Jeff Donnellan Re/Max
A book that I recently read had this quote and I was deeply impacted by the thought of having control over my time.
” What do you consider the signs of a successful life? Many people think that accumulating wealth & belongings is the central sign of success: others are happy to have their health and retirement security. You need to come up with your own definition, but here is an idea about success that deserves consideration. Success may be defined as achieving complete financial and personal freedom. That allows you to do as you please while maintaining complete control over how you spend your time.” - Michael Thomsett
Everyone has a dream about their future and how they would spend time if money was not a factor. Your work doesn’t define who you are, but provides a means to an end. A way to pay for living expenses, obligations and hopefully enough to save for investing or retirement. Real estate investing can be a means to an end and a way to take control of your time while becoming financially free. Rental properties have four advantages that no other investment can combine.
- Cash Flow
- Leverage & Loan Amortization
- Tax advantages
A rental property can generate monthly income that can be used to pay bills or reinvest into the property to increase its value or overall ownership. Most real estate appreciates over time. A home purchased today for $250,000 that appreciates at 3% per year will be worth $336,000 in 10 years. Residential home loans can leverage your down payment. With a 20% down payment a buyer can borrow five times more than what they put in and over time the loan is amortized to pay down more principal. This allows the owner to gain more equity each year of ownership. The tax advantages of owning real estate can be significant. The interest paid on the loan is a tax deduction as well as depreciated home value. The IRS allows the value of a home to be depreciated down to zero over 27.5 years. This creates a paper lose when the home is creating cash flow and appreciation every year.
Real estate should be viewed as a long-term non-liquid asset and its value compounds over time. This period is usually 5-10 years and called seasoning. If a property cash flows the owner can choose the correct time to sell for maximum profit in a good market, instead of being forced to sell and lose value in a bad market.
Many people who I speak with are interested in real estate investing, but don’t know how to begin. Saving enough cash for down payment can be difficult and usually doesn’t come quickly. I tell them to think of the time used to save as a learning period as well. Learn as much as possible about mortgages, properties available and plan the details of the purchase. One way to begin investing immediately is to buy a 2-4 flat and live in one of the units. By taking this approach you can get owner occupied financing ( lower rates, better loan terms & smaller down payment).
Another way to begin is called move up and rent out. This is where the owner of an existing home rents out their current home and purchases a different home to live in. Again the advantage of owner occupied financing comes in to play so cash flow is more likely. The challenge in this scenario would be financing. Today you would have to qualify for both loans or have more than 20% equity in your current home. This is to prevent a “buy & dump” which is when some one purchases a new home and stops paying for the old one.
The next most common way to begin is buying real estate as pure investment. Usually a larger down payment of 25% is needed, but the larger down payment will help the investment cash flow because less money is going toward paying a mortgage. Real estate investors at this stage are looking at properties for ROI or return on investment, and not as a stepping stone. Make sure your Realtor or real estate adviser can provide details on ROI for each property so you can make an informed decision.
Real estate investing is not for everyone. There are some down sides like dealing with tenants needs, repairs, & possible vacancies. Choosing the right team to help you is of the most importance. A Realtor with investment experience can help in the selection of properties or help manage rentals. A mortgage lender can suggest the best form of financing and qualify you for the appropriate purchase price. An accountant can plan your taxes in order to take advantages of the most deductions and pay less in income tax each year. Real estate attorneys act as an insurance policy & protecting your interests from losses. Selecting the correct advisers will set you up for success.
By Jeff Donnellan Re/Max
Residential real estate has been turned upside-down in the last 4 years. Purchasing a home was a fairly simple process. A buyer could find a home they like, make an offer directly to the owner, negotiate price and terms, then close within thirty days. Today real estate is a completely different world and the market is dominated by short sales and foreclosures ( up to 50% of all sales in some areas). However, there’s a lot of confusion concerning expectations and values between these types of sales. The largest differences between the three types of sales are price, timing, terms, and condition.
A traditional real estate sale will usually reflect the top price of the market. In most cases the owner has maintained the home and will quickly negotiate reasonable offers. In addition they will be open to fixing problems that come up during an inspection. This situation is ideal for a purchaser that wants to move quickly
Short sales are a type of distress sale where the owner can not keep up with mortgage payments or property maintenance. This type of purchase can take between two & six months before receiving a counter offer from the seller’s mortgage company. Most cases the seller will likely not make repairs to defects in the home. The typical discount when purchasing a short sale is 13%-30%. If you have time to wait and don’t mind making a few repairs this can be a great option.
Foreclosures are usually the deepest discount, but there are many unknowns. The home has been vacant for some time and an empty home in the winter has a high probability of frozen water pipes which then break. Repairs can be extensive and a buyer will need cash or a rehab loan. If the repairs needed are extreme, the home may not qualify for financing. A very thorough home inspection is needed to determine what type of repairs are necessary and how they will cost. Responses from the bank are usually quick and very from 24-72 hours. Closings can also happen quickly and in 30 days or less. This is definitely a “buyer beware situation.” If not planned properly a foreclosure could turn into a money pit.
When purchasing a home you must consider which option best fits your situation. Before falling in love with a home find out what type of sale it is and can it be financed. Realistic expectations are critical.
Jeff Donnellan Re/Max
Jeff Donnellan Re/Max
Building an new home is an exciting process and some times necessary when the real estate market is short on supply of what you need or want. When people have specific needs or looking for that forever home it’s important to get what you want, otherwise you just end up moving again.
The home builder market has shrunk considerably since 2007, with many being stuck with a large inventory and eventually declaring bankruptcy. In many ways this was a good thing since it cleared out many of the people that had no idea what they were doing as well as the disreputable business men. What remains is the best of the best and home builders with a well run business. Most home builders do not build spec homes any more or if they do, the selection is very limited. Because of this they some times charge a premium which is a little bit over market.
The benefits of a building a new home are that you get to make all the selections, such as location, lot, features and amenities with no trade offs or remodeling. The benefits of projected long term ownership and energy efficiency can be well worth paying a bit over market because moving costs are extremely expensive when you consider closing cost, hiring a Realtor and paying commissions.
Once you find the right home builder and location it’s important to negotiate the final price of the home with the lot and all upgrades. Find out what is standard and what is an upgrade. Ask about the materials used and how they effect over all usage, durability and energy efficiency. Make sure the home builder provides a warranty and is reliable about fixing any issues that go wrong in the 1st months of ownership. Also ask for at least 3 referrals.
The largest challenge is planning a strategic move. Financing plays key role and may take some creative financing to make it work since many home buyers also have a home to sell. Here are some options that can set you up for success if you currently own a home and want to build a new one.
1. You many need to qualify for loans, your current and the new one in order to start construction. The construction period is usually 4-6 months. This would give 3-5 months to market your home and find a buyer. This may be challenge depending your current real estate market.
2. Qualify for both loans and rent out your existing home just before construction is complete. This may be a great option if you can afford the new down payment and use rents to pay your existing mortgage.
3. Find alternative financing or a portfolio loan. The rates may be a bit higher but they do not have to meet conforming mortgage standards and could be a bit more flexible. Many of these mortgage lenders will set up a refinance with in 1 year once the mortgage has seasoned and you build property management history. At that point you can qualify for a conforming loan with lower rates.
4. Option 4 is to sell your home and find temporary living while the new home is being built. This could be a short term rental of 6 months. The key to this option this option would be to select all the details of your new home and once you get a purchase contract for your existing home, get the construction process started immediately.
Good luck with your new home.
So you’ve found that perfect home after searching for a week, a month, or a year. So what’s next? Most likely you’ve already done your pre-approval and financially qualified the home to make sure it’s in your budget. The next steps will show in detail of how to make that perfect home yours.
1. Ask for the Home owner’s disclosures such as “lead paint”, “Radon”, and the Seller’s disclosure that lists about 20 items that are critical to a well functioning home. If you are buying a foreclosure the seller will not provide disclosures. So a home inspection is crucial.
2. Next a CMA or Comparative Market Analysis prepared by gathering at least 3 sold homes with in close proximity and similar features will help determine value and offer price. If a home is asking 200k and the comparable sales are 195k, the home is well priced.
3. Making the offer: These are the 5 negotiable parts of the contract.
4. After the contract is negotiated it’s time to get busy. A home inspection should be scheduled in the 1st 5 days after acceptance. The inspection will help determine if there are any defective parts of the home and issues that need to be repaired.
5. An attorney should be contact as well to review the contract and get in writing home inspection issues that the seller agreed to fix or give as cash credits. (with in 10 business days after contract acceptance)
6. Contact your mortgage lender and let them know you have an accepted contract. They will take a mortgage application and start your loan processing. They will ask for additional documentation such as bank statements, pay stubs, w2′s and tax returns.
7. Many of the next steps take place behind the scenes. The underwriting your loan will begin to make sure all documentation is place and the appraisal will be order to verify the properties value meets the loan amount.
8. A mortgage commitment will be issued stating that funds are approved and awaiting the closing.
9. You will want to do a final walk through of the home usually the day before or morning of closing to make sure no damage was done to the home when the seller moved out and that all agreed upon items have been left in place.
10. And finally the Closing. Your mortgage funds will be wired to the title company where the closing is taking place and loan documents will be signed. Items needed: A cashier check for down payment, & closing costs made out to the title company and Identification like drivers license or passport.
Congratulations!!! You’re now the proud owner of a home.
Jeff Donnellan Re/Max www.webhomesearcher.com
Condos are very different from purchasing a single family home, town home, or apartment building. While most homes will qualify for almost any financing, condos can be much more difficult. Since they are a collected group of owners sharing the same land, walls, & maintenance expenses, rules are necessary to govern the common good of the entire building or buildings. An association of home owners or a private management company will administer the rules, collect monthly payments, pay bills and administer improvements or repairs. In order for a condo building to qualify for financing the association must be active and healthy. Here are 10 tips to make your condo purchase smoother and flush out all the potential challenges before making an offer.
1. Will the building qualify for financing? Since the down turn in real estate, financing options have changed and tightened up considerably. Unless you are purchasing a home with cash, it will need to be financed. Make sure the building can be financed with relative ease. Find out what types of loan can be used, this will effect ease of resale if multiple loan types can be used.
2. What types of loans can be used? Currently the most common financing options for purchasing a condo are:
The next 6 questions will determine financing options.
3. How many condos are being rented? Owner occupancy will effect financing since conventional & FHA loans allow no more than 50% to be rented. A good association will have rules in place to keep rentals at an acceptable level.
4. What’s the investor concentration? Find out if 1 person or entity owns more than 10% of the building. With smaller buildings 3-10 units if 1 person owns more than 1 condo. This is another financing guideline for FHA & Conventional loans. This standard is in place so if that 1 person or entity defaults, the whole building doesn’t suffer.
5. Are more than 10% of the condos delinquent or behind in assessment payments? This can also be road block to financing because it is usually leads to the entire association not being able to pay it’s bill or insolvency. Many times it’s also sign that condos owners will default on their loans.
6. How many condos are for sale as foreclosure or short sales? Not only do a high amount of short sales and foreclosures hurt values for all condos in the building but, conventional & FHA guidelines only allow for 25% or less.
7. How much is in reserve funds? Reserve funds are meant to pay for special projects or common repairs such as a roof, decks, exterior walls or other common elements.
8. Are there special assessments? When a condo building doesn’t have enough reserves to cover repairs or updates a special assessment is needed. This comes in the form of additional payments from each condo owner with a 1 time payment or monthly installment payments over a set period of time ie 1-3 years.
9. What’s included in monthly assessments? Find out what your monthly assessments cover heat, electric, cable, internet, parking and common amenities such as a pool or gym.
10. Is parking included? Parking spaces can be included as a common element with each unit, deeded & sold separately, or leased.
Before starting your condo search make sure you get pre-approved for a loan. This will help guide in your condo search by letting you know which financing method you can use and which buildings will qualify for that type of financing. The most disappointing feeling is finding that perfect place and finding out later that it won’t qualify for the type of financing you are using.
All signs point to 2012 being the year of the short sale.
Back in 2007 no one had ever heard of a short sale and the process was a complete disaster. Real estate agents didn’t know how to price short sales or get them approved by the banks. The whole process was a mystery because there was a complete lack of communication from the banks and they had no idea with thousands of defaulting loans. So many horror stories came from the early days of the housing crisis and home owners were on the loosing end, and the final chapter was foreclosure.
Real estate felt like the wild west. Prices were falling through the floor and loans were defaulting left & right. Banks were so far behind on handling home owners who fell behind on their payments and because they had no systems in place the only option was to foreclose. Most owners didn’t know what to do when their mortgage company wouldn’t answer phone calls or would send them into voice mail loops for days and weeks at a time and could never speak to a live person. Home owners became frustrated beyond all belief because there were no answers to the problems they faced.
5 years later the game has changed. Banks have realized that it’s more expensive to foreclose than helping home owners to complete a short sale or modification. Between attorney’s fees, loss of revenue from a paying mortgage ( some times for 2 full years), property damage, and endless management fees until the home finally sells as foreclosure. Systems & procedures have been established to give home owners more options than ever when they can no longer afford their mortgage and the major banks are extremely cooperative when payments fall behind. Many of the mortgage lenders are now calling when this happens to offer owners a way out with incentives up to $35000 in moving expenses for completing a short sale. In November, short sales accounted for more than 9% of single family home sales and were up 32% from the year before, according to CoreLogic. Short sales are being approved now more than ever providing home owners a way out.
The short sale process is being refined down to the finest detail so home owners have a way out now and prevents the dramatic decline in values that foreclosures represent ( up to %40 loss of value). Programs like HAFA, HAMP, & HARP are designed to free home owners from burdensome mortgages and receive moving expenses (up to $3000). Banks are offering cash incentives ($3000- 35,000) for home owners who complete short sales and streamlining the process so home owners have direct answers in short time periods. BofA, the largest servicer of home loans, did 107,000 short sales last year. That was up from 92,000 in 2010, which was double the 2009 volume, it says. New legislation has even been proposed to have answers in writing with in 75 days of an offer being submitted on a short sale.
Under water homes have more options than ever to get a fresh start, get out from a mountain of debt created by an economic down turn & a bad mortgage. However time is of the essence because the mortgage debt forgiveness act of 2007 is set to expire at the end of the year. This prevents owners from having to pay taxes on the difference of what they sell for and what they owe.
An opportunity exists for people who are behind on mortgage payments or soon will be. The opportunity to sell a home for less than what is owed while having the least impact to credit scores and receive cash to help with moving expenses. At no other time during this financial down turn have so many advantages been offered to struggling home owners.
Jeff Donnellan Re/max