannie Mae and Freddie Mac represent 80% of the secondary market.
If you go to a bank for a loan, they likely will turn around and sell it afterwards to Fannie and Freddie who set the guidelines for loans. Each bank adds their own overlay on top of those guidelines. For instance, the FHA says they’ll do a loan on a credit score of 620, but Wells Fargo, Chase, or Bank of America may require a higher score. Banks are private companies and can choose to say, “No.”
These guidelines are complicated and there are many of them. That is a big reason to work with a professional, whether a banker or mortgage broker. These guidelines with Fannie and Freddie change and keeping up with them is half the challenge.
Pulling your credit score
Banks use a financial credit score derived from information from the 3 bureaus. Get someone to pull your credit score early in your investment process and review it. Pulling credit does not automatically lower your score. The bureaus see who’s pulling it, how often it’s pulled, and what the purpose. Banks and brokers pulling it 10 times in a week will not lower your credit score. The bureaus see that you are shopping for a loan–not asking each company for money.
Knowing what’s on a report is vital to do early. Problems have to be identified and mistakes fixed – a process that can take 2-4 months . Mistakes easily derail a purchase or refinance.
Nowadays it’s so easy to continually monitor your credit score with companies like Credit Karma, that there’s no excuse for not being on top of your credit.
Chapter 6: What is the Difference Between a Fixed Rate and an Adjustable Rate Mortgage?
If you’re in the market for a home, you must understand the differences between a Fixed Rate and an Adjustable Rate Mortgages and what those differences mean to you.
What is a Fixed Rate Mortgage?
A Fixed Rate Mortgage is a mortgage where the rate stays constant or “fixed” for the entire duration of the loan. Since the interest rate stays the same during the lifetime of the loan, the monthly payment also stays the same.
What is an Adjustable Rate Mortgage?
An Adjustable Rate Mortgage is a mortgage where the rate floats or “adjusts” above an index rate, such as the London Interbank Offered Rate (LIBOR) or US Treasuries. This means as the index rate rises and falls, the interest rate on the loan follows suit, so your monthly payments will increase and decrease along with it.
How do the payments differ?
Since a Fixed Rate Mortgage is set before the loan is funded, the lender must be compensated for future interest rate risk. Therefore, the rate on a Fixed Rate Mortgage will be higher than an Adjustable Rate Mortgage at the beginning. Lenders do this to protect themselves if rates increase throughout the life of the loan. The majority of each payment at the beginning of your fixed rate loan goes towards the interest versus the principal, but this changes throughout the lifetime of the loan. The final payments on a 30 year fixed loan are primarily principal, as opposed to interest like at the beginning.
On the flip side, an Adjustable Rate Mortgage will start out lower than a Fixed Rate Mortgage because the Adjustable Rate Mortgage will increase if the index rate it is tied to also increases. The risk involved for you is a higher future interest rate on your loan, which will increase your monthly payment.
What are the benefits of a Fixed Rate Mortgage?
Plain and simple, the rate is fixed, therefore the payment is fixed. When you get a Fixed Rate Mortgage you also get the comfort and security of knowing exactly what your mortgage payment will be for the next 15-30 years. If rates drop substantially, you can always refinance.
What are the benefits of an Adjustable Rate Mortgage?
With an Adjustable Rate Mortgage your rate and therefore payment, will be lower to start out than a Fixed Rate Mortgage. If rates drop in the future, your rate will also drop.
Which type of loan is better for you?
Whether a Fixed Rate Loan or an Adjustable Rate Loan is better for you depends on current conditions of the mortgage market and your investment plan. Current market conditions include the National Average Mortgage rate, bank and government incentives, plus a number of other national, regional, and local economic factors. Your investment plan must take into consideration how large of a down payment you can put down on a loan, future income, and longevity of your investment.
Chapter 7: Setting Your Real Estate Investment Criteria
“Don’t stretch yourself too much with a mortgage. Buy within your means.. it’s not worth the sleepless nights.”Sarah Beeny
Setting your investment criteria is one of the most important things you will do when preparing to purchase an investment property. However, it’s vital that you understand that your investment criteria is only good if you stick to it. You must throw emotion out the door if you are going to find a deal where the numbers actually work.
Sometimes there will be multiple offers on properties which can create a bidding war. When you’ve reached your mark… STOP. Do not “fall in love” with a property. Never be afraid to walk away. Not walking away can be a costly mistake. As Kenny Rogers said, “You got to know when to hold ‘em, know when to fold ‘em, know when to walk away and know when to run.”
What can you afford?
If you are getting a loan, your lender has already determined how much you can afford. Your Pre-Approval letter will state that the lender will loan you a percentage of the purchase price (Loan to Value or LTV) up to a certain price.
Let’s say for example your lender approved you for an 80% loan to value loan on a $100,000 purchase price. This means the most they are willing to give you is $80,000, up to 80% of the purchase price of the home. Does this mean $100,000 is the max you can pay? No. It does mean that if you go over that price, the % of loan (or leverage) will go down. If you pay $110,000, the lender will not give you $88,000 (leaving the remaining $22,000 for your cash). They will instead give you only the $80,000 (leaving the remaining $30,000 for your cash).
Choosing the Area
Choosing the area is very important. Real Estate values vary from location to location. You cannot expect to get a house in Santa Monica for the same price as you would in Lancaster. Different cities have unique markets and submarkets. Knowing your price range can guide you to the areas that fit your criteria.
To narrow down your geographic criteria, consider several key factors that can affect the value of real estate, or your ability to rent it:
- Proximity to schools
- Proximity to hospitals
- Freeway access
- Proximity to dining and retail
- Pride of ownership in the neighborhood
- Crime Rates in the Area
- Proximity to Parks and Recreation
- Proximity to Business Centers
Houses vs Condos & Townhomes vs Multifamily Properties
Determining which type of property you should look for can depend on many things. Ultimately, there are benefits to every type, so make the right choice for you. In most markets, more homes sell each month than condos/townhomes or multifamily because there are usually more available for sale in any given area.
Some things to factor into your decision here are:
- Financing Options – What type of loan can you qualify for and what are the requirements of that loan? Does it require that you live in the property for a period of time? That’s often the case with FHA, VA, USDA, and other types of primary residence mortgages which are designed for personal homeowners and not investors. Make sure you understand the types of loans available to you and how much you will be required to put down. For example, don’t assume that a 3.5% down payment loan will be available to you as an investor just because it’s available to you for your primary residence. On that note, loans on multi-family often require higher deposits than even single family homes. These are questions to discuss with your loan officers BEFORE beginning your investment search.
- Exterior Maintenance – You can get a yard with a property, but then you also have to maintain a yard. Private outdoor areas are a nice perk as a homeowner, but add an expense to maintain as an investor. Whereas some condo communities offer green space, bbq’s, playgrounds, basketball or tennis courts, pools, and more, without the hassle of having to personally maintain them. There’s no right or wrong answer to exterior maintenance, but it’s something to consider when choosing which type of property to invest in.
- Costs – Most of the time, a similar quality condo will be cheaper than a home in the same area. This is for a lot of reasons: size, privacy, building vertical, etc. You can typically expect to save on price with a condo. However, condos have HOA fees to pay for common area expenses. In some HOA’s this can be several hundred or even thousand per month. Make sure you check HOA fees before buying a condo or townhome. HOAs add another level to your investment that we’ll discuss more in detail later.
- Reserves – The one perk to condos/townhomes is that the HOA typically covers maintenance on the exterior of the home including the roof, siding, landscaping, exterior plumbing, etc. This is included in your HOA fee (assuming your HOA isn’t broke and has a proper reserve to take care of such things). If after you pay the down payment and closing expenses on your first property, you won’t have much reserves left, a condo or townhome may be an attractive initial investment because you’d only need to have enough reserves to cover vacancy and interior maintenance. You won’t need a reserve for the roof or anything else that the HOA fee covers. This might mean the difference between tens of thousands of dollars in deferred maintenance expenses between a 25 year old house versus a 25 year old condo.
Should I buy a condo / townhome or a house / multifamily property?
Purchasing an investment property is a big step so it’s important to prepare yourself for the decision. Both have their benefits and their drawbacks. This section should provide some helpful things to think about before making the decision.
Benefits of Investing in a House / Multi-family:
- The entire property is yours–both land and house. You are free to remodel or make changes without the consent of others (with regards to city and county zoning ordinances if applicable).
- Houses / multi-family offer the ability to make value additions to the property like adding a bedroom, bathroom, or detached dwelling, which can increase the rental or resale value.
- Houses provide more privacy such as a private fenced in backyard, which may attract more renters in a given market.
- Houses have more parking options like in a private garage, driveway, or street parking, which can open the door to having multi-family living situations (roommates) and increase your rental income per property.
Drawbacks of Investing in a House / Multi-family:
- The homeowner is responsible for all property and lawn maintenance.
- Utility bills are typically higher because houses have more space to heat and cool than condos. (Applicable if you cover some or all utilities.)
- Homeowner is responsible for all expenses and must budget for long-term repairs to the roof, plumbing fixtures, and household appliances.
Benefits of Investing in a Condo / Townhome:
- Condos are often located near shops, restaurants, bars, grocery stores, etc. and may be easier to rent depending on the market.
- Association fees share the expense of water/sewer, trash removal, and outside maintenance which can cost the homeowner less money out of pocket for large repairs.
- There are lower barriers of entry to buy a condo because you can typically get a condo for cheaper than a house.
- Condos come with common amenities such as pool, fitness center, club house, walking trails, etc.
- There is no need to landscape or worry about outdoor maintenance in a condo.
Drawbacks of Investing in a Condo / Townhome:
- Condo association fees cost money every month above and beyond your mortgage payment.
- There is always the possibility of having noisy or inconsiderate neighbors close-by which might make it more difficult to rent your unit.
- Condos typically have less living area and storage space, which might be a turnoff for certain types of renters.
- Condos provide less privacy due to many folks sharing common areas, which might be a turnoff for certain types of renters.
- Sometimes financing an investment condo or townhome can be more difficult than financing a single family home due to special requirements by the bank.
You should know and understand the many differences between investing in a house, condo/townhome, or multi-family property before purchasing.
What is a Homeowners Association (HOA)?
A Home Owners Association (HOA) is a collection of homeowners who, in addition to owning their own home, also have a common interest in community property. The most common examples of an HOA is in a condominium. Each member of the HOA, or home owner, owns their condo space in its entirety and an equal but undivided share of the common areas such as the pool, fitness center, streets, business center, club house, or other complex amenities.
An HOA can also be referred to as a Condo Owners Association (COA) or a Property Owners Association (POA), typically for a master plan community with large single family homes.
HOAs are governed by documents which are recorded in the county in which the property is located. These documents consist of but are not limited to the Covenants, Conditions, & Restrictions (CC&Rs), Bylaws, Articles of Incorporation, Rules and Regulations, homeowner handbook, etc.
Common examples of HOA rules and regulations are:
- No dogs bigger than 10lbs
- No eating in the common areas
- Speed limit on streets within association
- Quiet hours or restrictions on number of guests
- No hanging lights or decorations on balconies or doors
- No hardwood floors on upper-level condos
- No renting your unit (or only a certain percentage of condos can be rented at once, so there is a waiting list)
Violations of certain covenants, conditions, and restrictions could result in fines or even loss of your property.
HOAs are managed by a Board of Directors which are elected by the homeowners. Typically a board of directors will oversee a management company, but some associations choose to self-manage.
Read all the condominium documents thoroughly to be sure of what you’re getting yourself into. Ask for a copy of the two most recent fiscal years and an independent third-party reserve study. Find out what the dues are and how much they can increase year to year. California, for example, only allows a 20% increase per year without a vote.
Aside from an increase in dues, an HOA can also stick special assessments on you — like for a new roof or an emergency repair. If you get into an HOA that doesn’t budget accordingly for long term expenses, you are more likely to be in a situation where you will be special assessed.
How many bedrooms and bathrooms?
This might seem obvious but the number of bedrooms and bathrooms in a property plays a huge role in how easy it will be to rent, as well as what type of renter you’re going to attract. For example, having one full bathroom per bedroom, or at least an extra half bath, will open the door to renting to roommates. Properties with 3+ bedrooms will attract more families, who are often less likely to move each year. The type of renter you desire as well as the needs of the particular market you’re investing in will help you determine the minimum/maximum number of bedrooms and bathrooms to look for.
What Returns are you seeking?
If you are buying a home to live in, your enjoyment of the home should be considered part of your returns. Most people are willing to splurge if it’s their own home. There is value in your happiness.
However if you are buying an investment home, you need to primarily consider the financial returns you seek. How much are you looking to make? Are you trying to merely break even every month and look for your returns when you sell the home? Or are you hoping to rent it each month and cash flow?
Do a rent study before purchasing and survey several similar properties in the area. Try to survey properties in a 1-2 mile radius of the property, of similar age and condition, and properties with similar amenities (pools, green space, fitness, etc). Determine what these comparables are renting for per sq ft by dividing the rent by the size of the property. Then apply that rent per sq ft to the size of the property you are looking at.
You can calculate your monthly payment based on a certain price, interest rate and loan term. Then use the rent study to determine the monthly rent you can hope to bring in. Do not forget to factor in other monthly expenses like HOA Fees, Real Estate Taxes, Repairs/Maintenance (leaky faucets, light bulbs, filters, etc), Long Term Capital Improvements (Major components – New Roof, AC, Flooring, etc).
Make sure your rent can cover all expenses and the monthly loan payments. The money left over there is your cash flow or return. Determine how much money you need to make to offset anything you could be doing to invest; such as buying stocks or bonds.
Stick to the plan
Always remember, once you determine your investment criteria, stick to it! A plan only works if you follow it.
Chapter 8: Who Are Your Real Estate Team Members?
“None of us is as smart as all of us.”Ken Blanchard (American author and management expert)
A football quarterback is nothing without his offensive line. Any good quarterback knows there is only so much he can do without his team who provide the strength, support, and individual expertise needed to win games. In real estate, it’s equally important to put together your team if you want to avoid making costly mistakes.
Each avenue of real estate requires certain expertise. You’ve heard the expression “Jack of all trades, master of none.” This is especially true in real estate due to how quickly things change with laws, financing programs, building codes, and individual markets. Learn below about the people involved in real estate transactions.
REAL ESTATE TEAM MEMBERS
Real Estate Agent / Broker
Other than yourself, your real estate agent is the most important member of your team. He or she can provide the most broad range of expertise because they are involved in every aspect of your transaction. Based on their experience working with previous investors, a good agent should be able to refer other qualified members of your team which makes your job a lot easier.
Loan Officer / Mortgage Broker
The job of a loan officer is to help you obtain a loan to purchase your future home. Loan officers are the intermediary between lenders and borrowers. They can work directly for banks and credit unions, or as independent mortgage brokers.
Escrow officers are independent third party companies whose job it is to ensure that property titles are clear, outstanding debt is paid, and the buyer and seller have fulfilled their obligations according the real estate agreement. Escrow Companies hold the funds in an independent Escrow Trust Account and disburse the funds upon a successful close of escrow based upon the instructions provided. Escrow provides a level of safety to all parties involved and ensures that all parties perform their obligations under a Purchase and Sale Agreement.
A certified home inspector’s job is to perform a thorough visual inspection of your home. If the home has pest infestation, a cracked foundation, or a problem with the electrical system, a home inspection will reveal it, potentially saving you thousands. On the other hand, if the home is in sound condition, you can rest easy, knowing it’s been thoroughly inspected by a professional.
An appraisal is the process taken by a licensed, professional, third-party appraiser to value a piece of real estate. Appraisals are done for many reasons, but typically the purpose is to find a fair market value. The most common type of appraisal is done in order to value the property to secure a loan for a new purchase. You are not able to choose your appraiser when they are hired by your lender. You may, however, privately employ an appraiser on a home you want to purchase which can be a valuable second opinion. Often times your real estate broker will have the experience to help you adequately judge the value of your home.
Your title representative will be involved in researching the property’s chain of title and placing a title insurance policy on it. Title Insurance will help protect you against fraud as well as hidden liens or easements on title. It is a standard cost and is based on the purchase price. Depending on purchase price, title insurance policies can cost anywhere from $500 for a property under $100,000 to several thousand when a purchase price is in the millions. A good title representative will help compare available policies and choose one that best suits your needs.
Having a contractor on your team will save you a lot of money and headaches. A general contractor can help you perform basic home upgrades or complex construction. A contractor can also provide an essential opinion about a home BEFORE you buy it so that you are prepared for the home improvement expenses you will incur.
Real Estate Attorney
A real estate attorney can protect you from costly mistakes, errors, and other problems that could lead to litigation or expensive legal action. An attorney can also help you set up a living trust after your investment so your intended heirs may inherit the property in the event of your unexpected death. In most cases, your real estate broker will be able to handle the complexities of your real estate transaction; however, even the best brokers occasionally seek the legal advice of a competent real estate attorney.
Your accountant is involved in all aspects or your finances and you should include them throughout the process of purchasing real estate. An accountant can provide an educated opinion on how much you can afford to put down in cash and how much to finance. They can also advise you of tax laws and loopholes that could potentially save you thousands of dollars.
Additional Team Members
In addition to the line-up above, you will also potentially find yourself working with a termite inspector, mortgage insurance agent, mold inspector, and more. Your real estate agent should be able to provide you referrals for most of the team members above.
Chapter 9: Mortgage Insurance
Mortgage insurance is an insurance policy that protects a lender if the borrower defaults on payments, passes away, or is unable to meet the contractual obligations of the mortgage. If a borrower defaults on their mortgage payments, the mortgage insurance company pays back the loan. It is a guarantee of the principal.
Mortgage insurance is sometimes required for certain types of mortgages. The most popular being FHA Loans. FHA requires a loan have mortgage insurance on it. In fact, more often than not, if you put down less than 20%, you will have to pay mortgage insurance. Mortgage insurance is required when loans are high loan to value (LTV) because the loan is riskier. Having mortgage insurance spreads the risk of default between the lender and insurance company.
Each month when you make your mortgage payment, you will also make a mortgage insurance payment. The mortgage insurance is calculated as a percentage of the loan balance, usually between 0.5% – 1% paid annually. This amount varies, just like interest rates do, and depends on a number of factors.
You will make mortgage insurance payments until the language in your loan allows you to stop. This is usually triggered by a specific event. Most commonly paying down the loan balance to below 80% of the value of the home, including capital appreciation. For example, if you put 5% down on a $200,000 property (ie: $10k down), and then a year later it appreciates to $250,000, you’ve now got $60k equity in a $250,000 property, which is 24% and should satisfy the criteria of your lender. However each lender and each type of loan will have different criteria. For example, since 2014, most FHA loans started requiring mortgage insurance for the LIFETIME of the loan if the borrow put down less than 10%. Check with your lender for specifics.
Chapter 10: How Much Cash Should I Put Down As A Down Payment On My Home Loan?
When it comes to fixed rate home loans, it’s obvious that the lower your interest rate, the better, but just how much of a difference can a quarter point make? How much long term savings can putting down an extra $25,000 mean? $50,000?
There are many factors involved with how much you can afford to put into your home. There might be a limit to what you can afford or you could need cash available for other investments. There might also be minimum requirements established by the lender that dictates how much you need to put down. This section examines the differences in monthly expense between various down payments and interest rates.
Let’s use an example of a $500,000 home with a 20%, or $100,000 down payment, which means a loan amount of $400,000. We’ll start with a 3.75% interest rate on a 30-year fixed rate loan.
|Beginning Balance||Interest||Principle||Total||Ending Balance|
Notice the difference in the amount of interest versus principal paid during the first six months than the final six months, Month 354 through Month 360. During the beginning of a loan, the borrower pays back mostly interest. Over the lifetime of a 30-year loan, the borrower would have paid a total of $666,886.45 for a $400,000 loan at 3.75%.
At 3.75%, how much difference would putting down an extra $25,000 make? Your loan amount would decrease to $375,000 and the additional down payment decreases your monthly payment by $110.01 to $1,736.68. Over the lifetime of the loan, you would pay $16,660.40 less in interest by borrowing $25,000 less.
At the same interest rate, how much difference would putting down an extra $50,000 make? Your loan amount would decrease to $350,000 and the additional down payment decreases your monthly payment by $231.55 to $1,620.90. Over the lifetime of the loan, you would pay $33,340.80 less in interest by borrowing $50,000 less.
What if the borrower was only able to obtain a 4% rate and put down $100,000? The 1/4 point only adds about $57.21 a month to the mortgage payment, but that totals $20,611.58 in interest over the lifetime of the loan.
Whether or not these differences in lifetime payout will affect you adversely depends mostly on how long you plan on keeping the property. Talk to a loan officer about what type of loan is right for you.
Does it even matter how much you pay in interest over the lifetime of the loan?
In the above example, we showed you the difference that 1/4 point and $25k/$50k can make over the lifetime of a loan, but does the difference matter for your particular objectives?
For example, if you only plan on holding the property for a few years, the difference in monthly payment may not affect your bottom line. You may benefit from putting less down and having more cash on hand, which you can put into other investments. Interest rates are so low right now especially that it’s not difficult to earn more from your cash than you’re spending in interest by leveraging a larger amount.
Even if you don’t have plans to invest the cash elsewhere, you may personally benefit from the liquidity. If a larger down payment prevents you from having a proper reserve left over to handle vacancies, unexpected expenses, or deferred maintenance expenses on your property, you may want less money down so that you can keep more cash on hand to cover those things.
On the flipside of the coin, it’s oftentimes not a good idea to be overleveraged. Higher monthly payments on properties cost you more money during periods of vacancy or periods when rental markets dry up. If you’re overleveraged, you may not be bringing in enough in rental income to cover your expenses, and you’ve got to be able to weather the storm. Whereas having more money in a property would allow it to stand on its own two legs. Meaning, the cash flow generated from the property can cover all expenses and periods of vacancy.
Everyone’s financial situation, objectives, and level of risk tolerance is unique, and there’s no single answer that is right for everyone. Consider your individual objectives, financial situation, and worst case scenarios when deciding how much is right for you to put down.
Chapter 11: What is Escrow?
Escrow Companies are an independent 3rd party to a transaction that essentially oversees and monitors the contractual agreement. They also hold the funds in an independent Escrow Trust Account and disburse the funds upon a successful close of escrow based upon the instructions provided. Escrow provides a level of safety to all parties involved and ensures that all parties perform their obligations under a Purchase and Sale Agreement.
How do you find an escrow officer?
In some states, your attorneys act as escrow officers. In other states, you work with 3rd party escrow companies. In those states, escrow officers can be found a number of ways, most often they are referred by word of mouth and recommended by the real estate agents or mortgage brokers in the transaction.
How do you choose the right escrow officer for you?
The “right” escrow officer is typically one that does business the same way as you do. For example if you like to correspond and receive documents by email you will want to ensure your escrow officer is proficient at email. If you want your officer to be available on weekends or after hours you will want to be sure to your officer is available by cell phone and is accommodating to your schedule.
Are there any escrow caveats, or anything people should be on the look out for?
If you are a buyer, during the escrow process it is important to diligently work on any financing you are obtaining to purchase the property and to return any paperwork sent to you in a timely manner. Delays can be very costly and could also possibly cost you the deal and your deposit! If you are a seller, you will want to be sure that you complete, sign and notarize everything as soon as possible and return your package to the escrow officer so that any issues can be cleared up well in time to close. For any party, it is highly recommended that you request an estimated closing statement as early as possible so that you know the fees up front, can ask any questions and be prepared for the final closing.
What should buyers and sellers have to be prepared to open and more importantly close escrow?
To open escrow – a mutually agreed to and executed Purchase Agreement and typically a good faith deposit (typically 3% of the sales price) are required. To close escrow – all signed escrow documents, removal of contingencies, any applicable financing and the balance of the down payment are required.
Chapter 12: Why You Need A Home Inspection
A home inspection is a thorough visual inspection of the property. ALWAYS do one when purchasing an investment property and make sure it’s by a neutral, third-party, professional company. The American Society of Home Inspectors (ASHI) publishes a Residential Standards of Practice that the company should follow.
Most home inspections cover heating and cooling system, plumbing and electrical systems, the roof, foundation, windows and structural components.
If the home has pest infestation, a cracked foundation, or a problem with the electrical system, a home inspection will reveal it, potentially saving you thousands. On the other hand, if the home is in sound condition, you can rest easy, knowing its been thoroughly inspected by professional.
Helpful Home Inspection Tips:
- ALWAYS get a Home Inspection
- Use a Neutral, 3rd Party, Professional Company
- Get a separate Wood Destroying Pest Inspection (termites) – the standard inspection will not include pests
- Do online research before hiring an inspector. Read customer reviews.
- Get referrals – Ask friends and family. Ask your real estate broker.
Depending on your particular area, you may want to obtain other types of home inspections in addition to the ones listed above, such as a radon inspection, sewer and drain inspection, electrical inspection, etc. Home inspectors are jack-of-all-trades, and depending on the property, you may require an advanced inspection from a specialist.
Chapter 13: What is an Encumbrance?
An encumbrance is a right that burdens or diminishes the value of a property; it impedes it in some way. There are different kinds of encumbrances. Encumbrances can be both financial or non-financial in nature. They can also affect the properties transfer-ability or the property’s use.
- Liens – Money or financial encumbrances are also called liens.
- Mortgages/Trust Deeds – Loans to purchase real property. These are the most common types of liens.
- Tax Liens – Liens against property for unpaid property taxes.
- HOA Liens – Liens against property for unpaid HOA dues.
- Mechanics Liens – Liens against property for monies owed to contractors who performed work on the property.
- Covenants, Conditions and Restrictions (CC&Rs) – Limit the use of a property. These can be set backs issued by municipal code or can be the governing documents of a homeowners association. They can limit anything from the maximum height and size of buildings built on a property to things you are allowed to do on that property.
- Easements – A right that a person or entity has in the property of another person or entity. In other words, it is a right to use someone else’s property without owning that property. There are many different kinds of easements that exist for many different reasons.
- Encroachments – Something, such as a tree limb, bushes, roof overhang, or fence that sticks out over the property line onto the adjacent property.
Encumbrances, like easements, should be recorded to be enforced, so make sure you check title to see if there are any encumbrances. Your real estate broker or escrow officer can pull a title report for you to review. An encumbrance could limit your ability to even acquire the property so make sure you are aware before getting to far into it.
Chapter 14: What is an Easement?
An easement is a right that a person or entity has in the property of another person or entity. In other words, it is a right to use someone else’s property without owning that property. There are many different kinds of easements that exist for many different reasons.
For example, Utility Companies have “easements in gross” over all properties to service the utilities. If a utility, such as electricity, has a problem in the line that runs on your property, it is going to affect a large amount of people. The utility company has the right to enter onto your property to service the utility.
Private individuals can have easements too. For example, if you owned a rural property that was completely “land locked” meaning it had no road access, you would be granted an easement over one of the other properties for ingress and egress. This would would allow you to access the adjoining property to reach roads.
Who are the Parties Involved in an Easement?
- Dominant Tenement – the person or entity who has the rights over the others property. In the examples above, the utility company and the land locked owner who has ingress and egress rights over the other property owner. Bob has dominant tenement over Kevin.
- Servient Tenement – the person or entity who owns the property over which someone else has rights. In the examples above, all the property owners with utility lines on their property or the owner of the land adjacent to the road who has to allow the neighbor to enter and leave their property. Kevin has servient tenement under Bob.
Easements should be recorded to be enforced, so make sure you check title to see if there are any easements. Your real estate broker or escrow officer can pull a title report for you to review. An easement is not necessarily a bad thing, just make sure you are aware of it before making a purchase decision.
Chapter 15: What is a real estate appraisal?
An appraisal is the process taken by a licensed, professional, third-party appraiser to value a piece of real estate. Appraisals are done for many reasons, but typically the purpose is to find a fair market value. The most common type of appraisal is done in order to value the property to secure a loan for a new purchase. An appraisal is different than a Broker Price Opinion (BPO), which we’ll discuss in detail in the next chapter.
Most lenders require that a property be appraised before they will fund a loan. Why? So they know their investment is protected. A bank knows that the home is collateral for the loan, so they need it to be worth more than the loan. That way, in the event of default, they can sell the home and get their money back.
When an appraiser does an appraisal for a property purchase of a single family residential unit they will typically use the Uniform Residential Appraisal Report. This is an appraisal report that has become industry standard, for its ease and efficiency. When appraising a property the appraiser must first state the purpose, because depending on the purpose, the value could be different.
The appraiser can value the property using three different methods: the cost approach, the income capitalization approach, and the sales comparison approach. The appraiser uses his professional expertise and experience to determine which method is best for the subject property.
Typically the cost approach is used for properties that are unique or very infrequently sold (such as a hospital). The income capitalization approach is generally used for income producing properties (such as an apartment). The sales comparison approach is the most commonly used for single family real estate sales where many substitutes and competitive properties exist.
Chapter 16: What is a real estate BPO?
BPO stands for “Broker Price Opinion” and is performed by real estate brokers to find the market value of a piece of property for sale. BPOs are used by mortgage lenders and banks to value a property in the current market and avoid the cost of an appraisal.
BPOs usually include local and regional Real Estate market information, neighborhood analysis, and comps to the house that is being priced.
BPOs are more in-depth and involved than a CMA (comparable market analysis), which can be done by sales agents to price a listing.
BPOs are NOT appraisals. BPOs are performed to find the market value of a home in order to list the property for sale. Appraisals can be performed for a number of reasons other than market value such as a tax appraisal.
If a broker does a BPO for you, that does not mean the home will sell for that amount; the broker is giving you his best estimate for the value of the home on the open market in its “as-is” or “repaired” condition.
If a lender is considering foreclosure, they will order a BPO or multiple BPOs to discover a reliable estimate of the current value of the property, compare it to the mortgage balance, and recommend further action.
A BPO Company is a middleman between banks and lenders and real estate brokers. They usually keep a list of qualified real estate brokers who are on call to perform BPOs for their clients. In addition to assigning BPOs, they will track job status, provide quality assurance, ensure accuracy, and expedite BPOs when necessary for the banks and lenders.
For example, if an investment firm was to purchase a portfolio of home loans, they might first contact a BPO Company to perform a BPO on each property. The BPO Company would then contact brokers from their list of Real Estate professionals in the area to assign properties and a due date. Depending on the client, they might assign multiple brokers per property to ensure accuracy of the BPO.
The broker would then perform an inspection of the home, gather local, state, and national market data relevant to the subject property, and compile the information to determine a selling price.
The broker submits the BPO to the BPO Company who performs a quality review before submitting the final BPOs to the investment firm.
Chapter 17: Title Insurance and Title Search
If you are buying real estate, you must consider the chain of title. Chain of Title is a history of the property; it shows all the owners and transfers. A title report details the history of a property. It will show sales and transfers, as well as liens. Liens can be on any property, and they represent monies owed to a person or entity.
Have your real estate broker order a title report from escrow once you decide to purchase a property. The title report will make sure you are aware of any hidden things or clouds on title. In addition to the liens, title will show easements that may exist. You could buy a property and only afterwards find out that the neighbor that lives behind you has a right of way easement over your property to get to theirs. Or even worse, you can find out that the person you think you are buying the property from doesn’t even own it.
In addition to ordering a title report, get title insurance on your transaction. Yes you have to pay for it and yes it’s worth it. This will help protect you against fraud as well as hidden liens or easements on title. Title insurance is a standard cost and is based on the purchase price. Depending on purchase price, title insurance policies can cost anywhere from $500 for a property under $100,000 to several thousand when a purchase price is in the millions.
Make sure you speak with your broker, escrow officer or title officer to discuss different policies. Different types of policies, just like other types of insurance, cover or exclude different things.
Chapter 18: Market Value vs Tax Value vs Appraisal Value
How much is your home worth? The answer will vary depending on who you’re asking. A potential buyer who wants to get you down in price? A licensed non-partial real estate appraiser hired by a bank to determine how much they should loan you? A listing agent who wants you to sell your home at the highest price? A tax assessor who is most likely valuing an entire neighborhood at once? Here we will explain how the value of your home can vary.
Market value is the value that is perceived by the market. It takes a buyer and a seller under normal market conditions to reach this price. Distressed real estate like bank owned properties (REOs) or a short sales are usually not priced to sell at market value. Neither would a standard sale where the homeowner needs to sell immediately–like during a job transfer, divorce, or death in the family where the surviving spouse can’t afford the mortgage on a single income.
Typically a broker or real estate agent attempts to figure out the market value of your home to determine the list price. This is done by a Broker Price Opinion (BPO) or Comparable Market Analysis (CMA). This is usually an educated starting point because in the end, a buyer and seller determine the market value.
Tax value is the value that the local tax assessor places on the property for tax purposes. Tax value is only used for this reason. In California for example, properties are assessed when they are sold and that is the value that is placed on it. In other states, the tax values of properties are periodically reassessed. Some states also limit how much property taxes can increase year to year. The criteria for tax values differ from city to city, county to county, and state to state.
Appraised value is whatever value a licensed appraiser places on the property for whatever purpose it states in the appraisal. Appraisals are usually done on a property by a bank before a borrower can obtain financing. If a bank is going to loan on a property, they are going to require you get an appraisal to make sure they are not over-leveraging you. For example, if you buy a house for $100,000 and the bank is willing to give you an 80% loan, you should in theory be putting $20,000 down. If the home only appraises for $80,000, you’ll only get 80% of $80,000, so you’ll have to come up with the difference in cash which is a $16,000 difference.
Chapter 19: Home Warranties
A home warranty is different than homeowners insurance. Homeowners insurance is a definite must, but it only covers damage due to very specific losses such as a fire or natural disaster. What about normal wear and tire? This is where a home warranty would take effect.
Even if your appliances or heating and air systems are new, most manufacturer warranties are 1 year or shorter. A home warranty will cover those items long past the original warranty provided by the manufacturer. These warranties (depending on your particular coverage) will protect you from the unexpected costs associated with the A/C breaking in the summer, the heater breaking in the winter, or other appliances like dishwashers, washer/dryers breaking down at what always seems like the worst possible time. A home warranty could potentially save you thousands of dollars.
Are home warranties worth it?
The answer is, MAYBE!
Purchasing an investment property is a big expenditure–so it’s important to protect it. If unexpected financial surprises like an stove or HVAC unit breaking don’t work with your current cash reserves, then the fixed expense of a home warranty may be best for you.
Whereas if you can handle the unexpected expense of an appliance (or multiple appliances) breaking at once, then you might want to save the money on a home warranties and deal with the expenses as they come.
How new the appliances are, how long you plan on holding the property, the cost of home warranties available to you, and how much reserve you have available to you for unexpected expenses, are a few factors that play into the decision of whether or not you should purchase a home warranty.
How to Choose a Home Warranty:
- Do online research about the companies, compare price and coverage, and read customer reviews. Choose a company with a good reputation.
- Call the representatives and ask questions. Ask your real estate broker to recommend a home warranty company that their clients have been happy with.
- Consider your home’s particular appliances. What do you need covered? Do you live in an area where the weather is bad? Is the roof old? Does it get very hot in the summer, which puts strain on the Air Conditioner?
- How long do you want your coverage to last? Typical plans run from 1 to 3 years and some can be extended/renewed.
Chapter 20: Choosing Your Real Estate Broker
“To be successful in real estate, you must always and consistently put your clients’ best interests first. When you do, your personal needs will be realized beyond your greatest expectations.”Anthony Hitt
Should I Use a Real Estate Broker?
There are many things to consider when purchasing real estate.
- Is one type of real estate better than another?
- Will I have a more difficult time obtaining financing on a condo or a house?
- Is there a market that prices are getting ready to go up?
- Is there a market with a particularly hot rental market?
- How much should I offer on a property if I really want it?
- What if my offer is accepted and I don’t end up obtaining financing?
- What if I change my mind after my offer is accepted because I find out the house needs too much repair work?
These are tough questions that if left unanswered could lead to costly errors & mistakes. If you work with a broker, they can answer and research any questions you have and provide additional important questions to ask the seller. How many times have you thought you knew something about a subject, then upon speaking with a professional, you at some point said, “Good question, I hadn’t even thought of that!”?
The reasons you should work with a real estate broker are endless. Buying a home without representation is not a smart decision. When making such a sizable investment, you MUST work with a professional who is accountable for acting within your best interest. A real estate broker lives and breathes real estate every day and will provide the expertise you need.
One of the most costly mistakes a new investor can make is to try and do it without representation.
What If I Don’t Want to Work with a Real Estate Broker?
If you are a buyer, you have nothing to gain by choosing not to work with a broker. It’s free! Who would turn down free expert advice? If you are a seller, the cost to you is the commission you pay the broker for selling your home. However, if you are a seller and opt out of listing with a broker, you are still likely going to pay a buyer’s broker. The majority of homes are purchased by a buyer who is represented by a buyer’s agent. If selling your home For Sale By Owner (FSBO), you have to cooperate with buyers agents and offer 2-3% or they will have no incentive to show your home. A good broker easily pays for himself, and then some!
What Should I Look for in a Real Estate Broker?
You should consider at least the following when choosing a real estate broker to work with.
- Where do I want to buy? – Choose a broker who works in the area you are looking to buy. A broker who lives or has an office where you want to buy a home should be very well versed in that area. It’s important to find someone who is an expert in that particular sub-market. Quiz them. What is happening in this market? What are prices doing? What is inventory doing? How is the local economy? What are the main employment drivers?
- Are they the expert they say they are? – If they claim to be an expert in the area, ask questions and have them prove it. How many transactions did they do last year in that area? Do they have testimonials?
- Compassion, Patience, Sharing and Knowledge – Your broker should never pressure you unnecessarily. They should understand that you are making a big decision in buying a property and sympathize with you. More importantly, your broker should educate you. Brokers should not tell you to do something without explaining why. We believe that information is the most valuable resource, and we like giving it away for free. That being said, it’s also their job to pressure you when it’s in your best interest, such as when you’re at risk of losing a property but lack the experience to recognize the signs.
- Communication – How important to you is it that your broker picks up the phone when you call? Return your e-mails in a timely manner? Are available to visit properties with you? Most likely, very important. A readily available broker is essential to purchasing an investment property because properties are going fast! Wouldn’t you hate to miss out on an opportunity to make an offer because your real estate broker doesn’t call you back for 2 days?
- Online Presence – The entire world is becoming more and more Internet based. Real Estate is certainly no different. In fact, even more so than many industries, real estate is taking place online. The MLS is Internet based; buyers and sellers can do their own online research better than ever with sites such as Zillow.com and Redfin.com. Entire transactions are even completed now without people meeting face to face. If the broker you are considering does not have a powerful online presence, it’s a big red flag.
What Should I Expect Out of My Real Estate Broker?
Real Estate Brokers are Full Service! Do not just expect full service.. DEMAND IT! One of the most common things buyers do now is perform all of their own research. Listing brokers get calls daily from buyers who find them on Zillow.com or a similar site. There is nothing more aggravating than having a buyer call up and spend a considerable amount of time with them over the phone only to find out that they are already working with a buyer’s broker.
If you are working with a buyer’s broker, the BROKER should do all the research for you. Your broker should send you every available property that fulfills your investment criteria. Every time a new property comes on the market that fulfills those criteria, your broker should be immediately sending you those too. You should not be able to find anything online that your broker hasn’t already sent you.
If you work with the right broker, you do not need to waste your time (a costly mistake) on searching for properties, that’s what the broker is there for. Instead, spend your time focusing on your business or job that provides you the income to make investments, preparing for you loan, and touring properties with your broker. Sure, there is nothing wrong with doing your own online research, in fact, you should. However, if you find a property your broker has not already sent you, send the information to your broker. They may be able to find out much more and better information about that property than you could on your own.
How Can I Get Help Choosing the Right Real Estate Broker for Me?
Your friends, neighbors and family members are great resources. Perhaps someone living in the neighborhood you are looking to move to knows a great agent. Real Estate Brokers thrive on referrals. A referral means someone has had good experience with that Real Estate Broker; they are at least worth following up on.
In addition to asking for referrals (or if you can’t get any), the best place to look for a great agent is online. Find brokers who have sold properties or represented other investors in the types of properties and in the areas you’re most interested in so that you can work with people who have their finger on the pulse.
Online Location Matters Too In Real Estate
Real estate is all about location, location, location! The better your physical location, the more valuable your real estate. Have you ever thought about what the role of “online real estate” can play in buying and selling properties?
Most people begin looking for homes through the Internet. When choosing a real estate agent to work with–consider their online location.
If you can’t easily contact your broker of navigate their website–imagine how other agents, buyers, or sellers would feel. When choosing a real estate agent to work with, remember the importance of your broker’s online presence.
Chapter 21: Working with a Buyer’s Agent 101
If you’re a buyer working with a Realtor, it SHOULD be a great experience. Your agent is compensated to act on your behalf, so you allow him or her to earn it. It’s fine to do your own research, in fact, we encourage it. At the end of the day, you should always run your own numbers on deals and not just rely on the info that your agent provides. However, there are several faux pas that buyer’s make that can rub listing agents and sellers the wrong way.
Do’s When Working With a Buyer’s Agent:
- Sit down with your broker and explain what you are ideally looking for. Discuss price, features, size, # of bedrooms, # of bathrooms, living space, outdoor space, parking, schools, neighborhood, future growth potential, location, and anything else you really want or really don’t want. There are thousands of homes for sale at any given time and the better you can narrow your search, the better service your buyers agent can provide you.
- Speak to a lender and see what type of financing you qualify for at the beginning of your search. Don’t wait until after you’ve seen 20 properties to discover that you’re looking in the wrong price range.
- Research properties and provide your broker with a list of the ones you are interested in at the beginning to help them get a feel for what you are looking for. Then let them run with it.
- Let agents and sellers know you are working with a broker. Ask your buyers agent for a stack of their business cards to give the sitting agent at an open house.
- Be honest with your broker about what you can afford and when you are looking to buy. Many brokers will be happy to work with you even if you aren’t looking to buy for quite some time–so long as you are upfront about your time frame.
Don’ts When Working With a Buyer’s Agent:
- Don’t call listings/agents to get information on listings you’re attracted to. Instead provide a list of questions to your buyers agent and let him or her do the research. Chances are your buyers agent can provide the answers for you by viewing private remarks on the MLS without having to contact the listing broker at all.
- Don’t go property hunting without your agent. Allow your agent to play a proactive role in your home search. Viewing properties together will allow your agent to learn about your likes and dislikes which will improve the services they can provide you and help you find the best home.
- Don’t ask your broker to do anything unethical. Realtors have taken an oath to abide by a strict code of ethics. Asking anything else of your broker but honest representation and dealings is disrespectful to their trade and could potentially lose you a broker. After all, you don’t want to work with someone who is unethical because where is the line drawn?
- Don’t call your broker while standing in front of a house for sale and ask them to meet you and let you in–schedule an appointment. Chances are (if you’re working with a good broker), you are not their only client and should be respectful of their time as they are of yours.
It’s important when working with a broker to actually work with the broker. The purpose and benefit of working with a buyers agent is to take advantage of the expertise that comes with representation. A good broker will happily do all the leg work for you.
Chapter 22: Choosing Your Contractor
“Why should I apologize because God throws in crystal chandeliers, mahogany floors, and the best construction in the world?”Jim Bakker
Having a contractor on your team will prove to be an incredible investment for many reasons. A general contractor can help you perform basic home upgrades like installing lighting fixtures all the way up to complex construction like building an addition or converting a half bath into a full. It’s important to have a relationship built with a contractor prior to needing work performed.
Why Do I Need a Contractor?
- Every property needs some work done, even if it’s something as minor as patching old nail holes or cleaning carpets.
- Contractors can usually recommend a good property inspector.
- Contractors can inspect the property you are looking to buy before you make an offer. Knowing how much the repairs/upgrades will cost before making an offer can be very valuable to you. By doing this, you can price the cost of repairs and upgrades into your offer. For people who do not have construction/rehab backgrounds there are always hidden costs. You would hate to find out after purchasing a new home that what you thought was a minor repair could actually cost thousands of dollars.
- Contractors can handle almost any job. If they can’t, they can most likely recommend someone who can perform specialized tasks that they may not be familiar with doing.
- Having your contractor selected in advance can save you time after you’ve already purchased the home. Getting your repairs done quickly means you can enjoy or rent the property sooner.
- Contractors can save you money. The best contractors look for things you won’t look for and can recommend creative solutions that are either less expensive or will save you money in the long run.
Where Can I Find My Contractor?
Just like with a Real Estate Broker, the best way to find a contractor is via referral. Ask your friends, family members, neighbors and most importantly your Real Estate Broker for referrals. If they are being referred to you by someone you know and trust, it should mean that they have worked with that contractor and had a good experience.
In addition to checking around for references you can also do research on your own online:
- Google (www.google.com) – Search for “contractors in (city name)” or “(type of work) in (city name)”. For example, “contractors in Woodland Hills CA” or “home remodel in Glendale CA”
- Craigslist (www.craigslist.org) – Check the Services section of Craigslist or use the search feature.
- Service Magic (www.servicemagic.com) – This website has a database of contractors all over the country. When you contact them you request the type of work you need done. They will source your request to their contractors and about 4 will contact you. It’s 100% free to the end user because they charge the contractors to be in their database. While the contractors do pay to be on there, they are researched by service magic ahead of time for added credibility.
- Angie’s List (www.angieslist.com) – An online contractor referral network. End users pay to use the site, so contractors have no control over their inclusion or exclusion. You can search for contractors here and read reliable reviews by paid members.
Other Tips For Choosing A Contractor
- This is the one team member who does not necessarily need to have an online presence for you to trust. Most contractors are sole proprietors. Most of them grew up working construction/doing odd jobs and eventually got licensed and opened their own company. While an online presence is absolutely a plus, a lack of a website or a basic website is not necessarily a red flag.
- Get multiple bids for work. Even if you know and trust your contractor. This will keep him honest. You may be surprised how much bids can differ.
- Ask for References. Any good contractor will happily provide them.
Chapter 23: Open House Etiquette
Visiting open houses is a great way to get a feel for an area if you’re in the market for a home. Many buyers prefer doing their initial research about a neighborhood by visiting open houses because they are a low-pressure environment. Open house brokers are accustomed to the casual “just looking” visitor. Plus you can be sure that the neighbors are going to stop by who can be a wonderful resource for learning about an area.
When you visit an open house, it’s important to remember that you are walking into someone’s personal home. There are rules of conduct to abide by. Follow these simple Rules of Open House Etiquette to get the most out of your open house visit.
Open House Rules of Engagement
- Announce that you’ve arrived and wait for a broker to show you around the house or give you permission to look before you start walking through the home.
- If working with a buyers agent, be sure to let the open house broker know right away. This allows the sitting agent to show consideration for the fact that you are a represented buyer.
- Don’t touch the homeowner’s personal items, open drawers, closets, kitchen or bathroom cabinets. Imagine that a stranger was in your home and treat their house with the same consideration you’d expect.
- Be mindful of the sitting broker’s time. If he or she is talking to a perspective buyer–wait for an opening before approaching them. Remember, this might be a Saturday for you but it’s a work day for the broker–this is his or her job so let them work.
- Ask permission before using the bathroom. It might be an open house, but that doesn’t make it a public restroom.
- Sign in if the broker requests. This allows the sitting broker to keep track of who comes and goes.
- Use the sidewalk, driveway, and front door pathway. Don’t take shortcuts through the front lawn.
- Wipe your feet on the door mat–even if there’s nothing on your feet.
- Don’t say bad things about the home itself, decorating style, or personal artifacts like pictures or artwork. You never know–the homeowner could be in the house or right behind you!
- Don’t lie in the homeowners bed even if it looks really comfortable.
- Some open houses are catered–but limit yourself to the food that’s out and available. Open house doesn’t mean open fridge.
Following these simple rules will make you an open house pro!
Chapter 24: Researching The Area
“In a real estate man’s eye, the most expensive part of the city is where he has a house to sell.”Will Roger
Can you imagine purchasing a property with a scenic view only to discover that a few months later, that landscape is replaced by a new highway onramp?
Did you notice how much available street parking there was on your block? Renters will notice, especially roommates with multiple cars per household.
You’ve learned why it’s so important to build a real estate team before buying a home. A contractor, home inspector, and real estate appraiser can provide valuable opinions about the condition of the home. Now it’s time to learn about the importance of researching an area before buying a property. This includes the city, sub-market, community, neighborhood, and street that you’re about to purchase on.
Here are some tips to help you research the area you are looking in:
- Visit the property during high traffic times to discover how backed-up the streets in your neighborhood become. Also check out the nearest freeway entrance for the same information. Renters who know the areas will actively avoid parts of town that experience gridlock.
- Pay attention to the proximity of the property to hospitals, schools, office parks, and other areas of high density employment which can provide a steady supply of potential tenants in the future.
- Another important thing to consider is the area schools. Buying a home near a school can be a valuable investment. Proximity to schools can add to the rentability and resale value of your home.
- Are you interested in short term rentals? Research nearby airports and how easy they are to reach. Your investment could potentially double as a short term rental in the future. Be careful here though… While being close to an airport has benefits for travelers, being too close adds lots of noise and air pollution which can be a turn off for long term renters.
- Research the value of homes nearby homes. Never buy the most expensive home in the neighborhood. The principle of regression dictates that the lower priced homes in the neighborhood will pull down the price of the most expensive home in the neighborhood. The opposite is also true–more expensive homes pull up the prices of less expensive homes. Therefore, it does not make sense to stretch for a nicer home in the same neighborhood, rather stretch for a nicer neighborhood. Educate yourself about the gamut of home values, number of foreclosures, vacant homes, and rentals in the area. A great tool for this is research is Zillow.com
- Check with the local department of building and planning to see what types of permits have been pulled and issued for new development and construction. This will prevent you from purchasing in an area that is about to be saturated with similar valued rentals, or alternatively could steer you towards a part of town that will be rising in value due to the construction of a new shopping center. Do not assume that your broker will do this for you.
- Is there a Starbucks or Chick-Fil-A nearby? Major higher end franchises like these spend millions of dollars on market research to determine good places to open their restaurants or stores. This isn’t a guarantee, but chances are, if there are major franchises like these in the area, it is probably a relatively good place to invest.
- Search the Internet. What’s it like living in the area? There are websites dedicated to reviewing individual neighborhoods within cities, and Internet commenters aren’t shy to tell you how they really feel.
- Ask people in the community what it’s like living there. Talk to street cops, the FedEx delivery person, Mail Man, and local residents like your future neighbors. Police officers can be desensitized to crime and might instinctively tell you that it’s a decent place to live because they’ve seen worse. A good question to ask a local police officer is, “Would you let your family live here?” Talking with local folks is some of the best research you can do. The majority of these people will be honest with if you tell them you are considering moving to the area and ask for their advice. We never invest in an area without talking to the local police station about their experiences with that particular street or area where our property is.
Chapter 25: Searching For A Property
“There is something permanent, and something extremely profound, in owning a home.”Kenny Guinn
You’ve come a long way in your investment process. At this point, you’ve determined what you can afford, set your investment criteria, chosen your real estate agent and team members, and researched the area. Now comes the fun part… searching for properties!
How to begin searching for properties
- Your broker should regularly provide an updated list with properties that meet your investment criteria in the area you are looking. You should know about every new property that hits the market, as well as every property that has been sitting for a while and may be overlooked by regular home buyers.
- A good buyer’s agent will not only search the MLS, but put the word out to their network of real estate brokers that they have a ready, willing, and able buyer. Sometimes agents have “pocket listings” which means they are working with a potential seller who doesn’t want to list their home for sale, but would entertain offers if the right buyer came along.
- Use online real estate searches. Doing your own Internet research is useful for refining your investment criteria. You can view the size, features, and amenities of homes to get a better idea of what you can expect in a given area.
- If you work with a good buyer’s agent, you shouldn’t be able to find any new properties that your agent hasn’t already shown you. It’s their job to inform you of new listings. If you come across a home you have a question about or want to see DO NOT contact the seller or broker directly. Instead DO send the home information to your broker and let him contact the listing broker or seller. After all, that is what he is being paid to do.
- Drive the area you are looking with your family or broker. You might come across For Sale By Owner properties that just hit the market. Canvassing a neighborhood also allows you to see a home for sale that you might have overlooked because the pictures or property description on the MLS didn’t accurately describe the property.
- Visit Open Houses to get a feel for the types of homes in a neighborhood. Neighbors will often come by open houses. This gives you a chance to ask them questions and get a feel for the vibe of the community. If you come without your buyer’s agent, be sure to tell the listing broker or agent on duty that you’re working with a buyer’s agent.
Save Time With “Presearch”
The more research you do before viewing homes in person, the better. Your time is valuable and doing your homework will reduce the amount of time wasted during the process of finding homes for sale.
- View all available photographs and virtual tours online.
- Search the property on Google Maps and use Street View to see the home and surrounding properties as if you were standing right there.
- Ask your agent to call the listing broker before you visit the property. This will save you time if, for example, the home is Pending Sale but the broker hasn’t updated the listing status yet. Sometimes, a home is listed on MLS but the seller already has a buyer in place.
- The listing broker can inform your agent if they have already received multiple offers, possibly above list price, and indicated that they are most likely going to accept one of those offers. You might not want to spend your time visiting this home unless you are willing to get into a bidding war.
Why do all this research?
There isn’t always a lot of time to make up your mind if you want to make an offer on a home, especially in today’s real estate market. Doing your homework should help expedite your decision making process.
Another benefit of research is that you know what to look for when you arrive at the property. You might overlook some of your investment criteria or forget to ask important questions if you aren’t working from a list. It’s easy to get caught up in the remodeled kitchen or spacious master bathroom and forget to notice some of the smaller items on your list.
Visiting a property in person
No pictures, video, or description can beat viewing a home in person. Even with an adequate amount of research and homework, there will come a time when you need to get off your computer and visit the property in person.
Your agent will be able to tell you if the home is vacant, whether it’s okay to come by during specified periods of time, or if the seller will only show the home by appointment.
When visiting a property, be mindful and courteous of the property and tenants. Don’t walk through the grass, wipe your feet before entering, and avoid touching personal items. A good rule of thumb is to treat the home as you’d want someone to treat your home for sale.
Chapter 26: Finding The Right Rental Property
“Landlords grow rich in their sleep.”John Stuart Mill
Buying a home to rent means a different set of investment criteria than searching for a home to live in. If you will be looking for a place to live yourself, there is personal value attached to aspects of the home. Your happiness is an important factor, which can come at a price. When buying a rental property, however, it all comes down to dollar and cents. You will not be living there so you need to primarily consider your return on investment.
Features of the home
Generally speaking, you should not put the same amount of money into upgrades on your rental property than your own home. It’s important to find a happy balance between creating a rental home with appeal and investing in home improvements that take minimal upkeep. Before investing too much in amenities and home upgrades, consider that renters typically do not concern themselves with maintaining the condition of the property as much as a homeowner would. Look for upgrades that are affordable and inexpensive to maintain.
Examples of good upgrades:
- Landscaping adds curb appeal to a single family home. Careful not to go too overboard with landscaping that requires constant maintenance. Stick to perennial shrubbery and plants that only require 2-3 visits by the gardener per year.
- Lighting fixtures and ceiling fans add value to your home, take little to no maintenance, and are appealing to renters.
- Window covers are inexpensive and give a fresh look to any room.
- Paint the interior walls one color throughout the house. This means you will only have to keep one color for retouches.
- Reface kitchen cabinets instead of replacing them. A good contractor can make your cabinets look brand new at a fraction of the cost of new cabinets.
- Kitchen and bathroom sink faucets aren’t too expensive, depending on your preference. Even a less expensive model can replace old fixtures and make your home appear less dated. Upgrading the kitchen and bathrooms are the best places to put your money into. At the bare minimum, update the toilet seats/covers and shower curtain.
- Repaint or replace the front door of the house. This door, remember, is one of the first things a prospective renter will encounter at your property.
- Installing an electronic thermostat is a cheap and noticeable way to modernize your rental property.
- An intrusion alarm is inexpensive an adds a lot of benefit and peace of mind to renters.
Upgrades that might not yield a return on the investment:
- Hot-tubs are fun but they are necessary to maintain even when the home is vacant.
- Hardwood floors become scratched, especially by renters who aren’t worried about the lifespan of the floors. Sanding and refinishing is much more expensive than carpet cleaning or replacement. Look into durable laminate flooring as a possible alternative.
- In some markets, single family rental homes do not provide a refrigerator. If you choose to afford this feature, make sure to advertise that benefit to renters. The same applies for washers and dryers.
Choosing the location of your rental property
We mentioned a few things about researching the area earlier like proximity to schools, hospitals, and major freeways. Here are additional factors to consider when choosing the location of your rental property.
- Proximity to your primary residence. If you plan on maintaining the home yourself, showing it to prospective renters, or routinely checking up on the property, you should consider how far it is from where you live. Traveling adds to the expense of maintaining your investment if you’ll be self-managing.
- What are nearby rents going for? Rents can fluctuate more quickly than home values, so this is something you want to stay on top of throughout your search. Take into account how many rental properties are available nearby. A surplus of available rentals in any area might mean you should look elsewhere or be prepared to compete with these rentals in your price point or home features.
- Are you looking at a property in a community with a Homeowners Association (HOA)? If investing in a community with an HOA, make sure to read the bylaws because some HOAs restrict renting or the number of rental properties allowed in the community at any given point. Having to be on a waiting list to rent your investment home isn’t something you want to discover after you buy the property.
Rental Home Expenses
- Mortgage – The interest, principle, and private mortgage insurance (PMI) payment due each month if you financed.
- Utilities – Electricity, water, gas, sewage, trash removal, cable, & Internet.
- HOA Fees – If in a community with a Homeowners association, what are the monthly fees? How much can they rise year to year? Are there additional shared expenses to consider with the HOA?
- Property Taxes – Usually a portion is added to your mortgage payment each month that covers the yearly expense.
- Insurance – Most lenders require you keep adequate home insurance if you finance your home. You also might want to purchase a better policy that covers floods, earthquakes, or fires, depending on where the home is located.
- Capital Improvements – Plan for future expenses long in advance. Have your contractor inspect the home before you purchase. He or she will be able to give you estimated useful life expectancy of the major components of the home such as flooring, roof, plumbing, electrical, HVAC, pools, etc. Your contractor can also give you estimated replacement costs. Divide the replacement cost by the number of months remaining in the life of the component, and then you know how much you need to save each month. Do not let a $2,000 HVAC replacement sneak up on you.
- Turn Costs – This is how much it costs to replace tenants. You will often need to repaint or at least retouch areas, clean the house, replace light bulbs, and shampoo carpets.
- Vacancy – Plan accordingly for vacancy at the end of the lease to give you time to make the repairs necessary for the next tenant as well as market the property for rent.
- Pets – Will you allow pets? If so, plan for the additional expenses associated with having a dog in the home. Allowing pets means you WILL need to replace the carpet. Consider charging a non-refundable pet deposit. If you choose to NOT allow dogs, consider how many people you will preclude. You will be chopping your prospective tenant base in half by not allowing dogs.
- Marketing – Will you market the home for rent yourself or hire a property management company? One takes time, both cost money.
Create a ProForma which is a series of cash flows. Plot out your projected monthly rent, allowing for adequate vacancy between tenants. Plot out all the operating expenses above. Once you have these incomes and expenses plotted, you can see what your monthly free cash flow will look like. This can be used to calculate Capitalization Rates and Rates of Returns to decide if this is the right investment for you.
Properties that are occupied
If you’re buying a property already occupied, consider if the lease is current. If you end up having to evict, the process can be lengthy. You will also not be collecting rent during this time but are still responsible for paying expenses. Not all occupied homes are a bad investment. You might want to see if you can negotiate a lease with the current leaseholders.
Sometimes in order to obtain financing, you’ll need to show that the property, or units within the property on a multi-family, are leased. The bank will want to see the lease, duration left on it, and history of payments in order to partially offset your debt to income ratio using the income from the property itself.
Finding a suitable property to rent takes a lot of hard work, but not an unmanageable amount. A real estate broker with experience helping buyers find rental properties will be able to help with most of the above.
Chapter 27: HOA Due Diligence
An HOA can be deal breaker for many properties. Not all HOAs are created equal and it’s important to perform your due diligence about the solvency of the particular HOA for any property that you’re interested in purchasing. In fact, mistakes relating to HOAs can be more costly than missing a repair on a home inspection (although you should do both). For example, we’ve seen investors buy townhomes in complexes where the HOA restricts rental properties. So the investor closed on the property only to discover that they could not legally rent it. They had to sell the property for what they paid, which resulted in a loss after closing costs. That’s a rookie mistake and one we hope you avoid by performing your due diligence about the HOA.
Your first step is looking around the complex, look at the common areas and verify the condition and make sure that the complex is well maintained. The exterior condition of the buildings and landscaping is often an indicator of how the rest of the property is maintained that you can’t see (like electrical, plumbing, etc).
Call up the Homeowners Association (HOA) to learn what the monthly HOA fee is and what it covers. This can range widely from solely upkeep of the common areas, to all exterior repairs, water, and trash. The more services you get, the more you pay.
When you’re on the phone with the HOA, or other times the property management company for the HOA, you are also going to ask them to provide you several documents. You are going to want to see:
CC&Rs – Covenants, Conditions and Restrictions outline what you can and can’t do with your property. For example, these can restrict the color you can paint your house or condo, if pets are allowed in the property, whether you can put up holiday decorations or plant a garden, how many cars you can park in your driveway, etc. This is also where you should discover any potential restrictions on rentals. The CC&Rs are not often amended so make sure you will be comfortable with their requirements before moving in, because changing them would be difficult.
Budget & Financials – Make sure the association has a healthy reserve that’s inline with the age of your buildings. For example, a 25 year old complex should have a large enough reserve to replace every roof within the next few years, and still have money left over for regular expenses. The association must be capable of making necessary repairs as they become needed in the future as well as handle larger deferred maintenance.
Special Assessments and Reserves – Do not put yourself in a situation where the HOA does not keep sufficient reserve funds to make repairs as they occur. If they do not budget for these repairs the HOA will likely issue a special assessment to the homeowners. That means more money out of your pocket for services that you thought were covered!
Insurance – The HOA will have an insurance policy to cover disasters such as fires. However, these policies will not cover your own personal possessions should they be damaged. Make sure to take a copy of the insurance policy to your insurer and see what you must do to protect your belongings.
Meeting Minutes – HOA committees meet with varying frequency, a good HOA committee will meet regularly. Look over the meeting minutes to learn what the hot button issues are within the HOA. Make sure that issues such as maintenance are being taken care of and not being pushed off until a later date.
Looking at these documents will get you started but always consult a knowledgeable real estate agent to assist you in the process and help you cover your bases.
Though living in a complex with an HOA can make life easier by reducing the burden of upkeep, the process of buying a property and the due diligence required is by no means easy.
Chapter 28: What are real estate contingencies?
A contingency is something that must happen for something else to happen. In real estate, a common example is a mortgage loan contingency which means the buyer must be approved for loan or they can not fulfill the terms of the purchase agreement. If the buyer doesn’t get the loan, the contingency is never met, the contract is cancelled, and the buyer receives their deposit back.
Another common example is an inspection contingency which means that the buyer will get a 3rd party inspection of the property. The property must satisfactorily pass that inspection before the buyer will fully commit to the purchase. Ultimately the buyer could feel that too much work needs to be done to justify their offer price.
Another common example is a pest inspection contingency which is mostly concerned with termites. The property has to pass as Termite Free or the problem must be corrected before moving forward with the sale.
A contingency can be written for anything, but in most situations, a seller is not going to accept an offer with too many contingencies–especially one where a seller has multiple offers.
Contingencies are designed to protect the buyer or seller. They are usually put into an offer to purchase or a counter-offer by the seller. For example, the seller could write a contingency that they will sell you the property if you agree to pay back taxes, HOA dues, or any cost that is usually associated with the seller.
Contingencies are removed from a contract when the terms are met. The person who asked for it issues a contingency release.
Including the proper contingencies could potentially save you from making a costly mistake.
Chapter 29: Investing in Fixer Upper
Purchasing a fixer upper can be a great way to enter into a property with equity from day one. Fixer uppers are essentially other people’s problems that you’re dealing with, which comes with upside, but also with work and risk.
What should home buyers be aware of when looking for a fixer upper?
When looking for a fixer upper you need to have an even stronger grasp of the numbers involved than if you were purchasing a move-in ready property. This is because you’re now dealing with two sets of number: the property itself and the repairs.
If it is a job you have not done before or are unfamiliar with, there may be additional cost associated that you are unaware of. It’s best to seek the help of a trusted contractor to help you look for additional issues that may have gone unnoticed and to help you estimate the costs of repair. However don’t expect this service for free. Pay your contractor handsomely for their time during this stage and you’ll avoid even costlier mistakes.
Another thing to look for is if the home has had any renovations in the past. If so, it’s a good idea to check with the local building department to ensure that everything was done to code. If it was not done to code, it is going to be your job to get it corrected so you can get the most value out of your home when it comes time to sell.
What are the most valuable improvements or renovations to make to a property in terms of rentability or resale?
Some of the best areas for improvements you can make with value in mind are bathrooms, kitchens, and curb appeal. However never underestimate the value of a new coat of paint. If you only have the time to concentrate on one area, you should spend it improving the landscaping and curb appeal of the home.
How do you choose the right contractor for the job?
Always make sure that with whomever you choose that they are licensed properly with the building department. Try to choose one that carries insurance as well as the mandatory bond. Also you get what you pay for so if you are bidding the job out and someone comes in a lot lower than what others are quoting there is a reason why. Don’t overspend, but also more importantly don’t under spend.
Chapter 30: Should I Consider Buying A Short Sale?
It’s likely that during your real estate research, you came across the phrase “short sale” or “short pay”.
What is a Short Sale?”
A Short Sale or Short Pay is a type of real estate sale. It is not a foreclosure nor is it an REO. When a homeowner (borrower) is behind on their mortgage, sometimes the lender will allow the buyer to do a short sale. When you buy a short sale, you are buying it from the borrower, not the bank. However, the big catch is that you buy it SUBJECT TO THE BANK’S APPROVAL.
Short sales can be a steal, but not always. It’s possible that the value of the home does not exceed the outstanding debt balance on the home. In other words, the property is worth less than is owed on it. For example, there may be a property that is worth $350,000 today, however, twelve years ago, that property could quite reasonably have been purchased for $500,000 with a loan of close to $500,000. Loans amortize slowly, so today that $500,000 loan is still, almost $500,000. Only now, the property is only worth $350,000.
As a result of the bank being owed more than the home is worth, they get the right to approve the sale. Once an offer is obtained, it is submitted to the bank for approval. If the bank approves the sale, escrow can be opened and the sale can be completed. If the bank rejects, as a result of getting perhaps $332,500 (a $350,000 price minus 5% for commissions and closing costs) on an almost $500,000 outstanding loan, the home remains on the market.
The home will remain on the market until an offer is accepted by the bank or the bank decides to foreclose on the homeowner. When the bank forecloses, the property either sells at a trustee’s sale or it becomes REO (Real Estate Owned); which we will cover in the next chapter.
Pros of Buying a Short Sale
- Price – Short sales can be an incredible value. They are difficult to get. Often times, this is factored into the price. Short sales can be priced well below market value.
- Property Condition – Most often the property owner is still living in the home so the property is not sitting vacant, like in the case of an REO. While short sale owners might not take the greatest care of their home, they will at least prevent things like leaks, plumbing, or electrical problems because they are living there. If the home was an REO, these things would sit unnoticed until a bank or broker got involved.
Cons of Buying a Short Sale
- Time – Short sales are subject to bank approval which means the process can take months. Short sales are known to drag on for several months and still fall apart.
- Second Mortgages – Some short sales have second mortgages on top of the primary first mortgage. The second mortgage lender must also approve the short sale. This can double the complications and time lines associated with buying a short sale.
- Other Liens – When dealing with a short sale there can be other liens (money owed) on title such as tax liens, HOA liens and mechanics liens. These will need to be paid before the home can be transferred. Either the bank or the buyer will need to pay for these.
Still Considering Buying a Short Sale?
If the cons didn’t outweigh the pros for you, there are still some things you need to consider. First and foremost, work with a real estate broker. Not just any real estate broker, an actual short sale specialist. A short sale specialist will be able to help you research title ahead of time and find out if there are any hidden liens.
Tax liens are very common, and if a homeowner is behind on the mortgage, they probably stopped paying the property taxes too. Property taxes are anywhere from 1-1.5% of the value of the property annually. If the taxes are 2-3 years delinquent, this amount could be 10s of thousands of dollars.
Just like with property taxes, the homeowner probably stopped paying HOA dues too. HOA dues range anywhere from as low as $40 per month for a single family home in an HOA to as much as $1,000s per month for high end HOAs with lots of amenities and services. It is safe to assume that HOA dues could be 2-3 years delinquent.
If the homeowner did any major renovations to the home, there could also be money owed to the contractor who performed the work. These liens are called mechanics liens.
Most importantly, your short sale specialist will find out which lender(s) is (are) involved. Short sales are dependent on the relationships with the bank. If your real estate broker knows the lender, that can be a huge benefit. They can hopefully help convince the bank that this short sale is the best path towards getting the most of their loan back. Unfortunately, no short sale specialist can guarantee success with short sales.
Now that you’ve considered buying a short sale, what about an REO?
Chapter 31: Should I Consider Buying an REO?
Now that you know short sales, let’s get you up to date on the other popular distressed sale, REO’s.
What is an REO?
REO stands for Real Estate Owned. This means it is real estate owned by a bank or lender. REO is essentially the last step in the foreclosure process.
In California, trust deeds are used as opposed to mortgages. When a borrower falls behind on their payments to the lender, the lender starts the foreclosure process. After proper notice and time, an appointed trustee holds an auction to sell the home, the proceeds of which will be used to pay the lender back.
If the property does not sell at the trustee’s sale, the lender takes ownership and the property becomes Real Estate Owned by the lender, or REO.
Pros of Buying an REO
- Price – REOs can be an incredible value. REOs can be priced well below market value.
- Bank Owned – Foreclosure is complete so the approval process will be much quicker (as opposed to a short sale).
- Liens – The foreclosure process will wipe out almost all liens, except tax liens which will be paid for by the bank.
Cons of Buying an REO
- You Get What You See – REOs have typically been neglected for years by a delinquent homeowner and could possibly have been sitting empty for many months. Properties fall into disrepair quickly. Banks are typically unwilling to make repairs to the property, so what you see is what you get.
- Hidden Expenses – Normally, when homes are sold, the sellers have to disclose all known defects of the home. However, when the seller is a bank, the manager of which has probably never been to the home, they cannot disclose these material facts. There may be significant unknown defects of the home or troublesome neighbors that could lead to some unknown expenses. Make sure and get a home inspection so you know what you are getting into.
- Competition – REOs are becoming few and far between and most buyers want them. This can drive up the price or create bidding wars. We recently listed an REO that brought in nearly 20 offers and sold for more than $20,000 above list price.
- Occupied Properties – If the property is occupied, it could be costly and timely to get them out
Still Considering Buying an REO?
Do you think the pros of buying an REO outweigh the cons? If you do, then you are like a lot of people out there. Make sure you consider everything before buying an REO. Work with an experienced REO Real Estate Broker. These brokers know the banks involved, they know the systems they use and more importantly, they know how to get the REO deals done.
Banks like REO deals to be clean and simple. They do not want to see an offer full of contingencies and with little money down. They have already lost a lot of money on the property and want out with as much cash down as possible. Your broker will be able craft an offer that is attractive to the bank, while still looking out for your needs.
Make sure you get a home inspection. REOs are exempt from some of the most important disclosures, the Transfer Disclosure Statement (TDS) and Seller Property Questionnaire (SPQ). These documents disclose everything about the property like if there is a leaky roof, if the plumbing is shoddy, if there is a bug in the electrical system, if the HVAC is constantly malfunctioning, etc.
Get a good home inspection done. It’s unlikely that the bank will do anything about it, but at least you will know all the issues you need to repair after you buy it. Knowing is half the battle, because it at least allows you to plan for the expenses.
Chapter 32: Not All Distressed Property Sales Fit The Stereotype
Although distressed sales (REO’s, Bank Owned, Foreclosures and Short Sales) can be sexy buys, many people still have a negative perception of them. It’s important to understand that not ALL distressed sales fall into the same category as the stereotypical distressed sale. There are some truly great homes that happen to be distressed. Here are some myths we’d like to bust.
Myth: All distressed sales are in terrible condition.
Busted: Some distressed sales are turnkey, move-in-ready. Sometimes the previous owner kept the home well maintained, or perhaps the new owner (a bank or investor of some kind) made all the repairs for you.
Myth: If you buy a distressed sale, you always have to pay back taxes and unpaid HOA fees.
Busted: After a property goes through the foreclosure process and the bank takes possession, these become charges for the bank to pay when they sell it. Beware, if you buy a short sale, you may have to pay for these items. Make sure to research title to find out about these charges.
Myth: Distressed sales will always sell for a discount.
Busted: The price of a distressed sale depends on the same factors as a traditional sale. Some distressed sales can actually sell at market value or even more. A distressed sale that’s move-in-ready, in a great location, when there are multiple interested buyers will likely not sell for below market. Many buyers make the mistake of putting in low ball offers just because a home is distressed; this can offend the bank and/or asset manager in charge of the home. Get with a real estate broker to determine the fair value of the home and make an offer there. If the home needs repairs, factor that into your price in the way of a credit at close. Don’t lose out on a good home by low balling your offer.
Buying a distressed sale can be a smart decision, but it comes with its own set of challenges and learning curve. With Distressed Sales, Foreclosures, Short Sales and REO’s/Bank Owned properties don’t let the “status” affect your offer price.
Chapter 33: What is a Deed of Trust or Trust Deed?
In California, if you hear someone say they have a mortgage, they probably have a Trust Deed or Deed of Trust. A Deed of Trust is used in California in lieu of a mortgage when financing the purchase of real estate. Whereas a mortgage has only two parties, the mortgagor and mortgagee; a Trust Deed has three parties, a trustor, a trustee and a beneficiary.
First, lets understand the three parties:
1. The beneficiary is the lender–such as a bank.
2. The trustor is the person who buys the home. He or she trusts the trustee with the deed until the loan is repaid
3. The trustee is a neutral third party who holds the deed to the property until the trustor repays the beneficiary. It’s the job of the trustee to carry out the express terms of the trust instrument and be impartial among beneficiaries.
When property is purchased using a Trust Deed the beneficiary (or lender) lends money to the trustor to purchase property. The beneficiary also executes a grant deed giving the property to the trustor. Immediately, the trustor also executes a deed of trust giving the property to a neutral third party trustee until the loan has been repaid. In this situation, the trustee holds “naked title.” This means the trustee holds the title, but does not have possession of the property. The trustor or borrower retains equitable title, meaning they get to occupy and possess the property.
Once the loan is paid in full, the trustor gets full title, ownership and possession of the property.
If a trustor or borrower defaults on the loan, after proper notice and time, the trustee will sell the property at trustee sale to a new owner who will take title using a Trustee’s Deed Upon Sale (TDUS).
If a property sells at trustee sale the proceeds from the sale are dispersed to three parties, in this order:
1. To the trustee to cover their costs associated with the sale and transfer of the property.
2. To the beneficiary or lender to cover their original loan, interest and legal fees.
3. If there are any funds remaining after the beneficiary is repaid those funds revert back to the trustor or borrower.
Are deeds of trust used in all states?
No. Deeds of Trust are mostly used in the financing of real estate purchases in Alaska, Arizona, California, Colorado, District of Columbia, Idaho, Maryland, Mississippi, Missouri, Montana, Nebraska, Nevada, North Carolina, Oregon, Tennessee, Texas, Utah, Virginia, Washington, and West Virginia. Most other states use mortgages.
What’s the difference between a Deed of Trust and a Mortgage?
With a Deed of Trust there are three parties involved, the borrower, the lender, and a trustee, whereas in a mortgage there are only two parties involved, the borrower and the lender.
Chapter 34: Capitalizing on the Real Estate Resources Available
“Do what you can, with what you have, where you are.”Theodore Roosevelt
You’ve come a long way in the investment process and have hopefully learned many of the skills necessary to avoid costly mistakes. The real estate buying process may seem complicated because honestly, it is! Remember though, you’ve built your team and are not alone. Be sure to capitalize on the resources available to you.
- Can you afford this property? Make sure you’ve spoken to your loan officer, accountant, and financial planner at this point in the process. All three can provide separate but valuable insight into whether this decision is right for you.
- How long has it been since your loan officer shopped rates? Things change quickly, especially in today’s loan market. A good loan officer will keep you informed of changing rates and new programs or incentives available to you. If some time has passed since you were quoted rates, it’s not a bad idea to let your loan officer know you’re still actively looking for a home and ask them to see if anything has changed that would affect your financing.
- Is the property worth what you’re offering? Have you consulted with a real estate appraiser, home inspector, and contractor? You took the time to build your team… maximize this time by seeking these individuals expert opinions.
- Are you using the Internet? The Internet allows us to research homes, view area crime reports, pull county records, map traffic patterns, and graph area home values over time. The amount of information available online was most likely not available the last time you bought a home or last time your parents bought a home, or if this is your first time.
- You have a buyer’s agent.. are you treating them like one? We’ve mentioned several times in this resource the importance of utilizing your real estate broker to their full capacity. A good broker has the knowledge, foresight, and expertise to help maximize your real estate transaction. Allow them to do their job and your real estate buying process will be successful, enjoyable, and a learning experience.
This chapter’s purpose is to serve as a reminder of all the work you’ve already put into the process of buying an investment property. No-one said it’d be easy, but you’re doing a great job! Continue working smart and capitalize on the resources available to you.
Now that you’ve come this far in the real estate buying process, it’s time to buy a property!
Chapter 35: Understanding Real Estate Expenses
“Beware of little expenses; a small leak will sink a great ship.”Benjamin Franklin
By now you’ve built your real estate team, learned how to research the area, and learned how to take advantage of the real estate tools and resources available. You are almost ready to start making offers on the many great homes you’ve found. Before you do, however, make sure you understand all the expenses associated with buying and owning an investment property.
Whether you are a first time buyer or you’ve owned a property for many years, understanding the expenses associated with real estate ownership is critical. As we said previously, knowing is half the battle, at least you can plan for it.
Here are some expenses you should be sure to consider when buying a home.
- Retro Fitting – Smoke Detector Installation, Carbon Monoxide Detector Installation, Water Heater Strapping, Sliding Glass Door Hazard Glazing, Seismic Gas Shut Off Valves
- Termite Repairs – Termite inspections set 2 “sections” for repairs. Section 1 is more critical, these are points of infestation that must be repaired. Typically you can get the seller to pay for section 1 repairs. Section 2 repairs are the inspectors recommended repairs. More than likely, these repair costs will fall on the buyer.
- Inspection Repairs – We’ve mentioned several times throughout this book that you MUST get an inspection. Your inspector will comb through the home and provide you with a report on anything that can or should be repaired.
- Aesthetic Repairs – These include normal beautification that homes need following a sale, like painting, patching walls, replacing floor coverings, deep cleaning, window coverings, etc.
Normal Homeowner Expenses
- Closing Costs – Buyers and Sellers both have closing costs which include, but are not limited to, title insurance premiums, escrow fees, recording fees, doc fees, transfer taxes, home warranty, loan origination fees (buyer only), appraisal fees (buyer only), real estate broker commissions (seller only).
- Loan Payments – monthly payments of principal, interest and mortgage insurance (if applicable)
- Real Estate Taxes – annual property tax payments, due in two installments
- Insurance – homeowners insurance, fire insurance, flood insurance, earthquake insurance
- Utilities – monthly bills for electricity, gas, water, sewer, trash, cable, internet, phone
- Lawn Maintenance – monthly payments for lawn upkeep
- Swimming Pool Maintenance – if applicable pools need to be cleaned and maintained by a pool contractor every month
- HVAC Filter Replacement – replacing the filter in your HVAC can extend its useful life and make it run more efficiently
- Light Bulb Replacement – Both indoor and outdoor lighting need replacement bulbs.
Long Term Expenses
- Roof Replacement – The lifetime of a roof depends on where the home is located and what it is made of. Expected life times of roofs run anywhere from 10 to 100 years and can cost 10s of thousands of dollars to replace.
- HVAC Replacement – HVAC units should last about 15 years, under normal use.
- Flooring Replacement – Flooring life spans differ based on material and use. Carpet lasts the shortest amount of time and generally needs to be replaced every 10-12 years. Regular steam cleaning can extend this. Hard surface flooring like tile, wood or bamboo lasts longer and can run from 20-50 years.
- Painting – painting is all depended on use and wear. If you have a formal living room or dining room that is rarely used, it will probably rarely have to be painted. The more walls are touched or rubbed up against the more frequently it will need to be painted. It is safe to assume you will need to repaint every 10 or so years.
- Appliance Replacement – most appliances last about 10 years, routine maintenance can extend the life time.
- Plumbing Replacement – most pipes in homes should last for about 100 years. Over time, products have improved and deficiencies in old materials have been discovered. Make sure and have your plumbing inspected by a home inspector, who will let you know if there is anything to worry about.
- Energy Saving Upgrades – These can include installing tankless hot water heaters, low flow plumbing fixtures, solar panels, and energy efficient appliances.
- Other Upgrades – Upgraded countertops (stone or granite), upgraded flooring (tile, wood, bamboo), backsplashes, light fixtures, water fixtures, etc.
Now that you have a thorough understanding of the costs involved with property ownership, you are ready to make offers. Let’s discuss how to make appealing offers that are more likely to be accepted by a seller.
Chapter 36: Making an Appealing Offer on Real Estate
Now that you’ve found a property, or several properties that fit your investment criteria, it’s time to make an offer. Making an offer is not as straightforward as you would think. An offer contains several different terms, all of which affect your overall offer. An offer is more than just price.
Components of a Real Estate Offer
- Price – The amount you are offering to pay for the property
- Length of Escrow – Amount of time from offer acceptance until closing
- Financing – Down payment and type of financing: Cash, Conventional Financing, FHA Financing, VA Financing, Other Loans
- Concessions – Credits, Upgrades, Additions, Anything the seller agrees to give the buyer
- Closing Costs – How will things like title insurance, escrow fees, recording fees, doc fees, or transfer taxes be paid
- Contingencies – things that must happen in order to close, such as selling another home, obtaining financing, passing an inspection, attaining an agreeable appraisal
Tips for Making an Appealing Offer
We hear stories all the time from investors, “I’ve made offers on five different properties and none of my offers have been accepted. What am I doing wrong?”
There are many mistakes buyers make when placing offers on properties. First of all, do not wait. If you found the right property, in the right location at the right price, why wait? Believe it or not, in certain markets there are more buyers than there are sellers. You do not want to miss out on a property because you were afraid to pull the trigger.
If you are ready to make an offer and feel uneasy about actually doing it, you are not alone. This happens all the time. Investors spend time and energy tracking down a place; they do all the work and then get nervous. Sometimes it is the fact that they are making the biggest purchase of their life or the fact that they are locking themselves into long term housing payments. Whatever the reason, people get scared, and that’s ok. Just ask yourself “What do I hope to gain by waiting?” Chances are, there is nothing you can actually gain, so make your offer now. Don’t wait for someone else to get an offer in.
Put your best foot forward. Many buyers today make offers for 10-20% below listing price. Why? So they can feel like they got a deal. The problem with that mentality is that list price is irrelevant to getting a deal. If you pay 10% less than the list price on a property listed 30% over value, did you actually get a deal? Of course not!
Determine what you think the property is actually worth and make your offer there. Leave a little room to come up in negotiations, but do not low ball your offer unless it’s actually necessary. Low balling an offer can insult and upset a seller. Once that happens, it will be hard to back track. If you do have to low ball, include your homework along with how you derived at that number so that they can understand where you’re coming from and how you got there.
Keep contingencies to a minimum. Many real estate transactions never actually close; they are cancelled for one reason or another. Sellers know this. Therefore, they want as few contingencies as possible. You need some contingencies to protect yourself, in case you cannot obtain financing or if there is a major defect in the inspection. However, only put in the contingencies you actually need. Discuss your offer in its totality with your broker. Ask him if he feels that it’s a strong offer. Real estate brokers have seen all different types of contingencies and typically can tell you if it will fly or not.
Do you actually NEED those closing costs you requested the seller pay for you? If you do, that’s fine, leave that part in your offer, but add them into the price. For example, if you need $5,000 for closing costs and were considering offering $250,000, make your offer $255,000. However, if you are putting down 20% or more, asking the seller to pay for closing costs could be a bad idea. If you do not NEED the closing cost credit, try not to ask for it. This weakens your offer.
One of the more frustrating things a buyer can do for a seller is to retrade the price. This means you make one offer, but then come back later and offer a new, lower price than was originally agreed upon. The most common reason for this is an issue with an appraisal or inspection item. Appraisal issues come up all the time; appraisers are catching a lot of blame for the housing bubble burst, so they are being much more conservative with their appraisals now. If you offer $250,000 on a property, it should be because you’ve done all your homework and that’s what you think it is worth. If an appraiser comes back and says he thinks it’s worth $240,000, why is that the seller’s problem? Stand by your offer, do not retrade it.
Go make your offers! In the next chapter, we will cover how to best negotiate on the offers you’ve made and the counter offers you will receive.
Chapter 37: Negotiating the Best Deal on Real Estate
If you have already put in a few offers on real estate, you are ready for this chapter because you have probably received some counter offers from the sellers. Counter offers are responses to offers and are the primary way real estate negotiations take place. Any time an offer on real estate is made there are three possible outcomes.
- Acceptance – the seller accepts your offer as is
- Rejection – the seller rejects your offer
- Counter Offer – the seller may come back and make you a different offer than what was offered in your original offer
For example, if a property is listed for $300,000 and you put in an offer at $275,000, the seller may come back and say “we will sell it to you at $290,000, all other terms to stay the same.” That is the seller’s counter. The next step will be your acceptance, rejection or counter.
Understanding Counter Offers
If you are entering into negotiations on real estate you need to understand how counter offers work. Not understanding could prove to be a costly mistake. A counter offer is an offer by one party that has anything different from the terms of the original offer. A counter offer is a rejection of an offer. Therefore, making even one seemingly insignificant change to an offer rejects that offer.
For example, let’s go back to the property above listed at $300,000 and your offer of $275,000. If the seller came back and countered your $275,000 offer with $290,000 they are legally rejecting the offer of $275,000. Therefore, if you reject their counter of $290,000 they cannot come back and say they will take the $275,000 unless you agree. You are no longer locked in on your offer of $275,000 because the seller rejected it by offering $290,000.
Tips for Negotiating on Real Estate
Purchasing real estate is a negotiation. This means that both parties need to be willing to compromise to make both sides happy. You must leave negotiation room in your original offer, unless you specify in advance. If you make an offer below list price and the seller counters, they expect you to be able to come up at least a little bit. In the example above, the seller was willing to come down $10,000 in their price. They will likely look at it as you being unfair if you stay firm at the $275,000.
If you are making a highest and best offer up front, specify that in your offer. “Highest and best” means that you will not be going up any higher in price. At least then the seller knows where they stand. No one wants to negotiate with themselves. The advance warning will let them know that counter offer attempts are going to be futile.
Be willing to change other terms. Perhaps you’ve gone as high as you can on the price. A good way to still negotiate without going up in price is to change other terms. Instead of going up in price, offer to close faster, put down a larger deposit, make the deposit non-refundable, or remove a contingency. These types of changes affect your offer and can make it stronger, but you do not have to sacrifice price.
Do not get too emotional. The negotiations can be the most emotional part of the buying process. Do not forget your investment criteria that you have already set. If you capped yourself at a certain price, make sure you stop when that threshold is reached. There are millions of houses out there and you can continue to look if your reasonable offer is not accepted. Falling in love with a house before it becomes your home can be a costly mistake.
Stick to your guns, make wise decisions, follow the advice of your real estate team and eventually one of your offers will be accepted. However, the acceptance of the offer does not end the process. You still need to have the follow up needed to close the deal.
Chapter 38: Closing Your Real Estate Transaction
Your offer has been accepted and the goal is now to get escrow opened and closed. This is not as simple as it seems. Many real estate transactions get to this point but never end up closing. When you talk about a real estate transaction “closing” that means the new owner has been recorded on title and has taken possession of the home. The transaction is not finished until it closes.
Get Escrow Open ASAP
Upon receiving an accepted contract from the seller, immediately take steps to open escrow. Escrow will have been chosen in your contract. Either you specified your escrow officer or you let the seller choose. Either way, have your broker find out who the escrow officer is and get a copy of the fully executed contract and the actual deposit check over to escrow.
Your escrow officer will get escrow open and deposit your deposit check into their escrow trust account. They will also notify you that escrow is open and send you a file number.
Choosing the Inspector / Get a Home Inspection
If it sounds familiar, it’s only because we’ve been beating this dead horse, GET A HOME INSPECTION. It is that important. Skipping a home inspection could prove to be the most costly mistake you could make. If you don’t know a good home inspector, start with referrals from your real estate team. Your experienced real estate broker can provide a referral from a past transaction.
You can also search online using the tools we’ve already provided you with. Check websites like Google for searches of “Home inspectors in (city name)”. Go to servicemagic.com and search for a home inspector in the zip code of the home you are purchasing. After you choose your inspector, search that inspector online to see if there are any reviews. Remember when reading reviews that the only people who write reviews are typically either VERY mad or VERY happy. Take it with a grain of salt; just make sure there are no very bad, seemingly legitimate reviews.
After you get the inspection report back, read it thoroughly and go through any questions you have with your real estate broker and home inspector. If there were hidden things (items you did not know about before making an offer) you can try to work something out with the seller. A couple solutions are for the buyer to receive some form of a credit for later repairs, or the repairs be completed and the contractor paid at closing out of a combination of seller and buyer funds.
THIS IS NOT AN OPPORTUNITY TO RETRADE. As we covered earlier, a retrade is when you offer one thing, then later once escrow is opened, you request a reduction of some sort. If the pool was empty and clearly in disrepair when you toured the home, do not use the inspection as a reason to ask for a $10,000 reduction because the pool needs repairs. If you knew about it when you made your offer, do the right thing and stand by your offer. If you did not know about an item needing repairs on the inspection report, those are the items you should negotiate on.
Title Searches, Title Reports and Title Insurance
Upon opening of escrow, the escrow officer will order a preliminary title report. This is a report detailing the ownership and description of a property. It will have a legal description, show the current owner, and show all recorded documents against it. Some items that you would expect to see are:
- Real Estate Taxes Owed and Tax Liens
- Mechanics liens, if any
- Covenants, Conditions and Restrictions (CC&Rs)
- Current Mortgages or Deeds of Trust
- Easements – a right of an owner on the property of another owner. An easement could allow you to use someone else’s property or it could allow someone else to use your property.
- Encumbrances – a burden against the property such as money owed, like a mortgage
Post Offer Acceptance Advice for a Timely Close
- Don’t Make Big Purchases – Believe it or not some people actually buy cars while their loan is in underwriting! Do not do anything to change your financial status in any way until you have completed your purchase.
- Get Your Lender Everything ASAP – The funding of a loan is the last step in your home purchase. Do everything you can to get the loan done as quickly as possible.
- Stay on Top of Your Lender – Your lender should provide you regular updates on the status of your loan. If this does not happen automatically, request updates from your lender until the process is complete.
You are now a property owner!
By following our advice, you hopefully will have secured a great deal on an investment property and avoided making costly mistakes.
We hope you find this resource helpful as you begin your journey into real estate investing. If you have any questions or feedback about this resource, please e-mail firstname.lastname@example.org.
Glossary of Terms
Acceleration Clause – A part of a loan agreement that allows the lender to demand payment in full immediately if certain things happen (such as borrower default).
- Example: If a borrower has an acceleration clause in his or her loan documents, they may be called upon to pay the balance in full if they miss a payment. This is a clause that is beneficial to the lender, it gives them added protection.
Adjustable-Rate Mortgage (ARM) – A mortgage loan that has an interest rate that moves with the market. The rate on this type of loan is tied to an index, typically, US Treasuries or LIBOR.
- Example: A borrower may use an adjustable rate mortgage to keep their monthly payment lower in the short term. A mortgage rate is determined by a spread plus an index. The spread is the lenders “profit”. In an adjustable rate mortgage, the lender has protection against future interest rate increase because the rate of the mortgage floats with the rate of the index. Therefore, the lenders spread does not need to be as high as it would on a fixed rate mortgage.
Amortization – To gradually pay down the principle balance of a loan over time.
- Example: A lender can lend money in different ways. If a borrower does not want to have to pay the loan back as one lump sum, the loan amount will be amortized over the length of the loan. This means that each month part of the monthly payment will go towards paying back the loan amount. The other part will be interest.
Amortization Schedule – A table or schedule that details the payments on an amortizing loan. This shows the total monthly payment, the portion of the payment for interest, the portion of the payment for principle, beginning balance and ending balance.
- Example: If a borrower wanted to know exactly how much principal (loan balance) he is paying down each month, he would refer to an amortization table.
Annual Percentage Rate (APR) – The actual cost of borrowing as a percentage rate. The calculation accounts for all finance charges and interest payments made and is expressed as an annual or yearly rate.
- Example: Interest rates are quoted to the public using annual percentage rates. An annual percentage rate factors in all loan costs, so they can be compared between different lenders and loan products.
Appraisal – A statement of a property’s value by a licensed appraiser. It must also contain the reason for the value and how it was arrived at.
- Example: To determine a value for a certain reason, such as for taxes or for sale, an appraisal can be ordered from a licensed appraiser. The appraisal is done and valued for a specific reason at a specific time.
Appraised Value – The value of a property as stated by a licensed appraiser.
- Example: An appraised value is the end result of an appraisal. An appraised value is a value for a specific purpose at a specific time.
Appraiser – A licensed, trained professional who is qualified to provide appraised values of properties.
- Example: An appraiser is licensed by the state to evaluate properties. Appraisers follow specific protocol outlined by the office of real estate appraisers to come up with a fair value for the specified purpose.
Appreciation – An positive change in value of a property over time, due to normal market functions.
- Example: Speculative real estate buyers buy for appreciation. Appreciation is the gain in value over time due to general market forces.
Assessed Value – The value placed on a property by the local tax assessor for tax reasons.
- Example: The local tax office uses the assessed value, as determined by a local assessor, to determine the amount of property taxes are owed on a property.
Assessor – An person who works for the local government office to provide the taxable value of properties.
- Example: The assessor is the person who works for the government tax office who values your property.
Asset – Any item of value owned by a person or entity.
- Example: Assets are anything of transferable value. Assets can be anything from money, to real estate, to art and much more.
Assignment – When transfer of a loan to another person or entity. This must be allowed by the lender in the loan documents.
- Example: If permitted by the lender, a borrower may transfer a loan to another borrower through an assignment.
Assumable Mortgage – A mortgage loan that can me taken over by another person or entity.
- Example: An assumable mortgage is one that can be transferred through assignment from the original borrower to a different borrower. The lender must always approve of this.
Assumption – When a new borrower takes over a loan from a previous borrower. This must be allowed by the lender in the loan documents.
- Example: When a different borrower takes over a loan from the original borrower the process is called assumption.
Balloon Mortgage – A type of mortgage loan that is not completely amortized over the term of the loan; the balance of which is made in one final payment called a balloon payment.
- Example: Buyers who anticipate real estate values to rise can bet on this using a balloon mortgage. They keep their payments low because the loan is not fully amortizing, but then they have to pay the large lump balance back at the end of the loan. If property values fell drastically, they may own the lender a substantial amount of money.
Balloon Payment – The large payment at the end of a balloon mortgage; its the entirety of the remaining balance of the loan.
- Example: If your loan does not fully amortize, when the loan term ends, you must pay back the full balance owed in the form of one final, large balloon payment.
Bankruptcy – A legal action filed by a person or entity to restructure or alleviate debts.
- Example: In recent years many people have come to a point in their lives where their liabilities (what they owe) outweigh their assets (what they own). To get relief from some of their debts people can file bankruptcy, however, this has a huge negative impact on their credit and can affect their ability to borrow money for many years to come.
Biweekly Mortgage – A type of mortgage that requires payments be made every two weeks, rather than once per month.
- Example: In order to make more frequent, smaller payments a borrower can use a biweekly mortgage and make payments every two weeks, rather than one time per month.
Bond Market – A forum for the buying and selling of government and corporate bonds.
- Example: When a borrower gets a mortgage loan the rate is typically calculated by adding a spread to a US Treasury bond that is traded on the bond market. Therefore when rates in the bond market go up, so will mortgage rates.
Bridge Loan – A short term loan that is designed to allow homeowners to purchase new homes with the equity in a home for sale but prior to its sale.
- Example: If an owner of a home purchases a new home before selling their property and does not have a home sale contingency in the purchase agreement of the new home, they may need to try to get a bridge loan to bridge the gap until they have the funds from their original home.
Broker – A licensed person who acts as an agent for one or both parties in a transaction for a fee.
- Example: When purchasing real estate, inexperienced buyers should always work with an experienced real estate broker who can make the transaction easier and more profitable to the buyer.
Buydown – Paying upfront fees to a lender in exchange for a lower interest rate on a loan.
- Example: If a buyer wants to get a lower interest rate on their loan they can do a buydown where they pay an upfront fee to compensate the lender for the lower interest rate.
Capitalization Rate – A ratio of net operating income to the value of an asset. For real estate investment, it is used as a valuation tool as a required return. Also called “cap rate”.
- Example: Investors determine their required capitalization rate and apply it to the expected net operating income of an investment property to determine what it is worth. If an investor is seeking to buy an investment at a cap rate of 8% and the expected annual net operating income is $100,000, the investor values the property at $1,250,000 ($100,000 ÷ 8% = $1,250,000).
Cash-out Refinance – A refinance of a loan that is larger than the current loan balance.
- Example: If a homeowner wants to take advantage of lower interest rates and use some of the equity in their home, they can get a cash-out refinance. The new loan will be for a greater amount than the current loan, therefore more than paying off the existing loan; giving the rest of the cash to the homeowner.
Certificate of Eligibility – To get a VA loan, the veteran must first obtain one of these documents from the Veterans Administration that proves the veteran is eligible fr a VA loan.
- Example: If you are a veteran and want to purchase a home using a VA loan, the first step should be to get a certificate of eligibility which will show that you are qualified to purchase a home using a VA loan.
Certificate of Reasonable Value (CRV) – The document issued by the Veterans Administration that establishes their benchmark value of a property being purchased using a VA loan.
- Example: When purchasing a home using a VA loan the price must be less than or equal to the certificate of reasonable value issued by the Veterans Administration. If the price exceeds that value, the buyer must cover the cash difference.
Chain of Title – An analysis of the transfers of title to a piece of property over the years.
- Example: When purchasing a property, a buyer should always check the chain of title to make sure the seller is who they say they are and that there are no unidentified liens against the property.
Clear Title – A title that has no liens or pending litigation against it.
- Example: In order to purchase a property it needs to have a clear title or it cannot be transferred.
Closing – The end of a real estate transaction, when the property legally changes hands and the new owner is recorded on title.
- Example: After the closing the new owner or the new owners agent will make arrangements to collect the keys as there is now a new legal owner.
Closing Costs – Costs that are paid at the closing of a real estate transaction. These are things such as prorated taxes, insurance and dues, commissions, recording fees, title insurance, mortgage fees, escrow fees, inspection fees, etc.
- Example: When purchasing a home make sure you are prepared to pay the down payment and closing costs, which can be approximately 3% of the purchase price.
Closing Statement – The document issued at the end of a real estate closing that itemizes the funds in a transaction. It breaks out price, loan amount, down payment, credits, prorations, commissions, closing costs and then shows how much is owed by the buyer and what is owed to the seller. It is also called a “HUD-1 Settlement Statement” because the form is issued by the Department of Housing and Urban Development (HUD). It can also be referred to as a “closing statement” or “settlement statement.”
- Example: After the closing of a home the buyer and seller can review their closing statements to see an itemized breakdown of where every penny in the transaction went.
Cloud on Title – An encumbrance on title of any type that hinders the sale of a property. These can be pending litigation against the property or previous owner or monetary liens.
- Example: When purchasing a property you will have to make sure there are no clouds on title that will have to be resolved or paid before the transaction can close.
Collateral – An item of value put up by a borrower that is used as security for a loan. In a mortgage, the home is the collateral for the loan.
- Example: A lender requires a borrower to put up collateral to protect themselves if the borrower does not repay the loan. In a mortgage, the home serves as collateral and will be taken back by the lender if the borrower defaults.
Commission – A fee earned by a broker, agent, facilitator or salesperson for facilitating a transaction.
- Example: Real estate brokers are paid by commissions they earn when transactions close.
Common Area Assessments – These are fees charged to homeowners who live in common interest developments such as Condominiums, Planned Unit Developments and Master Planned Communities; it is used to maintain and operate the common areas. They are also called “property owners assessments,” “condo owners assessments” or “homeowners assessments.”
- Example: If you live in a condominium development with common area facilities, you will have to pay monthly common area assessments to pay for the maintenance of those areas.
Common Areas – The portions of property that are owned as undivided common interests. These are the parts of condominiums, master plans or planned unit developments that all owners have the right to use and enjoy. They are paid for by all the property owners and maintained by the association.
- Example: One of the biggest draws of living in a condominium are the common areas that are a part of it. These amenities add to the lifestyle of living in a condo while you enjoy the pools, fitness centers and tennis courts.
Community Property – In California, this is property that is owned jointly by a married couple, they each have equal ownership.
- Example: When a husband and wife purchase a property in California it becomes community property and they equally own it, no matter who actually paid for it.
Comparable Sales – These are recent sales of homes that are similar and located in the same area that act towards setting a benchmark value for other similar homes. Also referred to as “comps”.
- Example: When you are buying or selling a property, ask your broker to show you the “comps” or comparable sales so you can see what other similar properties in the area are selling for.
Condemnation – The process the government goes through to take a property without the consent of the owner for public use, through the power of eminent domain.
- Example: – Sometimes governments expand highways or build new utility services in town as cities grow. As a result, they must acquire the land to do so. They use the power of eminent domain to forcibly buy any land they need for public use at fair market value. This process is called condemnation.
Condominium – A type of ownership in real property where owners exclusively own an individual unit space and then also have a common undivided interest in common area amenities.
- Example: A home buyer who wants to enjoy the benefits of amenities such as pool, fitness, tennis and not have to maintain a yard may opt to buy a condominium with the desired amenities.
Construction Loan – A short-term type of loan used to finance construction. These loans are typically repaid using the proceeds from the sale of homes that were constructed. In these loans, the lender makes the payments to the contractor and the developer starts making interest payments to the lender.
- Example: When developers build large developments they typically finance them with construction loans that are quickly repaid using sale proceeds from the home sales.
Contingency – A thing or condition that must occur before a contract becomes legally binding. In real estate contingencies protect buyers and sellers against loans, inspections, appraisals, etc.
- Example: If you are purchasing a home using a loan, you should add a loan contingency to your offer, so if you do not get your loan you can cancel the contract and get your deposit back.
Contract – An agreement, in writing or oral, between two or more parties that specifies the duties of each party.
- Example: If you sell your home you need to do so using a contract to protect yourself and the buyer.
Conventional Mortgage – Loans that conform to secondary loan markets (those purchased by Fannie Mae and Freddie Mac) but are not guaranteed by government entities.
- Example: When loan specifics do not conform to loans that are backed by government entities but do conform to specific secondary market regulations, they are conventional mortgages.
Convertible ARM – A mortgage that starts out as an adjustable rate mortgage but allows the borrower to convert it to a fixed rate loan for a specified period of time.
- Example: A borrower who wants to take advantage of lower initial payments but still have the long term protection of a fixed rate loan can use a convertible ARM.
Cooperative (co-op) – A type of multiple ownership in which the owners own stock in a corporation that gives them the right to occupy their specific share of the development. It is an alternative to a condominium.
- Example: In areas where cost of living is high cooperatives are sometimes used instead of condominiums because it keeps costs down; bills are paid by sending the shareholders their bill for their portion.
Credit Repository – An organization that collects, records, analyzes and reports on the credit histories of people and entities. Also known as credit bureaus.
- Example: Everyone should know their own credit report, so check with the major credit repositories to check up on your report.
Creditor – A person who has a monetary claim.
- Example: In a mortgage situation, the lender is the creditor.
Credit Report – A third party report that details a borrower’s credit history and rates his or her credit worthiness.
- Example: When applying to for a loan, bring a copy of your credit report, as it will be required by your lender.
Debt – An amount owed to some other person or entity.
- Example: In a mortgage, the balance owed is the debt.
Deed – A document that gets recorded in county records that conveys ownership from one person or entity to another.
- Example: When purchasing a property, the seller will transfer ownership to you using a deed.
Deed of Trust – A document that transfers ownership in property from a borrower to a trustee who retains ownership until the loan is repaid to the lender.
- Example: If you took a loan to purchase property in California, you most likely did it using a deed of trust not a mortgage as the typical nomenclature would indicate.
Deed-in-Lieu – A process whereby a property owner returns ownership and possession of a property to the lender instead of going through foreclosure proceedings. This process avoids foreclosure. Recently, many developers who have fallen delinquent on large commercial loans have gone with a deed-in-lieu to prevent the bank from taking the time and money to foreclose in exchange for being released from a personal guarantee.
- Example: In recent years, many homeowners and development owners have avoided the foreclosure process with their lenders by opting for a deed-in-lieu.
Default – When a borrower fails to uphold their responsibilities under loan documents. Most of the time this is missing or being late on a mortgage payment.
- Example: When the economy collapsed and homeowners lost their jobs, many of them had no choice but to default on their mortgages.
Delinquency – Being late or missing a payment.
- Example: The borrower who could not keep up with his mortgage payments stopped paying and threw his mortgage into delinquency.
Deposit – The amount of money paid upfront as a down payment on a larger future some. This is sometimes called an “earnest money deposit” and is given to a seller to demonstrate a buyers intention to purchase a property.
- Example: When a buyer breaches a purchase agreement by not going through with a transaction, the seller will keep the buyers deposit.
Depreciation – A decrease in the value of something due to natural market forces and use. It is the opposite of appreciation.
- Example: Starting in 2005 prices started to depreciate to the point where they got so low that people no longer felt it was worth it to keep paying on loans that were far larger than the new value of the property.
Discount Points – Upfront fees above origination fees that are paid to a lender in exchange for a lower interest rate on a loan. One “point” is one percent.
- Example: A borrower who desires to keep their interest rate lower than normal can pay discount points upfront to the lender.
Down Payment – The cash that a buyer puts down on a property that is not financed in their loan.
- Example: Since properties can no longer be purchased using 100% financing, home buyers must come up with a down payment in addition to the proceeds from their loan.
Due-on-Sale Provision – A clause in loan documents that requires a buyer repay the loan in full upon sale of the property.
- Example: When a buyer sells his home prior to the end of his loan term, he typically must use the sale proceeds to repay the loan due to a due-on-sale provision in the loan documents.
Earnest Money Deposit – The amount of money paid upfront as a down payment on a larger future some. This is sometimes called simply a “deposit” and is given to a seller to demonstrate a buyers intention to purchase a property.
- Example: When a buyer breaches a purchase agreement by not going through with a transaction, the seller will keep the buyers earnest money deposit.
Easement – An interest that one person or entity has in the property of another owner. It is for a specific use.
- Example: If you buy a property there is always an easement that allows the utility companies access to the property to service and maintain the lines.
Effective Age – The age of a property in terms of its physical condition and level of maintenance.
- Example: A property that is well maintained will have a younger effective age than that of a property which is not properly maintained.
Eminent Domain – The power of government to force the sale of private land for the greater good public use. They must pay fair market value for the property.
- Example: As cities expand, governments expand interstates and freeways. In order to acquire the necessary land to do so, they can call upon their power of eminent domain to induce a fair market value sale.
Encroachment – Anything that extends over the property line, illegally onto another property owners property. This can be something like a roof overhang, fence, driveway or tree branch.
- Example: A neighbor may build a fence without checking the property lines and in doing so create an encroachment on your property. To fix it, if the neighbor is unreasonable, you may have to take legal action.
Encumbrance – Something that limits or affects a property owners use of their property.
- Example: When you put a mortgage on your home to purchase it you are creating an encumbrance because you now must pay off that mortgage in order to sell your home.
Equal Credit Opportunity Act (ECOA) – A federal law that made it illegal for creditors and lenders to discriminate based on religion, color, race, sex, age, martial status or national origin.
- Example: The Equal Credit Opportunity Act made it illegal to discriminate based on a multitude of reasons when lending money to borrowers.
Equity – The difference between a property’s value and the debt on the property.
- Example: One of the primary benefits of homeownership is that as you pay your mortgage you are building equity.
Errors and Omissions Insurance (E&O Insurance) – Insurance that protects a real estate broker or salesperson from mistakes, errors or omissions that may occur during a transaction.
- Example: If a real estate broker mistakenly fails to disclose that a roof is leaking and the buyer brings a suit against the broker, the broker will be protected by his errors and omissions or E&O insurance.
Escrow – During a real estate transaction escrow coordinates the transfer of the property deed and purchase money.
- Example: In order to make sure the buyer gets the deed and the seller gets the money during a real estate transaction escrow makes the exchange and records the documents.
Estate – A property owners interest in their property.
- Example: If you are a homeowner your ownership rights are an estate in the property.
Eviction – The legal process of removing inhabitants from your property.
- Example: If a tenant in your rental property stops paying rent and will not leave willingly, you may be forced to go the eviction route to get the property empty.
Exclusive Listing – A contract for a real estate broker to list a property for sale for a fixed period of time, during which they will have the exclusive right to sell the property.
- Example: Most listing brokers work with exclusive listings because it makes the process more organized to have all offers going through one broker only.
Executor – The person who is responsible for administering the terms of a deceased’s will. The feminine of the word is Executrix.
- Example: After the death of a person, the executor of the deceased’s will facilitates the distribution of the estate.
Fair Credit Reporting Act – A law enacted to protect consumers and regulates consumer credit reporting by reporting agencies and establishes procedures to correct mistakes.
- Example: The Fair Credit Reporting Act makes the storage, dissemination and reporting of credit more fair for all people.
Fair Market Value – The price that a property should sell it given normal market conditions, with ready, willing and able buyer and seller, when neither party is compelled to act.
- Example: When you get a loan to purchase real estate the lender will get an appraisal to determine the fair market value of the property and they will use that for the basis of the amount of the loan.
Fannie Mae (FNMA) – The Federal National Mortgage Association (FNMA or Fannie Mae) is a government chartered, publicly traded company that purchases home loans on the secondary market, and in doing so funds more home loans.
- Example: Fannie Mae is one of the primary reasons most home buyers are able to get loans to purchase real estate. When lenders lend you money to purchase a home, they turn around and sell them home to companies like Fannie Mae on the secondary market.
Fannie Mae’s Community Home Buyer’s Program – A program under which mortgage insurers and Fannie Mae offer more flexible underwriting rules to make it possible for more low to moderate income families to purchase homes.
- Example: The Fannie Mae Community Home Buyer’s Program was designed to help people purchase homes, they want to help so much, they even require the borrowers to take classes on homeownership.
Federal Housing Administration (FHA) – A part of the US Department of Housing and Urban Development that insures certain home loans and establishes the guidelines for approving those loans.
- Example: The Federal Housing Administration makes it possible for many low to moderate income families to get home loans by insuring their loans.
Fee Simple Estate – An unlimited and perpetual form of ownership in property.
- Example: When you own a fee simple estate you own it for your entire life and can will it to your heirs.
FHA Mortgage – A home loan that is insured by the FHA or Federal Housing Administration. Also called a government loan.
- Example: FHA Mortgages are those that can be given to buyers with lower credit than would typically be accepted by a lender because the FHA insures the loan.
Firm Commitment – When a lender agrees and commits to loan money to a borrower to purchase a specific property.
- Example: When purchasing real estate its important to get a pre approval and firm commitment from your lender so you can demonstrate your ability to close to the seller.
First Mortgage – The first loan as per the recording dates of the liens. Also called the senior mortgage.
- Example: When a property is foreclosed and sold at auction the first loan to be paid back with the proceeds is the First Mortgage.
Fixed-Rate Mortgage – A loan where the interest rate is fixed for the duration of the loan.
- Example: When interest rates are low buyers take advantage of the low rates by locking into long term fixed-rate mortgages.
Fixture – When personal property is permanently attached to real property it becomes a fixture and is considered real property.
- Example: When you install chandeliers or other light fixtures in your home you need to be careful when selling the property as to what goes with it, because those chandeliers will be looked at as fixtures.
Flood Insurance – Insurance purchased to compensate the damaged property owner in the event of a flood.
- Example: If your home is downgrade in your neighborhood and you live in an area that is subject to sudden down pours, you should get flood insurance to protect your home and personal property.
Foreclosure – The process by which a lender takes ownership of a property where the borrower is delinquent on their loan payments.
- Example: If you fall behind on your mortgage the lender will initiate a foreclosure to take the property back and sell it to recoup their loan.
Government National Mortgage Association (Ginnie Mae) – One of the big players on the secondary loan market, functions like Fannie Mae and Freddie Mac; purchases mortgages on the secondary market, providing funds for the primary mortgage market. The difference between Ginnie Mae and Freddie/Fannie is that Ginnie Mae is wholly owned by the US Government.
- Example: The secondary mortgage market is made up of corporations who securitize, buy and sell mortgages. In addition to the widely known Freddie Mac and Fannie Mae, another one of the big players in the secondary mortgage market is Ginnie Mae or the Government National Mortgage Association.
Grantee – The person or party on the receiving side.
- Example: The grantee is the buyer in a real estate transaction.
Grantor – The person or party who is transferring.
- Example: The grantor is the seller in a real estate transaction.
Hazard Insurance – Insurance that covers a property owner for damage caused by fire, wind, vandalism, or other hazards.
- Example: If you own your home you should purchase hazard insurance to protect your home and property from damage due to various hazards.
Home Equity Conversion Mortgage (HECM) – Typically called a reverse mortgage, the lender makes payments to the homeowner and then is repaid when the home is sold because the homeowner no longer occupies the property.
- Example: Some senior citizens use a home equity conversion mortgage to retire if they own their home.
Home Equity Line of Credit – A loan against the equity in a borrowers home.
- Example: A home owner can use a home equity line of credit to borrow money against the value of their home.
Home Inspection – A detailed inspection of a home by a professional property inspector.
- Example: When purchasing a home, make sure to get a home inspection to make sure there are no hidden defects in the home.
Homeowners’ Association – A not for profit organization that manages, maintains and operates the common areas of a community.
- Example: If you purchase a home in a condominium development be sure to check on the homeowners association which would govern your property.
Homeowner’s Warranty – A warranty that covers the appliances and systems of a home, this is purchased by the homeowner and can be for a variety of different lengths and cover a variety of different items.
- Example: When you purchase a home, it may be a good idea to also purchase a homeowners warranty in case the appliances or systems break down.
Joint Tenancy – A way to take title to a property where both owners own it together, there is no division of ownership. However, when one owner dies, the surviving owner becomes the full owner. It cannot be willed.
- Example: Married couples typically hold property using joint tenancy so that if one spouse dies it automatically goes to the surviving spouse.
Judgment – Any decision made by a court of law.
- Example: When a lender forecloses on a borrower, they can also go to court to seek a judgment for any loan amount that cannot be recouped through a foreclosure sale.
Jumbo Loan – A loan that is larger than the limit as set by Fannie Mae and Freddie Mac; can therefore not be sold on the secondary market. Here is a link where you can find up to date loan limits in California by county, these change.
- Example: If you purchase a home and need a loan that is too large to conform with Fannie Mae and Freddie Mac’s loan requirements you must get a jumbo loan, which in Southern California is between the low $400s and low $600s depending on county.
Lease – A verbal or written agreement between a landlord and a tenant that specifies a payment agreement for possession of a piece of property.
- Example: In the State of California, if you have a lease to rent a property from a landlord for more than one year it must be in writing.
Lease Option – A different form of financing where a lease is entered into and the tenant has the option to purchase the home at the end of the lease. Extra rent may be paid to have it applied to the down payment.
- Example: If there is a willing seller, sometimes a buyer can use a lease option to purchase a property if they are low on cash. They will pay a little more rent each month, which will be applied to the down payment.
Leasehold Estate – A way of possessing property for a long period of time under the terms of an agreement whereby the possessing party does not actually own the property but rather owns the rights to possess the property for a period of time.
- Example: Sometimes people buy properties with 99 year ground leases, these are leasehold estates. The owner can do whatever they want, so long as it does not violate the terms of the lease, for 99 years, but then the property reverts back to the party who leased it.
Legal Description – The description of a property used in county records and title reports which are the written words that describe the property. Typically this is the lot and block system.
- Example: The legal description will appear in the title report to ensure there is no confusion about the property being sold.
Lien – A claim against a property that is financial in nature. It must be paid before the property can be sold.
- Example: A mortgage is a lien.
Liabilities – Obligations of a financial nature. Amounts owed to another person or party.
- Example: Amounts you owe are liabilities, such as mortgages and car loans.
Line of Credit – An agreement by a financial institution or bank to offer a certain amount of credit to a person or entity.
- Example: To make purchasing quick and easy most people use a line of credit, such as a credit card, for everyday purchases.
Loan Officer – The representative of a financial institution or bank who works with borrower to issue loans.
- Example: A good loan officer can fund a mortgage in a quick, easy manner and make the transaction better for all parties; choose wisely.
Loan Origination – Obtaining and issuing new loans.
- Example: The beginning of the mortgage process is with the loan origination team who issues new loans.
Loan Servicing – The process of handling a loan from its issuance through the end of the term. This consists of collecting payments, sending notices, and foreclosures. Most often, this function is not done by the same company who lent you the money.
- Example: One of the big businesses that has boomed in recent years is loan servicing because that is the function of seeing a loan through the end of the term. Loan servicers collect monthly payments, and initiate foreclosure proceedings.
Loan-to-Value (LTV) – The ratio of loan amount to value of property a lender is willing to lend.
- Example: When you purchase your home, you need to be careful about the price you pay because your lender will not lend you the full purchase price to get the home. They will lend you only a portion of the value of the home as determined by a loan-to-value ratio. If a property worth $100,000 on an appraisal, which sold for a $125,000 purchase price and the lender will fund an 80% loan-to-value means they will lend $80,000 and the buyer must pay the other $45,000.
Margin – The spread between a rate on a loan and the index it is tied to. As the index moves, the rate moves, while maintaining a constant spread for the lender.
- Example: If you have a good relationship with a bank they may be willing to take a smaller margin on a loan with you which will save you money.
Maturity – The date when a loan becomes due in full.
- Example: The loan is due at the maturity date.
Modification – When a lender agrees to change the terms of your loan.
- Example: Lately, many people have been trying to get loan modifications to reduce their loan payments.
Mortgage – A document that offers a property as collateral for a loan.
- Example: If you are seeking to purchase a property but do not have enough money to do so you can use a mortgage to finance part of the price.
Mortgage Banker – A banker who originates and funds their own loans.
- Example: If you are seeking a loan for a home and do not have a good relationship with a bank you can try to work with a mortgage banker who can originate, fund and service the loan for you.
Mortgage Broker – A company or person who represents lending institutions and banks in facilitating the lending of home loans.
Example: If you need help with a loan a mortgage broker can shop several different loans for you.
Mortgage Insurance (MI) – Insurance that protects the lender in the event of a borrower default.
- Example: If you get a high loan-to-value loan you will probably have to pay mortgage insurance to provide additional security to the lender.
Mortgagee – The person or party who lends money for a mortgage.
- Example: The lender is the mortgagee.
Mortgagor – The person or party who borrows money in a mortgage.
- Example: The borrower is the mortgagor.
Multidwelling Units – A property that has more than one unit on the same lot.
- Example: As a real estate investment, multidwelling units work well because you can rent out several units in the same property.
Negative Amortization – Some adjustable loans only require a borrower to pay a monthly minimum payment, even if the interest rate rises. If the rate rates and the borrower pays only the minimum payment, they did not pay the full interest amount owed to the lender. The difference is added to the balance of the loan, causing the loan balance to increase, rather than decrease.
- Example: If a borrower fails to pay the full interest amount and principal amount in a monthly payment, the difference is added back onto the balance of the loan. The result is a higher balance and shows how negative amortization has an adverse affect on a borrower.
No Cash-Out Refinance – A refinance loan where the borrower does not pull out any equity. The new loan and original loan have the same balance.
- Example: The opposite of a cash out refinance. In a no cash-out refinance the borrower refinances their original loan but pulls no equity out. The new loan and old loan have the same balance.
No-Cost Loan – A loan with no costs or fees charged directly by the lender. In some situations there are still other fees such as recording fees, but none of them are directly charged by the lender.
- Example: If you do not have extra cash, you should consider a no-cost loan where you would have to pay no costs or fees to the lender.
Non-Performing Loan – A mortgage loan that is delinquent.
- Example: Investors are purchasing non-performing loans from banks as a way to acquire properties. They purchase the non-performing loans at a discount from the lender, then foreclose on the borrower to take ownership of the property.
Note – A document that sets forth the terms, interest rate, loan amount, payment terms, etc, of a loan and obliges the borrower to repay it.
- Example: In order to purchase a home, many buyers have to borrower money and must therefore sign a note stating the terms of the loan.
Note Rate – The interest rate being charged on a loan and stated in the note.
- Example: The interest rate charged on a loan is also referred to as a note rate.
Notice of Default – A written notice from a lender to a borrower that a default has taken place. It is the first step in the foreclosure process and notifies the borrower that further legal action may be taken.
- Example: The first step in the foreclosure process is for the lender to file a notice of default, notifying the borrower of the missed payment and that the foreclosure process is beginning.
Origination Fee – Fees charged up front by lenders to originate loans.
- Example: In order to generate income and cover the costs of doing a loan, lenders charge origination feesto borrowers that are paid in order to fund loans.
Original Principal Balance – The original amount borrowed.
- Example: The original principal balance is the original amount borrowed.
Owner Financing – A type of financing where the seller takes a note from the buyer and finances the sale on their own with no outside lender.
- Example: If a buyer is unable to qualify for normal financing through a lender, a seller can still sell them the home using owner financing and start collecting payments from the buyer.
Partial Payment – A payment that is less than the required monthly minimum payment. Most lenders will not accept partial payments.
- Example: If you do not have enough funds to cover the minimum monthly payment on your loan you can try to arrange a partial payment if the lender will allow it.
Personal Property – Any property that can be moved freely and readily that is not real property.
- Example: Your car, clothes, and computers are all examples of personal property.
P.I.T.I. – An acronym for principal, interest, taxes and insurance. These are the components a lender uses when calculating a housing expense ratio.
- Example: The basic components of a housing payment are P.I.T.I., principle, interest, taxes and insurance.
P.I.T.I. Reserves – Cash reserves that a buyer is required to have on hand after their down payment is made. These are funds to protect a lender against default and are a set number of months of housing payments.
- Example: Some types of higher leverage loans require a borrower to have a set number of months of housing payments saved away called, P.I.T.T. reserves, which give extra protection to the lender that the borrower will make the payments.
Planned Unit Development (PUD) – An ownership type where owners own their individual unit or home but jointly own the common areas together with the rest of the owners.
- Example: A planned unit development is very much like a condo. Individuals own their units but then own the common areas together with the rest of the owners of the community.
Point – 1 percent of the loan balance.
- Example: A lender may charge additional points up front in exchange for a lower long term interest rate.
Power of Attorney – A document that grants authority for someone to act on someone else’s behalf. This can be complete power or just for a limited situation(s).
- Example: When buyers have good working relationships with their agents, sometimes they give power of attorney so they can sign documents on their behalf.
Pre-Approval – A preliminary approval for a lender to loan money to a borrower. This generally means a borrower has provided full income and expense verification and has been approved for a loan. A pre-approval is always based on property approval and several other conditions such as an appraisal.
- Example: The first thing you should do when starting a home search is to get a pre-approval from a lender so the sellers will know you can get a loan to purchase the home.
Prepayment Penalty – A fee charged to a borrower for paying off a loan early.
- Example: Due to the way mortgages are sold to investors as a stream of cash flow, there are some mortgages that come with prepayment penalties to protect the investment.
Pre-Qualification – A lenders written opinion that a borrower will qualify for a loan. This is usually based on the borrower answering questions and they are not verified by the lender. This is not as good as a pre-approval and will come with many other conditions and verifications before an approval can be obtained.
- Example: At a minimum, when purchasing a home, you should get a pre-qualification with a lender, although a pre-approval is more desirable.
Prime Rate – The interest rate applied to the best qualified, preferred borrowers.
- Example: If you have good credit and qualify properly, you can get the prime rate from your lender on your loan.
Principal – The amount of unpaid or remaining loan balance.
- Example: The amount you still owe on your loan is the principal balance.
Private Mortgage Insurance (MI) – Insurance that provides coverage to the lender in the event of a borrower default.
- Example: If you get an FHA or other high leverage loan, you may be required to get private mortgage insurance to protect the lender in the event of default.
Promissory Note – A document stating the terms of a loan and the borrowers promise to repay it.
- Example: A borrower is required to sign a promissory note in order to document the loan and the buyers promise to repay it.
Public Auction – An auction style sale of a bank owned, foreclosed or distressed home that is open to the public.
- Example: Since the housing collapse, many buyers have been buying homes from banks at public auction to get a great deal.
Purchase Agreement – A written agreement to purchase a property that is signed by the buyer and seller and outlines the terms of the sale.
- Example: When writing up an offer use the standard C.A.R. purchase agreement as this is the approved form that most brokers and sellers use.
Purchase Money Transaction – The acquisition or disposition of a property using money or other funds.
- Example: Transactions that are no refinances and are actually to acquire or dispose of a property are purchase money transactions.
Qualifying Ratios – Ratios of a borrowers expenses to income; they must hit a certain level to qualify for a loan. The primary ratios are housing expenses to income and total expenses to income.
- Example: Borrowers must qualify not only on a gross income basis but also through several qualifying ratios as well in order to provide the lender with the comfort they need to feel confident that the borrower will repay the loan.
Quitclaim Deed – A deed that transfers ownership interest, without warranty, from one person or entity to another.
- Example: When a parent wants to give a property to a child they often do so using a quitclaim deed.
Rate Lock – An agreement from a lender to hold a specified interest rate for a borrower for a specified period of time for a fee.
- Example: Managing an escrow is very important, if the borrower is getting a loan, too many delays could cause the rate lock to expire and therefore the loan process would be started over.
Real Estate Agent – A licensed professional who is authorized to represent a principal in a transaction.
- Example: Working with a real estate agent who is experienced can make transactions run much smoother for you, they know all the red flags to look for and can put out fires before they start.
Real Estate Investment Trust (REIT) – A corporate entity that exists for the sole purpose of investing in real estate.
- Example: REIT’s or Real Estate Investment Trusts can be privately or publicly held companies and they must distribute 90% of their taxable income to their investors. Therefore they are popular investment vehicles for investors who want to invest in real estate.
Real Estate Owned (REO) – Following an unsuccessful foreclosure sale, a property is returned back to the lender and it becomes real estate owned.
- Example: During the housing collapse, many homes went to foreclosure sale and did not sell at auction. As a result, all of these homes became real estate owned or REO.
Real Estate Settlement Procedures Act (RESPA) – A law that protects consumers, bans illegal kickbacks or commissions and requires lenders to disclose closing costs.
- Example: The Real Estate Settlement Procedures Act (RESPA) was designed to protect consumers from unfair closing practices. Prior to RESPA some closing costs were undisclosed and several parties may have been taking commissions or fees that the buyer or seller was unaware of.
Real Property – Land and anything permanently attached to it.
- Example: The land on which your home sits and the home that is permanently attached to that land is real property.
Realtor® – A real estate broker, agent or salesperson who is a member of the National Association of Realtors.
- Example: Working with a realtor who is experienced can make transactions run much smoother for you, they know all the red flags to look for and can put out fires before they start.
Recorder – The public officer who records and keeps track of all real property transactions.
- Example: The last task of an escrow office is to send the deed to the office of the recorder to have the document recorded into public records and make the transfer official.
Recording – A permanent noting of something that affects a property’s title or ownership in government records.
- Example: A property transaction closing following the recording of the deed in county records. Once this happens, the buyer is the owner of the property.
Repayment Plan – An agreement between a creditor and debtor to repay delinquent payments on a specified schedule.
- Example: If you are going to fall behind on your mortgage, its best to call the lender ahead of time to try to wok out a repayment plan to try to prevent foreclosure actions from taking place.
Replacement Reserve Fund – A funds set aside for the long term replacement of major capital expenditure projects such as roof replacement, repaving, elevator replacement, etc.
- Example: When purchasing a home in a condo or PUD, make sure and check on the HOA’s financial standing, particularly its replacement reserve fund because if that is not properly funded, the property owners could be looking at a large special assessment in the future when large systems need to be replaced.
Refinance Transaction – A transaction where an existing loan is replaced with a new loan.
- Example: A refinance transaction is one in which the property does not change hands, rather an existing loan is paid off and a new loan is placed.
Remaining Balance – The amount of loan principal that has not yet been paid back.
- Example: When you get an amortizing loan, the remaining balance goes down slightly with each monthly payment.
Remaining Term – The amount of time left before a loan becomes due.
- Example: If a borrower has a 30 year loan with 360 equal monthly payments, once they make the 120th payment, at the end of year 10, the remaining term is 20 years or 240 months.
Rent Loss Insurance – Insurance that protects a property owner in the event a loss or casualty prevents the property from collecting rent.
- Example: Some landlords purchase rent loss insurance to protect themselves in the event something damages the property and they cannot collect rent.
Revolving Debt – A credit arrangement, that allows a borrower to borrow money against a line of credit and then repay it along with interest.
- Example: A credit card is an example of revolving debt, it can be drawn on and paid off on a revolving basis.
Right of First Refusal – An agreement that gives one party the first opportunity to purchase something should it become available for purchase.
- Example: Sometimes when a condo gets foreclosed on, the HOA has right of first refusal to purchase the home from the bank. This is to allow the HOA an opportunity to buy the home first.
Right of Ingress or Egress – The right to enter or leave a property.
- Example: If a property is completely landlocked, so that it does not have a way to access roads, the local planning office will grant a right of ingress or egress to allow the owner the right to enter and exit their property.
Right of Survivorship – In joint tenancy, this is the right of owners to acquire the rights of deceased owners.
- Example: If two buyers purchase a property together as joint tenants and one buyer dies, the remaining buyer becomes the sole owner of the property due to the right of survivorship.
Sale-Leaseback – A transaction where a seller sells a property to a buyer only to have the buyer immediately lease it back to the seller so they do not have to move out.
- Example: Sometimes, like in recession periods, sellers need to sell homes before they can vacate them. In these situations a possible solution to the problem is to do a sale-leaseback so that the new buyer can rent the home to the current buyer.
Secondary Market – The buying and selling of mortgages that are already in place. Typically, they are pooled with other similar mortgages.
- Example: Conventional and FHA mortgages are sold on the secondary market to raise funds to give out more mortgages.
Second Mortgage – A mortgage that is on top of a larger, primary mortgage. The second mortgage is junior (will be repaid after) the first mortgage.
- Example: In previous times, when buyers did not have cash on hand for a down payment, they could get a second mortgage to finance the down payment.
Secured Loan – A loan that is protected by collateral of equal or greater value.
- Example: A mortgage is a secured loan where the home acts as collateral for the loan.
Security – The item that acts as collateral for a loan.
- Example: In the case of a mortgage, the home itself is the security.
Seller Carry-Back – An type of financing where the seller takes a note from the buyer and finances it on their own.
- Example: When buyers cannot qualify for conventional financing, one alternative is for the seller to finance it for the buyer through a seller carry-back.
Servicer – An company that provides services to mortgage holders such as collecting payments, tracking balances and starting foreclosure proceedings.
- Example: Once a loan is given to a buyer, its typically sold to an investor, therefore, servicers are hired to service the loans such as collecting payments, sending out notices, tracking balances and starting foreclosure proceedings.
Servicing – The tracking of loan balances, collecting of payments and filing of notices for a mortgage.
- Example: The process of collecting payments, tracking balances and sending out notices to mortgage holders is referred to as servicing.
Setback – The minimum required distance improvements must be from a property line.
- Example: – When building a shed in your backyard be sure and check the setback requirements first. If you build too close to the property line and violate the setback you could be subject to fines or worse.
Settlement Statement – The document issued at the end of a real estate closing that itemizes the funds in a transaction. It breaks out price, loan amount, down payment, credits, prorations, commissions, closing costs and then shows how much is owed by the buyer and what is owed to the seller. It is also called a “HUD-1 Settlement Statement” because the form is issued by the Department of Housing and Urban Development (HUD). It can also be referred to as a “closing statement”.
- Example: After closing of a real estate transaction the buyer and seller are given settlement statements that show where every penny in the transaction went.
Short Sale – When a borrower is delinquent on their mortgage and the home is worth less than is owed on it, sometimes there is an opportunity to sell the home on the open market before a foreclosure. The home is sold for short of what is owed on the loan. Both borrower and lender are able to avoid the foreclosure process.
- Example: A short sale is an alternative to the foreclosure process whereby a delinquent, underwater borrower sells a home for a value short of what is owed on the loan and the lender agrees to take the net amount.
Subdivision – A housing development or neighborhood created by breaking a large tract of land into smaller individual lots.
- Example: A lot of neighborhoods are subdivisions where a builder bought a huge tract of land and broke it up into many smaller lots to build homes on.
Survey – A map or drawing that shows a property in detail; it has the property lines, improvements, easements and encroachments.
- Example: When property line disputes occur between neighbors, the best solution to the problem is to order a survey to determine exactly where the property line is.
Sweat Equity – Contribution to a property in the form of services or labor, not cash.
- Example: Value is added to properties in ways other than spending money. When laborers clean up a property using no money, its considered sweat equity.
Tenancy in Common – When two or more buyers own a property together, in a situation where it is possible to will the property to heirs.
- Example: Typically, when multiple buyers purchase property together, they purchase it using tenancy in common, so they can will it to their heirs.
Third-Party Origination – A process when a lender uses a different company to perform all or part of their origination, underwriting and funding processes.
- Example: Sometimes small shop lenders use third-party origination to speed up the process and enable them to do more loans.
Title – A document that shows the legal owners of the property throughout history.
- Example: When purchasing a home, a buyer should always check title to make sure the seller is actually the owner of the property.
Title Company – A company that insures, examines and advises on title reports and issues.
- Example: It is important to work with a good title company who can get title reports quickly and can advise on any title issues.
Title Insurance – Insurance that protects buyer or lenders against defects in a property’s title.
- Example: When purchasing a home a buyer should always purchase title insurance to protect against possible defects on title.
Title Search – Checking the title records of a property to ensure the seller is who they say they are and that there are no defects on title that would affect the transfer-ability of a property.
- Example: When purchasing a home, a buyer should always do a title search to make sure the seller is actually the owner of the property.
Transfer Tax – State, county or city taxes that are charged to transfer a property from one owner to another.
- Example: When a property is sold in LA county there is a transfer tax of $1.10 for every $1,000 of purchase price or 0.11% that is charged by the county. Some cities also charge a transfer tax on top of the county transfer tax.
Treasury Index – An index based off of US Government Treasuries that is used to set interest rates on adjustable and fixed rate mortgages.
- Example: The treasury index is an index of interest rates that are used to set mortgage interest rates.
Trustee – A fiduciary who holds the deed to a property in a deed of trust purchase loan situation. The trustee is the one who handles the foreclosure sale for the lender if needed.
- Example: In California, where most purchase loans are deeds of trust, a trustee is appointed by the lender to hold the deed and handle the foreclosure sale if necessary.
Truth-in-Lending – A federal law that requires lenders to disclose certain items on a loan. These include but are not limited to annual percentage rate, term, number of payments, etc.
- Example: All lenders must follow the truth-in-lending law when loaning money, which requires them to disclose the terms, conditions and rate on a loan.
Two-Step Mortgage – An adjustable-rate mortgage in which the interest rate is set at one level for the beginning of the loan and then it adjusts to a different rate later on.
- Example: When a buyer predicts his future income will rise, he can go after a two-step mortgage to keep his rate lower in the short term and higher in the future.
Two-to-Four-Family Property – A property that consists of two-to-four dwelling units on the same lot.
- Example: Many investors gravitate towards purchasing two-to-four-family properties so that they can live in one and rent out the others to get some positive cash flow.
Underwriting – The process a lender goes through in order to qualify a borrower and determine the risk of the loan. Also is used by investors to mean the process of valuating a property.
- Example: If you are using a loan to purchase home, once you get escrow open and an executed contract, your lender will begin the underwriting process to determine if you will indeed repay the loan.
VA Mortgage – A purchase mortgage that is insured by the Department of Veterans Affairs (VA). The buyer and property must both qualify with the VA.
- Example: Veterans of the military can sometimes qualify for a VA mortgage which allows them to purchase a property with 100% financing should the VA approve the property and the buyer.
Veterans Administration (VA) – A federal agency that insures mortgage loans to military veterans.
- Example: The Veterans Administration works with military veterans to qualify them for loans that are insured by the Veterans Administration.
Voluntary Lien – A monetary encumbrance that a homeowner willingly places on their property.
- Example: A mortgage or deed of trust is a voluntary lien.
Walk Through – A visual inspection performed by a real estate buyer; buyer walks through the home to check for needed repairs and condition.
- Example: When purchasing a home a buyer needs to schedule a walk through before they close to make sure the property is in the same condition at the close of escrow as it was at the start of it.
Zoning – Government regulations that control and regulate land use.
- Example: Always check the zoning of a property before purchasing it. Sometimes people build additional units on a property without the proper approvals. If this is a violation of the zoning when the government finds out, you could be required to tear it down on your on dollar.
BONUS: Real Estate Jokes & One Liners
Just for fun to end this resource, here are a collection of real estate jokes, one-liners, and humorous anecdotes!
Real Estate One Liners
- This country is great. It’s the only place where you can borrow money for a down payment, get a 1st and 2nd mortgage and call yourself a homeowner.
- Sign next to FSBO: We shoot every third agent and the 2nd one just left.
- My realtor sold me a two story house- one story before the sale, another after.
- This house is 5 minutes from shopping … if you have an airplane.
- Home sickness is what you feel every month when the mortgage is due.
- If you want to know exactly where the property line is, just watch the neighbor cut the grass.
- Realtor sign–We have “lots” to be thankful for.
- The dream of the older generation was to pay off a mortgage. The dream of today’s young families is to get one.
- If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.
- They have an all-electric home. Everything in it has been charged.
- “I found happiness in my own back yard, but my neighbor claims it is on his side of the property line.”
- Real Estate Agent Ad: “If we don’t sell your house within two weeks, we will gladly refund every cent you have not paid us yet.”
Real Estate Jokes
Two women were walking through the woods when a frog called out to them and said: “Help me, ladies! I am a real estate broker who, through a curse, has been transformed into a frog. If one of you will kiss me, I’ll be returned to my former state!”
One woman took out her purse, grabbed the frog, and stuffed it inside her handbag. The other woman said, “Didn’t you hear him? If you kiss him, he’ll turn into a real estate broker!”
The second woman replied, “Sure, but these days a talking frog is worth more than a real estate broker!”
A broker was dismayed when a brand new real estate office much like his own opened up next door and erected a huge sign which read ‘BEST AGENTS.’
He was horrified when another competitor opened up on his right, and announced its arrival with an even larger sign, reading ‘LOWEST COMMISSIONS.’
The broker panicked, until he got an idea. He put the biggest sign of all over his own real estate office. It read: ‘MAIN ENTRANCE’
A client bought a new home and the broker wanted to send flowers for the occasion.
They arrived at the home and the owner read the card; it said “Rest in Peace”.
The owner was angry and called the florist to complain. After he had told the florist of the obvious mistake and how angry he was, the florist said. “Sir, I’m really sorry for the mistake, but rather than getting angry you should imagine this: somewhere there is a funeral taking place today, and they have flowers with a note saying, “Congratulations on your new home”.
A big, burly man visited the pastor’s home and asked to see the minister’s wife, a woman well known for her charitable impulses.
“Madam,” he said in a broken voice, “I wish to draw your attention to the terrible plight of a poor family in this district. The father is dead, the mother is too ill to work, and the nine children are starving. They are about to be turned into the cold, empty streets unless someone pays their rent, which amounts to $400.”
“How terrible!” exclaimed the preacher’s wife. “May I ask who you are?”
They sympathetic visitor applied his handkerchief to his eyes. “I’m the landlord,” he sobbed.
A doctor vacationing on the Riviera met an old lawyer friend and asked him what he was doing there.
The lawyer replied, “Remember that lousy real estate I bought? Well, it caught fire, so here I am with the fire insurance proceeds. What are you doing here?”
The doctor replied, “Remember that lousy real estate I had in Mississippi? Well, the river overflowed, and here I am with the flood insurance proceeds.”
The lawyer looked puzzled. “Gee,” he asked, “how did you start the flood?”
Bill and Barbara went out for dinner to celebrate their 50th anniversary. After a couple of glasses of wine, Bill asks Barbara, “have you ever cheated during our marriage?”
“No, of course not.”
“If you had, it’s okay” said Bill, “I just wanted to know.”
“Well” said Barbara “remember way back 28 years ago when you thought you would get laid off from that development company you were working for?”
“Yes, I remember and I was sure glad they kept me on.”
“Well….I paid a little visit to your boss and, if you remember, everyone got laid off but you.”
“Yes, I did, but it was for you!”
“Well….okay, but were there any others?”
“Well…..do you remember 10 years ago when you needed heart bypass surgery and the only qualified surgeon in the area, Dr. Anderson, was completely booked and wouldn’t take you?”
“So.. .I talked him into taking you.”
“You mean you…”
“It saved your life!”
“Okay, I guess I can see that, but… .were there any others?”
“No, no, no.”
“Are you sure?”
“What, what, what?!?!”
“Well……do you remember when you were running for president of the local chapter of the Real Estate Board…..and you were only 27 votes short.”
The homeowner got into his grubbiest clothes on Saturday morning and set about all the chores he’d been putting off for weeks.
He’d cleaned the garage, pruned the hedge, and was halfway through mowing the lawn when a woman pulled up in the driveway and yelled out her window, “Say, what do you charge for yard work?”
The fellow thought for a minute, then answered, “The lady who lives here, lets me sleep with her.”
A very successful real estate broker had a meeting with his new son-in-law. “I love my daughter, and now I welcome you into the family,” said the man. “To show you how much we care for you, I’m making you a 50-50 partner in my real estate office. All you have to do is go to the office every day and learn the business.”
The son-in-law interrupted, “I hate offices. I can’t stand agents.”
“I see,” replied the father-in-law. “Well, then you’ll work from home and take charge of the paperwork.”
“I hate paperwork,” said the son-on-law. “I can’t stand being stuck behind a desk all day.”
“Wait a minute,” said the father-in-law. “I just made you half-owner of my real estate office, but you don’t like offices and won’t work from home. What am I going to do with you?”
“Easy,” said the young man. “Buy me out.”
WHEN A real-estate agency hadn’t sold our house, we decided to do it ourselves. I placed ads in the local papers, spray painted a “For Sale” message on a sign board and posted it outside.
When my husband came home that evening, he told me, laughing, that my sign was the most truthful one he had ever seen. Confused, I rushed outside to take a look. In my haste I had printed – “For Sale by Ower.”
“I have to have a raise in my commission,” the agent said to his manager. “There are three other companies after me.”
“Is that so?” asked the manager. “What other companies are after you?”
“The electric company, the telephone company, and the gas company.”
An agent who was being paid by the week approached his office manager and held up his last paycheck.
‘This is two hundred dollars less than we agreed on,’ he said.
‘I know,’ the manager said. ‘But last week I overpaid you two hundred dollars, and you never complained.’
‘Well, I don’t mind an occasional mistake,’ the agent answered, ‘but when it gets to be a habit, I feel I have to call it to your attention.’
A crusty old man walks into a real estate office and says to an female agent,
“I want to sell my G-d damn house.”
To which the astonished female agent replies, “I beg your pardon,
sir; I must have misunderstood you. What did you say?”
“Listen up, damn it. I said I want to sell my fucking house!”
“I’m very sorry sir, but we do not tolerate that kind of language in this office.”
So saying, the agent goes over to the officer broker to tell him about her situation. They both return and the broker asks the old geezer, “What seems to be the problem here?”
“There’s no damn problem,” the man says, “I want to sell my fucking million dollar home.”
“I see,” says the manager, “and this bitch is giving you a hard time?”
Einstein dies and goes to heaven. First person he see he asks, “Excuse me? What’s your IQ?”
The person replies, “280”.
Einstein says, “Great! We can talk about astro physics!”
Second person he runs into, he asks the same question, “What’s your IQ?”
The person replies, “150.”
“Great!” says Einstein, “We can talk about events of the day!”
Third person he sees, he once again asks about their IQ.
This time the person says, “45!”
Einstein says, “Great! Where do you think the real estate market is headed??!!”
A real estate agent was knocking on doors of homes in his farm area. At one house it was clear that someone was at home, but his repeated knocks at the door went unanswered. So, he took out one of his business cards and scribbled “Revelation 3:20” on the back of it, stuck it in the door, and went about his rounds.
When he got back to the office the next day, the receptionist gave him a business card. It was his own, and he recognised the “Revelation 3:20” he wrote the day before. In a very neat handwriting, a cryptic message was added: “Genesis 3:10”.
Later, when checking the Bible verse, he couldn’t help but break into gales of laughter.
Revelation 3:20 begins: “Behold, I stand at the door and knock.”
Genesis 3:10 reads: “I heard your voice in the garden and I was afraid for I was naked.”
Q: What room in your house is a mummy afraid of?
A: The living room!
A blonde realtor walks into an appliance store and says, “I would like to buy that T.V. please.”
The store clerk replies, “I’m sorry, we don’t do business with blondes -especially Realtors.”
So she went to her car, took off her real estate blazer and went back into the store. “I would like to buy that T.V. please.”
The store clerk again replies, “I’m sorry, we don’t do business with blondes.”
The blonde leaves the store. Then she stormed off back to her house and dyed her hair black. The next day, she went back to the same store and said, “I would like to buy that T.V. please.”
The store clerk, once again, replies, ” Sorry, but I told you before. We don’t do business with blondes.”
The blonde replied “How did you know I was blonde?”
The clerk says “Because that’s a microwave, not a T.V.”
Vartanik and his three friends are telling stories in a bar. Vartanik leaves for a bathroom break. Three guys are left.
The first guy says, “I was worried that my son was gonna be a loser because he started out washing cars for a local dealership, but they made him a salesman, In fact, he’s so successful that he just gave his best friend a new Mercedes for his birthday.
The second guy says, “I was worried about my son too because he started out raking leaves for a Realtor, they made him a commissioned salesman. By the way, he just gave his best friend a new house for his birthday.”
The third guy says, “Yeah, I hear you. My son started out sweeping floors in a brokerage firm. In fact, he’s so rich now that he just gave his best friend a million in stock for his birthday.”
Vartanik comes back from the can. The first 3 explain that they are telling stories about their kids, so he says, “Well, I’m embarrassed to admit that my son is a MAJOR disappointment. He started out as a hairdresser and is STILL a hairdresser after 15 years. In fact, I just found out that he’s gay and has SEVERAL boyfriends. But, I try to look at the bright side. His boyfriends just bought him a new Mercedes, a new house, and a million in stock for his birthday.”
A businessman meets a beautiful girl and agrees to spend the afternoon with her for $500. So they do. Before he leaves, he tells her that he does not have any cash with him, but that he will have his secretary write a check and mail it to her, calling the payment ‘RENT FOR APARTMENT.’
On the way to the office he regrets what he has done, realizing that the whole event was not worth the price. So he has his secretary send a check for $250 and enclosed the following typed note:
Dear Madam, Enclosed find check in the amount of $250 for rent of your apartment. I am not sending the amount agreed upon, because when I rented the apartment,I was under the impression that:
1) it had never been occupied;
2) that there was plenty of heat;
3) that is was small enough to make me cozy and at home.
However, I found out that it had been previously occupied, that there wasn’t any heat, and that it was entirely too large.
Upon receipt of the note, the girl immediately returned the check for $250 with the following note:
Dear Sir: First of all, I cannot understand how you expect a beautiful apartment to remain unoccupied indefinitely. As for the heat, there is plenty of it, if you know how to turn it on. Regarding the space, the apartment is indeed of regular size, but if you don’t have enough furniture to fill it, please do not blame the landlady.
Send the rent in full or we will be forced to contact your present landlady!
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