5 Key Factors that Will Help You Understand the Importance of a Buyer’s Agent

Every new real estate investor soon comes to grip with the realization that the purchase of a property can be a daunting and sometimes complicated process.  Does everything start with the actual offer on the property?  Sadly, the answer really starts much sooner.  Before you ever purchase a property, you need to be able to determine if the property in question is the best property and if the price you are willing to pay is the best price.  Assuming that it is the right property, the price then becomes even more important.

It’s entirely possible that you have heard of a “buyer’s agent” and been a little confused.  Many new real estate investors mistakenly believe that if you automatically call the number on a listing sign, you will have an agent that will work in your behalf.  Nothing could be further from the truth.  That agent has signed a contract to work for the seller and to do everything in his or her power to represent the seller.  Nowhere in such listing contract does it say that the listing agent will work to represent the purchaser of the property.

It’s time to understand just how important a good, well-qualified, and knowledgeable buyer’s agent can be.  The term “agent” comes from the concept of “agency” which generally means an action or intervention to accomplish a certain result.  Thus, a buyer’s agent refers to the action of purchasing a property for the benefit of the buyer.  When you engage a buyer’s agent you are engaging someone who is going to work for you, negotiate for you, and stand in your best interest.

As a real estate investor, you should ask yourself if you really need a buyer’s agent.  In order to answer that question, step back a moment and ask yourself these three questions:

  • Do you want to lower the purchase price of the subject property?
  • Are you confident that you can negotiate the best purchase price possible?
  • Do you know who is representing you in the transaction?

Once you answer those questions, you will probably come to the conclusion that you might need additional help to secure the best deal.  That help can come through a well-qualified buyer’s agent.  If you are ready to become a better real estate professional who secures the best deals, you need to consider the following factors about a real estate buyer’s agent.

 

 

Key Factor #1 – Understand the Benefits of Using a Buyer’s Agent

There are major benefits a real estate investor can receive when using a knowledgeable and well qualified buyer’s agent.  The only real negatives generally appear when an investor has chosen an agent who is not knowledgeable or qualified.  With that caveat in mind, let’s look at several ways a buyer’s agent can benefit you, the purchaser of the property.

  1. Locating the best property. The first thing you need to do is to decide what type of property or real estate strategy you are going to pursue.  Are you going to search for “fix up property”, “potential rental property”, “raw land”, or some other type of property?  You need to determine exactly what type of property you are searching for.  Once you have done this, you will need to pass on this information in specific detail to your selected buyer’s agent. (Later in this article, we’ll discuss how to find and identify a good buyer’s agent.)

Your buyer’s agent needs to be able to distinguish between your wants and needs.  You should let the agent know exactly what you are trying to accomplish.  When you do this, your buyer’s agent will schedule appointments to view the properties and should be able to provide you with advance information regarding both the properties preliminarily selected along with critical facts about the neighborhoods.

  1. Negotiate the offer. This is a major benefit for you, the purchaser of the property.  The buyer’s agent will act as a third party and eliminate uncomfortable situations between yourself and the seller.  Keep in mind the fact that the listing agent of the property is contractually bound to represent the seller of the property.

The buyer’s agent can suggest appropriate starting offers and terms that might be acceptable to the seller.  In all likelihood, these terms might not be the price and terms that the listing agent is offering.  A good buyer’s agent will have researched other sales in the neighborhood and be prepared to have reasons for the price and terms you are offering.  This negotiation is generally made directly between your buyer’s agent and the listing agent.  Once the offer is accepted, the buyer’s agent can help and assist in drafting up the final closing documents.

  1. Recommend and find other real estate professionals. Depending upon the exact strategy that you will be employing, it is very possible that you might need the help of a well recommended contractor, mortgage broker, real estate attorney, appraiser, property inspector, mover, or other professional.  Your buyer’s agent should be knowledgeable about these individuals and be able to provide resources to help close and finalize the purchase of the property.  Having this information in a timely fashion will help you overcome obstacles that often appear when purchasing property.  It may be something in the home inspector’s report, be an appraisal problem, or some other setback.  When you have knowledgeable experts at hand, you are in a position overcome setbacks or obstacles that derail your investment strategy.

SEE ARTICLE: How to Convert Stumbling Blocks into Stepping Stones

 

Key Factor #2 – Understand the Difference Between a Buyer’s Agent and a Seller’s Agent

You must not believe that the buyer’s agent and the seller’s agent are one and the same.  They are not. When you use the seller’s agent (the listing agent) to negotiate on your behalf, you are positioning yourself in an untenable situation.  The buyer’s agent is working for the purchaser of the property, while the seller’s agent (the listing agent) is working for the seller.  Yes, you want to buy the property and yes, the seller wants to sell the property.  The difference is that you want to purchase the property at a price and terms that make sense for you, while the seller is trying to maximize the sales price on the same property.  In most cases, these goals are not the same.  The seller’s agent is bound by fiduciary responsibility to represent the seller, and not you.

Who do you want representing you?  Do you want the seller to know the absolute highest price you will pay before you even present the offer?  If you elect to use the seller’s listing agent to negotiate for you, you have already lost the negotiation issue.  Let’s take an example from the real world.  If you owned a rental property and your tenant was injured while repairing his motorcycle in your garage and sued you because your garage didn’t provide enough safety equipment, would you want the tenant’s lawyer representing you as well as your tenant?  I’m sure the answer would be a resounding “no”.  The same thing is true when negotiating with a seller.  You don’t want someone bound to and reporting to the seller to be representing you, the buyer.

 

Key Factor #3 – Determine How to Find a Good, or Even Great, Buyer’s Agent

Before you look for a good buyer’s agent, you must decide if you want to use one.  Once you make this decision, you must become very selective in the process.  What you don’t want to do is to choose someone who is not qualified or knowledgeable.  You want to find someone who understands the role he or she will play in the property purchase.

The first thing we recommend is that you immediately disregard the listing agent as a potential buyer’s agent.  The listing agent is legally bound and responsible to the seller of the property.  With this being the case, how can that individual represent you as a buyer’s agent?  You can be choosy when selecting the buyer’s agent.  You may receive recommendations to use your sister’s uncle or some family relative.  While it is difficult to say no to these type of recommendations, it is usually wise to do so.

What you are looking for is someone who truly understands the role of a buyer’s agent and is prepared to fulfill the responsibilities that come with this opportunity.  You can search online for “buyer’s agents” in your specific locality.  It is also possible to get recommendations from other friends who have purchased property using a buyer’s agent.  We suggest that you get several recommendations and then interview these individuals and find out how knowledgeable they are.  During the interview process, try asking these questions of each individual:

  1. Do you accept listings? If the agent does accept listings, this means that he or she is automatically working for the sellers of those properties.  Great buyer’s agents specialize in working with buyers and don’t accept listings from sellers, thus avoiding conflicts of interest.  If the agent accepts regular real estate listings, the agent is basically saying that he or she is working as a dual agent.  Does this sound like what you want?

A final note about agents who work as “dual agents”.  It is not illegal to have an agent work on your behalf as well as for the seller of the property, but when you do, you are competing against yourself.  When an agent agrees to show you a property where he or she is the listing agent, that is exactly what you are doing.  Many real estate professionals have found it more profitable to contract with a buyer’s agent and have that agent contact the listing agent.

  1. What type of properties do you specialize in? In order to increase your success in real estate, you need to find a buyer’s agent who both understands your specific real estate strategy and has had experience in finding these properties.  When your buyer’s agent has past experience, the learning curve will be shortened.
  2. What neighborhoods do you specialize in? You want to find an agent who is familiar not only with the type of property you are interested in, but, knows the area very well.  Hopefully, you will find an agent who has both the experience as a buyer’s agent, but also has experience on a personal basis.
  3. Are you working part or full-time? You need to understand from the beginning how much time the individual will have to devote to scheduling and showing you properties.  If the agent is working only part-time, ask very specific questions as to the availability he or she will have to working with you on your schedule.
  4. What references can you provide? You would be well-served to have references from other real estate purchasers who have used the agent.  You might also ask for references from other professionals like appraisers, mortgage brokers, or home inspectors.  Once you get a list of references, follow through and talk to each of them and ask their professional opinion of the agent.

 

Key Factor #4 – Understand How the Buyer’s Agent Gets Paid

The first question that often comes to mind is “Who pays the buyer’s agent?”  In most cases the fee paid to the buyer’s agent comes from the actual sale of the property.  When the property owner lists the property, he agrees to pay a real estate commission of 5 to 6 percent of the purchase price of the property.  The fee is paid through the listing broker and is generally split 50/50 between the listing broker and the buyer’s agent broker.

Most people say that the seller is paying for the buyer’s agent because the money for the buyer’s compensation comes from the sale of the property.  When you analyze the situation more closely, you recognize that the actual money comes from the payment made by the purchaser of the property to the seller.  Yes, it comes from the seller, but only after the buyer has actually paid the money to the seller.

Professional buyer’s agents have a contract they sign with you, the purchaser, of the property.  This is done when you engage the professional buyer’s agent and is called and Exclusive Buyer Agency Agreement.  The contract between yourself and the agent specifies what he or she will do on your behalf.  Before you sign such an agreement, make sure that you are satisfied with the agent.  The buyer’s agent will work for you.  You must be satisfied that he or she is just what you want.

The agreement is generally for three to six months and can be cancelled by yourself if you are not satisfied with the agent.  Many of these agreements have a clause that states you will pay a minimum amount (often $2,500) from any purchase arranged and negotiated through the buyer’s agent.  This fee comes from the listing commission paid through the seller of the property.  In the case of properties offered “For Sale By Owner”, the fee could be paid separately, or the buyer’s agent may get the seller of the property to pay the fee.

 

Key Factor #5 – Understand the Role of a Credible Professional Buyer Agent

There is an organization that is known as “The National Association of Exclusive Buyer Agents” and is known as (NAEBA).  This organization is a membership organization of buyer agents.  The organization selects agents who don’t accept listing contracts with sellers as the listing contract makes them responsible to the owner and creates an immediate conflict of interest.

You can search for the best buyer’s agents in your specific area by using a search engine and searching for the terms:

  • Real Estate Buyer’s Agents
  • Buyer’s Agents
  • Professional Buyer’s Agents

Try matching the terms with your specific locality and you will find buyer’s agents in your area.

A final word to the wise.  There are always two parties to a real estate transaction – the buyer and the seller.  As a buyer, you want the best price possible on the best property available, according to the best terms you can negotiate.  Consider strongly searching out a knowledgeable and professional buyer’s agent to accomplish your goals.

 

Real Estate Investor Secrets

Real Estate Investor Secrets

It’s true that the vast majority of individuals who initially make the decision to invest in real estate soon fail.  In fact, real estate professionals have found that 95% of the people who start the process to invest in real estate never even make an offer to purchase a property.  Why does this occur?  It all boils down to one simple word – Discouragement.  On the other hand, there are a substantial number of people who decide to invest in real estate, using one or more investment strategies, and they prosper and succeed.  What’s different between these two groups of people?  The second group has learned to control and even eliminate discouragement from their mindset, while the first group hasn’t.

Let’s look at several things that successful real estate entrepreneurs have done that changed the way that they invest in real estate.  We like to call them the 7 secrets that can eliminate that dreaded discouragement for beginning real estate investors.  As you learn to incorporate these secrets into your investment strategy, you will soon recognize the benefit of eliminating discouragement from your mindset.

Secret #1 – Understand your Personal Investment Strategy

Each of us are different and we all have separate talents and strengths.  Some of us are great with numbers, while others are fantastic in developing personal relationships.  Regardless of the differences we have and the talents we share, it’s possible for all of us to succeed in real estate investing, but we need to be aware of our personal strengths and weaknesses.  The goal is to match a separate real estate investment strategy to your personal strengths.  For example, if you have a talent and skill of doing construction work, you might want to consider looking into finding fixer upper properties and flipping them for a profit.  If you are great with numbers and love working with people, you might best look into finding a rental property as your first purchase.

There are basically three major real estate investment strategies that include: rental properties, fixer upper and flip properties, and buy and hold properties.  Within these three major categories, there are multiple individual strategies.  As you begin your real estate investment adventure, you need to select your individual strategy and then begin to do the research on how that strategy works.  It is critical that you understand what to do and how to do it before you do anything.  If you decide to go into rental properties as your main strategy, take the time to learn all you can about the advantages and disadvantages of owning rental property.

Once you have a basic and sound understanding of how a selected real estate strategy works, you need to develop your own approach to the strategy.  We like to call this approach – your niche.  It’s what is going to make you special and help you make a profit from your real estate adventure.

Secret #2 – Create a Roadmap that Will Guide You to Success

Every new real estate investor should start by developing or framing a basic business plan based on the real estate strategy they have studied and chosen to follow.  This business plan is really a roadmap you can follow that will help you overcome obstacles and move towards success.

  • Set Specific Goals.  In essence, this roadmap will contain a list of short-term, mid-term, and long-term goals, all of which will guide you along the path of success. If your chosen strategy was rental properties, specific goals might include items such as; looking as specific properties in your target area, researching rental rates within the target area, identifying funding opportunities that match your credit rating; making the offer, etc.  This list of goals should be written out and be extremely specific in nature.
  • Each goal should have a timeline or timetable attached to it.  You must have a way to measure if you have succeeded reaching the goal. These timelines are not meant to be a constraint on your ability, but rather a way to motivate you to take action.
  • Create Rewards for Completing Your Goals.  Each goal is a step toward your ultimate success as a real estate investor.  Goals are nothing more than dreams if no action is taken, and if you reward yourself for completing the goal, action will usually take place.  For example, one of your goals might be to identify three specific rental properties in the target area.  Once this goal is reached, you might reward yourself with a special night out with your spouse or significant other.  The object is to create rewards that you will remember and enjoy as you reach and complete these initial goals.  If the reward you choose has meaning for you, you will work harder to complete the goal.
  • Establish Danger Points that should be avoided. Your roadmap should list things that can derail your success in real estate.  As you study and develop your personal investment strategy, you should understand all the risks involved and then work to eliminate them.  Some of these dangers signs might be:
    • Don’t over leverage your property.  It’s true that when you use borrowed money or capital to purchase a property, you can magnify your return, but, it’s also true that increased leverage or borrowing can also magnify your risk.  When you decide to purchase a property, you need to be aware of how you are going to repay the borrowed capital.  Every investor needs to control the leverage and not let the leverage control you.
    • Don’t fall in love with the property.  When you become emotionally involved with the property, you begin to make emotional decisions instead of fact based and financially sound decisions.  If you start to believe that you must have a specific property, regardless of the price or terms, you are setting yourself up for both failure and discouragement.  Wise investors always look at the numbers and base their decisions on those numbers.
    • Don’t over rehab when buying properties.  This is especially true for fixer upper properties.  You want to make to make the property as rentable or saleable as you can.  When you over rehab a property, you are spending your profis before you ever get them.

Secret #3 – Continue Your Education

Educating yourself should be a life-long pursuit, and it is extremely important for the aspiring real estate entrepreneur who wants to achieve success.  There is, however, another side benefit of continuing your education about real estate.  Discouragement often appears when things don’t go as planned.  By continuing your studies about real estate investing you will plan better and avoid those pains of anxiety and discouragement.  And when you are already discouraged because things haven’t gone as anticipated, continued education in the following ways will get you back on the path to success.

  • Educate Yourself Through Personal Study. This study can take place in a myriad of ways.  You might start by reading and listening to books written by other successful real estate experts.  Pay special attention to their stories of how they reacted when obstacles appeared unexpectantly.  In addition to discovering that you are not alone in these pangs of discouragement, you will learn specific steps to overcome the obstacles or setbacks that might be causing your discouragement.
    Your personal study should not be relegated to simply reading books.  You should also search out other successful investors and spend time talking to them about their experiences.  These discussions should always be centered first on identifying the problems they may have met, and second, on evaluating specific ways they solved the problems.  Don’t pass on the opportunity of learning about their successes in real estate.A third way to continue your personal education is to meet and greet the experts in the field of real estate.  Leverage their expertise by learning what they do and how they do it.  You may want to meet with well-known appraisers, bankers, and even surveyors.  All of these experts can give you information that will help you identify problems along with the best solutions.  The time you use meeting and interacting with real estate professionals will also teach you multiple languages.  Soon you will know how a plumber, appraiser, banker, title company officer etc. speaks.
  • Find a Mentor. Mentors may be paid professionals or they may just be other real estate professionals who have experienced great success.  When you are just beginning your career in real estate investing, take the time to meet other like-minded individuals in real estate.  When meeting these people, learn to ask questions that are based on specific examples.  You will find that when you ask knowledgeable questions, you will get real world examples of success.  You might find a mentor by becoming an unpaid intern for them.  Offer to do some of their research for them, naturally following their instruction.  As your relationship with a mentor grows, your education will also increase.
    If you have the financial capability to pay for professional mentoring, it can be worth the money you spend.  If you elect to pay for professional help and mentoring, make sure you establish the credibility of the selected mentor.  If you are paying for this valuable service, the mentor should be able to provide references and examples of how they have helped other people like yourself.
  • Attend Training Events.  If you belong to a local real estate investment organization, they will normally have access to local training.  Make sure you attend and take good notes.  These are also places where you might establish relationships with potential mentors.  There are also well qualified national organizations who can provide extremely competent instruction in the specific steps involved in different real estate investment strategies.  Many successful real estate entrepreneurs have found that the money they spent on their education was returned many times over in their personal success.
    There are also credible webinars offered online that can increase your knowledge about real estate.  When selecting a webinar, take the time to assess the qualifications and credibility of the person providing the webinar.  The more you learn, the better you will feel, and the better you feel, the quicker your discouragement will disappear.

Secret #4 – Buy Right

Every smart investor should always make money on the purchase.  This means that they are buying at market or below market.  Naturally, if you can purchase a property below market value, you have built in equity right from the start.  The question becomes, “How do you buy right?”  It starts by using the following simple steps:

  • Know Your Target Market.  If you are buying locally, spend time looking at what other properties have sold for.  It doesn’t matter what people are asking, what really matters is what people are getting for the property.  The saying “Location, location, location” is all important.  Make sure you are comparing apples to apples and not apples to oranges.  Pay attention to where the different properties are located in the area and then compare sales among true like properties.  Once you have established realistic values in a geographic area, then you are ready to start identifying prospective properties.
  • Look for Motivated Sellers. When you are ready to purchase a property, it will pay big dividends to know why the seller is selling the home.  Once you identify a well-motivated seller, you can make an offer that builds in equity for you at time of purchase and likewise get the property sold immediately for the seller.  It’s a win-win deal.
  • Learn to Negotiate. Negotiation techniques can be learned and the time you spend understanding how to negotiate will pay big dividends.  There are training courses and seminars that will help you learn how to do this.
  • Create an Exit Strategy. Many first-time buyers think the exit strategy just means how they can sell the property when they are ready to liquidate the property.  Yes, this exit strategy should be considered when purchasing the property.  You don’t want to buy a property that is a dog and will always be a dog.  You want a property that can be put in a position to be sold with good curb appeal.  Forgetting this fact, is the reason why some investors are discouraged when they are left with a property that is in the wrong location and can’t be sold regardless of the price.
    The second type of exit strategy that must be considered is an exit strategy that allows you to exit the purchase.  If you make an offer on a property and soon find out that it wasn’t what you thought it was when you made the offer, you need to make sure that your offer allows you to walk away.  The “subject to” clauses are an important part of the purchase agreement.  Discouragement can come when you are locked into a bad purchase.

Secret #5 – Follow the Roadmap

Discouragement and anxiety usually appear when the investor has gotten off course in their real estate experience.  These individuals have usually failed to meet short-term or intermediate goals.  Perhaps the individual is discouraged because they haven’t found a great under market property in their local area.  Maybe they are depressed because they haven’t secured financing.  There are numerous reasons why discouragement appears, and in almost all cases it can be traced back to not following a plan and taking action.

  • Match your Roadmap to your Market.  It’s important for you to immerse yourself in the real estate market on a local basis.  Unless you are aware of those things that influence the market, you will be in peril of making decisions that are unwise and possibly fatal.You need to know what things are driving the job market, which schools are best, and where the people are moving to.  Sometimes when you first draft your business plan or roadmap you may not be totally aware of changes that are taking place.  When you become aware of these changes, make subsequent changes to your goals and timetables.  Your discouragement may sometimes be a factor of what is happening around your property and not the property purchase itself.
  • Keep a Real Estate Journal. The best way to keep yourself on track and following your personal roadmap is to record what is happening and what steps you have taken.  It is a good idea to write your specific goals in your journal along with the timeline for accomplishing those goals.  When you meet an objective, write it down in your journal.  You will find that by recording both the positive and the negative things that take place in your real estate adventure, you will have a guide book to help you on subsequent purchases.
    Be honest with yourself when recording both the good and the bad things that take place.  Accuracy in your journal is important.  It has been found that this recording of events reaps rewards.

Secret #6 – Upgrade your Mindset

Your mind is a powerful tool and it can change how you act and how you perceive what is going on in your real estate business.  If you want to eliminate discouragement from your existence, you need to remove those obstacles that influence those negative feelings, but you must also change the way you think.

  • Eliminate Negativity in your Life. It has been proven over the years that we act as we think.  This is true in all aspects of our life and is especially true in the real estate business.  Start by doing simple things such as removing negative words from your vocabulary.  Surround yourself with positive reminders of what you want to accomplish.  If you have decided to fix up a property and flip it, then get a rendering done of what the property will look like when finished, and then put this rendering or picture in plain view.Instead of saying “If this doesn’t work, I don’t know what I’ll do,” replace it with “When I finish this property purchase, I’ll be able to create a regular passive income with that rental money.”  Start looking at what you want to do instead of looking at negative outcomes.
  • Surround Yourself with Like-Minded People. There is nothing that creates more discouragement than “naysayers”.  You don’t want to be around people who will tell you what is wrong with your ideas.  These type people never take action on their own behalf and deep down are envious of your efforts in improving your life.
  • Read Books on Positive Thinking. Books by well-known authors about positive thinking will influence how you think.  And when you start thinking different, your life will be different.
  • Consider Getting Professional Real Estate Help. If you are discouraged because you think you are alone, then maybe you just need to enlist the help of good professional rental management or the help of a good accounting firm.

Secret #7 – Take Immediate Action

It’s no secret that action creates habits and when a habit is fully adopted, the task in question becomes easier.  If you are discouraged, make the decision to do something that requires real action on your part.  If you are still waiting to make your first offer, then go out and make an offer that you don’t even expect to get accepted.  The important point is to make the offer.  And you may be surprised to find yourself in control of a great property at below market value.

One action may not be enough to get rid of the feelings of discouragement.  If you are still feeling discouraged after accomplishing just one of your short-term goals, go ahead and fulfill the action for another goal on your roadmap.  As long as you are acting, you are progressing.  Success in real estate investing is a process and action is also a process.  Make it the same process.

There is nothing that discourages discouragement more than simply taking action.  You have a roadmap to success in your business plan.  If you are discouraged, take the specific action steps you have recorded on your roadmap.  When you act, you really do change things.

 

Why Invest in Real Estate

Why Invest in Real Estate

There are many ways to invest your time and money. You can invest in a variety of investment strategies with banks like bonds, stocks, annuities, interest bearing savings accounts or interest bearing checking accounts, certificate of deposits (cd), and many others. You can invest in the stock market with its large variety of investment strategies. You can invest in IRAs and other retirement funds. All of these and many other types of investments provide ways to make your money work for you.

Real estate investing also has several different strategies that you can use to get your money working for you. Fast cash strategies include buy-fix-n-flips or wholesaling. Creative financing strategies include seller financing or a lease option. Long-term strategies include buying and holding residential or commercial properties. All of these real estate investment strategies are great ways to not only make a lot of money but also to leverage your money as well as other people’s money.

There are many advantages of investing in real estate. Housing is something that everyone needs. Like other types of investments, real estate values go up and down. However, over time, the downs aren’t as low as previous downs, and the ups are higher than the previous ups. Buy-and-hold strategies have the advantage of passive monthly income, appreciation over time, equity, and tax advantages. Fast cash strategies allow you to make a profit quickly and move on to the next deal. Real estate trust strategies allow for consistent income that can be reinvested to continue growth.

Real estate investing can bring you a great return on investment whether the economy is going up or down. Choosing a real estate investing strategy that meets your specific financial goals can be safer than other types of investments, as well as an excellent way to gain true long-term wealth.

Exercise Danger!

Exercise Danger!

Would you ever sign a contract without knowing what you were signing? Hopefully the answer is no. Remember when you are trading options that you are signing a contract.

The simplest definition of an option is that it is a contract. Contracts have rights and obligations.

An option contract is the right to buy or sell an underlying security at a set price on or before a set date. For example, we may buy an option contract that gives us the right to purchase shares of a stock for $50 per share at any time within the next 90 days. In this example $50 is the strike price and the expiration date is in 90 days.

Exercising an option is the terminology used when putting into effect the conditions of the contract. In our example, we have the right to purchase a stock for $50 per share. If we exercise our right, we are choosing to purchase the stock for $50 per share. A standard option represents 100 shares of stock so that would cost us $5,000 plus whatever fees and commissions we owe.

There are two common types of equity options. European style and American style. American style options can be exercised at any time up to expiration. European style options can only be exercised at expiration. Most stocks and ETF options trade American style. Most index options trade European style. You should contact your broker if you are not completely sure which type of option you are trading.

Most options are not exercised. They either expire out of the money or are offset by closing positions prior to expiration. Most options that do get exercised get exercised at expiration, however, early exercise is a possibility on American style options.

The OCC (Options Clearing Corporation) uses a process known as exercise by exception to exercise options at expiration. Simply put, options that are in the money by the threshold amount will be exercised at expiration unless the OCC is instructed otherwise. Since June of 2008 the OCC has had an exercise threshold of $0.01. That means any option that is in the

money by $0.01 or more will be exercised at expiration unless the OCC is instructed otherwise. Individual brokerage firms may have a different threshold for exercise from the OCC.

Generally speaking it is safe to say that options that are in the money will be exercised at expiration. If you are unsure of whether your option is in the money or not please don’t hesitate to reach out to your broker for additional assistance.

Managing Trades

It is critical that we are aware of exactly what we are investing in. Since options are contracts we need to be sure that we understand our contractual rights and obligations. If our options are in the money at expiration they will be exercised.

For example, if we own a long call at expiration and it expires in the money we will end up buying the stock at the strike price of the call. We would then be responsible for the full risk of the stock position.

If we are short an in the money call at expiration we would be obligated to sell the stock. If we already own the stock then we have to sell it. If we don’t own the stock then we have to borrow the stock from the broker and sell it anyway. This means we are short the stock and are responsible for the full risk of the short stock position.

Early Exercise

American style options can be exercised at any time. Options that are deep in the money have a higher chance of getting exercised early. This is because they are made up of mostly intrinsic value. If an in the money option has little or no extrinsic value remaining then it has a high chance of being exercised early.

Let’s say we sold a $45 strike call. The stock is now trading for $50 per share. The call option is trading for $4.85 per share. The buyer of the call has a choice. They can choose to sell the call for $4.85 or they can exercise the call and purchase the stock for a $5 discount. Mathematically it makes sense for them to exercise the call early. As the seller of the call, we would be obligated to sell the stock for $45 per share. This could happen at any time. This is why it is so important to manage our trades properly and be aware of our contractual rights and obligations.

When we short a call we are also exposed to dividend risk. Since selling a call requires us to sell a stock if exercised we could find ourselves short a stock through a dividend. When short a stock we are responsible for paying that dividend to the owner of the stock we borrowed. If the dividend payout on a stock exceeds the extrinsic value of an in the money calls corresponding put, then that call is in danger of getting exercised early.

Let’s say there is a $50 stock that is issuing a $1 dividend. We own a $48 strike call on that stock. If the $48 strike put is trading for less than $1 then our call is in danger of getting exercised early for the dividend.

Education

Options useful tools when used properly. As option traders it is our responsibility to master the

fundamentals of options; be aware of the contractual rights and obligations involved in options, understand how options are priced, master risk management techniques, master basic option strategies such as long options and covered options, and learn vertical spreads and other more advanced strategies.

Most importantly, control risk. Options are leveraged instruments and leverage works both ways. Know what the maximum loss is. Don’t invest with money you can’t afford to lose. Don’t be intimidated by options. They are wonderful tools. Have fun learning, be safe, and allow us to assist you in this journey.

The TLC Your Garage Deserves

The TLC Your Garage Deserves

The first part of your home you step foot in is most likely the one you give the least attention to. This first impression of your home can not only have a strong psychological effect on your personal mood and perspective, but it can also equate to more tangible damage, in the form of diminishing financial value. That is why 82% of 500 realtors surveyed stated that a disorganized and messy garage has a considerably negative impact on potential home buyers (Braun Research survey). Here, we examine a few of the most common long-term effects of a neglected garage and how we can begin to quickly address them while transforming your garage into a portion of your home you want to show off.

 

Cracks in flooring

One of the most common issues that arise in a garage are cracks in the flooring. We’ve almost accepted them as inevitable, but the truth is they don’t have to be. Cracks in the floor are most commonly caused by things like shrinkage, settlement and exposure to cold and frost. They also have real effects and are subject to regulation, as demonstrated in industry standards manuals everywhere. The real issue with cracks is the extra damage caused by water seeping into them followed by freezing occurring in the winter time, which can cause expansion and excess pressure against the garage slab. This can lead to excess cracking and heaving. Try to eliminate exacerbating these cracks by utilizing a garage floor mat in your garage.

 

Staying organized

The clutter overflows, spring time comes around, and we finally decide to spend a day solely devoted to cleaning out the garage. The only problem is, this is a band aid on a larger issue, as next spring we will be doing the same thing. Sound familiar? One way to help with this is installing garage organizers. Purchasing some storage shelves and cabinets go a surprisingly long way in keeping your garage clean and clutter free. Just having the ability to put items away in a specific place instead of stacking them on top of each other leads to a more habitual upkeep of your garage, ensuring it stays organized.

 

Outdated or broken garage door openers

As with all technology in the last two decades, developments have been consistent and continuous. A unique issue has risen with garage doors, as they aren’t as easily replaceable as an iPhone or a pair of headphones. They also aren’t anywhere near the top of our list – until they are. Having an updated and fully functional garage door system is a necessity in this market, and goes a long way as far as presentation. They are after all, one of the most frequently used doors in the home.

 

You’ll find it surprising how tending to just these three simple aspects of your garage can be completely transformative. Potential buyers will see your house as much more valuable, and you’ll also feel significantly better as you return home every day. You may even be able to make it to the door without having to avoid stepping on any old toys or furniture

Getting Started in Real Estate Investing: Part 2

 

Getting Started in Real Estate, Steps 4-5:

Step 4: Move Forward on Your Selected Approach to the Market.

Here are some recommendations on how to move forward with the following approaches:

  • If you intend to “Buy, Fix and Sell,” finding and screening a good contractor is critical to your success. Even if you already have a background in this, it is still part of your due diligence. Attending real estate investment clubs and seeking referrals from other investors can provide some of the best sources for this search.
  • If you are going to “Buy & Hold” a rental property, then working with a good and well-respected property management company will be key. They will also be a great resource for managing your rental rates, as well the market.
  • Wholesaling – Here are three ways investors conduct wholesale deals:
    • Bird Dog — This consists of finding a property that meets or exceeds another investor’s expectations and criteria, then getting them to sign a bird dog consulting agreement with a pre-discussed finder’s fee that they have agreed to pay after an offer is made and closed on.
    • Assignment of Contract —This is when you find a property that fits your cash-buying partner’s criteria and put in a written offer on the property. When the seller accepts your offer, you then sell the interest in the property and/or the contract to your cash buyer for an assignment fee.
    • Double Close or Back-to-Back Close — This is the last of the wholesaling techniques. This is when you find a property that fits your cash buyer’s criteria and put an offer on the property between you and the seller with a second contract between you and the end buyer. Both closings will be scheduled to take place within a few hours of each other or within a couple of days. Your profit is received after the second closing.

Step 5: Find the Active Cash-Buying Investors in Your Market.

If you are going to be wholesaling, then this is one of the most imperative steps for you to take. Look for those who have closed on more than two deals in the last year. You might want to consider the following types of cash-buying investors: LLC companies, holding corporations, and/or trusts. You will often find these are the investors that do multiple deals a year.

Well, that’s it for getting started. Happy hunting!

How Leveraging Your Real Estate Investments Increases Your Return on Investment

How Leveraging Your Real Estate Investments Increases Your Return on Investment

Leveraging your real estate investment means using financing to increase your return on investment.  So how does this work?  Let’s look at two scenarios to illustrate how this is possible.

Scenario 1:

An investor purchases a rental property for $90,000 cash and puts $10,000 into improvements for a total investment of $100,000.

He or she then finds a renter and leases the property for $1,300 a month or $15,600 annually.

He or she has expenses of 35% for taxes, insurance, management fees, maintenance and a vacancy factor, equaling $5,460 annually and creating a net operating income of $10,140.

Since the investor’s Net Income is $10,140 and his total investment is $100,000, his return on investment equals 10.1%.

  • $15,600           Gross Annual Rent
  • –  $5,460           Annual Expense
  • = $10,140           Annual Net Operating Income
  • Divided by   $100,000           Total Investment
  • ROI           10.1%           Annual Return on Investment

Scenario 2:

If this same investor finances the purchase of this property by securing a loan for 80% of the purchase price at 4.5% annual interest, amortized over 30 years, his or her mortgage payments will be $365/month.

He or she will put $18,000 down and $10,000 into rehab for a total investment of $28,000.

The investor’s annual mortgage payments will be $4,380, decreasing his or her net annual income to $5,760; creating an annual return on investment of 20.5%.

  • $15,600        Gross Annual Rent
  • –  $5,460         Annual Expense
  • = $10,140        Annual Net Operating Income
  • –    $4,380         Annual Mortgage Expense
  • =   $5,760         Annual Net Income after Mortgage
  • Divided by     $28,000           Total Investment
  • ROI            20.5%             Annual Return on Investment

You can see from this example that an investor can increase his ROI from 10.1% to 20.5% by leveraging; thus doubling his or her income from the same monetary investment.

Can Using a Staging Service Make Your House a Hot Property?

Can Using a Staging Service Make Your House a Hot Property?

If you’re planning on selling, you might want to consider staging your house first. Staging is the process of renovating or redecorating your home before putting it up for sale. A private residence may have its own style while it’s occupied, but it will help to have it refurbished before adding it to the real estate marketplace.

Staging a home increases its chance of becoming a hot property in the market. It doesn’t require a total renovation of the house. Some people may opt to replace some old furniture, add decorations, or maybe make landscape changes. Some may also want to repaint, change tiles or wallpapers, and such. Anything added or modified to make the house look newer, neater and more attractive will make the house more appealing to potential buyers. While it’s true that staging will cost quite a bit of money, it can potentially increase the market value of the home, depending on the extent of changes and how long they take.

Although you have your own idea of how you want the home to look before selling it, you might want to consider hiring staging services. Having someone professional do the job may help increase the home’s market value after staging. Yes, you will be spending an additional cost for hiring a designer, but a professional stager can make a difference in the selling price. There are certain things you can do on your own, but there are also some things that are better left in the hands of a professional if you really want your house to be a hot property.

The Real Estate Closing – Policies and Procedures

The Real Estate Closing – Policies and Procedures

It was quite the transition in my life to go from mom and wife to business mogul! It was a long and winding road for me to really develop a business mindset, especially one that felt comfortable to me in my own head. You cannot be someone else, but you are leaving your old lifestyle behind.

Be patient with yourself. Pay attention to what gets you excited in your new world. That’s where you are going to be most successful. That’s where to put your energy. Once you know where to focus, you will be better at treating it like a business because you will believe in what you are doing. You have to be on guard with your emotions. This is not an emotional business.

One thing that never occurred to me until I was attending an event at a real estate investment club is that I should have policies and procedures for my business. It seems insanely obvious now, but really, it never even occurred to me. However, much like a business plan, you can’t really establish these in much detail until you get some experience. I’ll give you an example of a procedure I have for purchasing a new property:

  1. Inform the title company this will be a remote closing. Documents are to be emailed and sent back overnight.
  2. Get wiring instructions for funds.
  3. If using a private money lender, contact a local attorney to draw up the promissory note and mortgage.
  4. Contact the insurance company and get coverage.
  5. Once email of documents is received, read carefully. Sign documents that do not require notarizing. Go to notary and sign the remaining documents in front of notary as needed.
  6. Go to Federal Express or UPS to overnight and return documents.
  7. Track closing progress with the title company.
  8. Call utility companies.

Now, why is this important? Number one, you don’t want to have to rethink this every time. It’s easy in the rush of the moment to forget something important. Number two, you are building your business so you can sell it. What? You have no intention of selling your business? Well, at a minimum someone needs to be able to step in and run it for a few weeks while you are on a beach in the Caribbean. OK?

Policies, practices, and standards of operation: document what works and revise it over time.

Financial freedom likely sums up what you are willing to do. Is it possible? Is investing in real estate your answer? It can be. You are going to have to work hard, especially in the beginning. You are going to have to be persistent. You are going to have to pick yourself up and push hard when you really don’t want to. You are going to fail a lot on the way to success. Success did not just fall in my lap, and it won’t fall in yours either. You must struggle and strive. It will be worth it.

Gypsy Real Estate Investing

Gypsy Real Estate Investing

Gypsy real estate investing is a great way to build a strong rental portfolio. My wife and I started our real estate investing this way by accident. We had a house built and had lived in it for a few years when we decided to move. I had just finished real estate school and received my realtor’s license. While attending real estate school, I met a mortgage broker who introduced me to real estate investing. I decided to research lease options and liked what I found, so I decided to give it a try. We decided to move and do a lease option on our house instead of selling it. After we moved, we acquired a couple of other properties that we lease optioned also. During this time, we kept looking for another great deal on a house for us to live in. When we found one we wanted to buy, we moved and lease optioned the one we had been living in instead of selling it.

The strategy is to find a great deal on a house to live in that gives you a better interest rate and smaller down payment. Live in the house long enough to find another great deal on a new house that you can move into, and then rent out the house you move out of. You can buy ready-to-move-in properties, or you can buy properties that need a little work. You can then work on fixing the house up while you are looking for another great deal.

One thing with this strategy that helped us be successful is to not be in a hurry to find the next deal. We were able to acquire other properties using creative terms in between each move, which helped.

Of all the properties that we have owned and rented out, or lease optioned, the ones we lived in before renting them out have brought us by far the largest returns. Obviously, you have to be okay with moving that often. But if you have a long-term plan, you can create a very profitable passive income using the gypsy method.

How a Real Estate Closing Works

How a Real Estate Closing Works

You’ve showed your client the property and he seems very interested in it, then he decides he’s going to buy it. Now you have reached closing, which is the final step in executing a real estate transaction. But you’ll have to go through a few processes before the transaction is actually over.

Several things happen during closing: the buyer and the lender deliver a check for the balance owed on the purchase price. Then the seller signs the deed over and gives it to the buyer. A recorder’s office, which will record the deed, will require the seller’s signature to be notarized. Commonly, the seller delivers possession to the buyer by giving them the keys to the property. Unless otherwise specified in the real estate contract, delivery of possession should be on the closing date, which is usually several weeks after the offer is formally accepted.

A title company, lawyer, notary, or the buyer will register the new deed with the local land registry office or recorder’s office. A declaration or statement by the buyer or seller regarding the purchase price may have to be filed with the government. Conveyancing taxes and recorder’s fees will typically have to be paid, which are part of the closing costs. The seller receives a check or bank transfer for the proceeds of the sale, minus the closing costs and mortgage payouts. Prepayments for real estate taxes and insurance may be taken from the funds allotted for closing costs, and fees charged by other parties are paid. Sometimes, closing in escrow, which is a neutral third party, may occur to prevent the two parties from getting ripped off.

At a closing, the basic idea is this: the buyer gives the seller their money and the seller gives the buyer the deed.

How to Run Numbers to Get Your Desired CAP Rate

How to Run Numbers to Get Your Desired CAP Rate

When investing in cash flow or rental properties it is important to understand what your return on investment is going to be. Investors refer to this as a CAP rate. Investors will target a specific CAP rate to make sure the properties they are buying are going to give them the desired return they are targeting. We will go through numbers to show you how your offer amount will be able to give you your desired CAP rate.

CAP rate is defined by Net Operating Income (NOI) divided by the cost of the asset. I’ll call the cost of the asset the all-in cost, which may include rehab costs as well. To get the NOI, I have to know the amount I can rent the property for minus all the expenses associated with owning that property. Let’s go through some numbers to show you how to calculate CAP rate.

Let’s say I need an 8% CAP rate to buy a rental property. The property will also need 15K worth of work to make it rent ready. Once it is fixed up, the property will rent for $1,100 per month. Taxes and insurance will cost me $150 per month. This is information I will need to get my numbers dialed in.

First, let’s get our NOI. We are getting $1,100 monthly for rent but we have to take off the monthly expenses.

  • $1,100 – $150 (taxes and insurance) = $950
  • $950 – $110 (10 % property management company) = $840
  • $840 – $110 (5% for maintenance and 5% for vacancy) = $730
  • $730 * 12 = $8,760 (Yearly NOI)

Now we have our NOI. Here is the rest of the calculations to get our offer amount:

  • $8,760 / .08 (desired CAP rate) = $109,500
  • $109,500 – $15,000 (rehab cost) = $94,500
  • $94,500 – $2,835 (3% closing costs) = $91,665

This formula has given me an MAO (maximum allowable offer) of $91,665. This offer will give me an 8% CAP rate. Now, if we go one step further and want to wholesale this to an investor that wants an 8% CAP rate, we only have to subtract our assignment fee.

  • $91,665 – $3,000 (assignment fee) = $88,665 (MAO for an assignment)

By using this formula you should be able to calculate whatever CAP rate you or your investors are hoping to get from a rental property.

How to Accumulate Rental Properties with Very Little Money Down

How to Accumulate Rental Properties with Very Little Money Down

Do you want to own rental properties but have very little money or none at all? Then you need to listen to the following article on buying rental properties using seller and existing financing. In today’s seller’s market, it can be difficult to purchase properties to fix and flip because you have to buy the property for a price that allows you to make a quick turnaround profit and that usually means making offers at 25-30% below the asking price with very few offers accepted. Rental properties, on the other hand, can pencil out financially, even if full price offers are made, as long as the rental income is sufficient to justify the investment and especially if seller’s financing is put into place.

Here is what you do. Look for properties that are already rental properties with tenants that are taking good care of the property so there are no rehab costs. Then make offers on the property at no less than 90% of the asking price so that sellers are interested. Ask the seller to carry a note for 99% of the offer price. Then take the property subject to the existing loan so that the owner is only carrying paper for the difference between the 1st mortgage and your offer price minus the 1% down payment. An example is as follows:

The asking price is $100,000 so you offer $90,000 and ask the sellers to carry a note for $89,000 with a $1,000 down payment and take the property subject to the existing 1st mortgage of possibly $75,000. You will then pay the seller a month fee based on the total loan amount of $89,000 at an agreed upon interest rate amortized over 30 years with a balloon payment at the end of 5-10 years. You will set up an escrow account with a bank or title company (neutral third party) who will collect your payment and make the payment on the 1st mortgage. You now have a rental income property with a loan in place for 1% down, no origination fees and a reasonable monthly loan payment in place. You have no out of pocket cost for rehab and the place starts paying rental income immediately.

All you have to do is make sure the rental amount is sufficient to return a positive cash flow that makes you a sufficient return on your investment. An example is as follows:

The house cost $90,000 to purchase with only $1000.00 down. The monthly payment on the seller’s financing at 6% interest amortized over 30 years is $539/month or $6,432.00 annually. The rental is $1,000/month or $12,000.00 annually with a net income after expenses of $7,800. 00. The net income minus the mortgage payments equals $1,368.00 annual income along with paying the principle debt off. Since your investment is only $1,000.00, the income of $1,368.00 equals a 136% return on investment.

With $10,000.00 you can purchase 10 homes and let them pay themselves off over time until you eventually have 10 homes bringing in $7,800.00 each annually for a total annual rental income of $78,000.00. Plus the original value of each home will increase over time by 3-5% annually.

Pros and Cons of Condo Ownership

Pros and Cons of Condo Ownership

Condo ownership is appealing to many prospective homebuyers. With convenient locations and low-maintenance living, it may seem like the ultimate solution! Before you go all-in, take a look at the pros and cons of condo ownership:

Pros of Condo Ownership

Amenities: Many condo associations offer resort-like amenities. Because the cost of the pool, gym, and common spaces are split across so many owners, you can get access to luxurious amenities for a fraction of the price.

Security/Safety: Some condo associations offer a doorman or private security. Apart from security, proximity to neighbors provides peace-of-mind.

Price: Condos are often much more affordable than single-family homes, especially for their location. Many condos are located in desirable neighborhoods, city-centers or resorts, making them an affordable option for first-time homebuyers who don’t want to sacrifice their ideal location.

Maintenance: The biggest advantage of buying a condo is that maintenance is included. Exterior maintenance and lawn care are all taken care of by the homeowners association. While you do pay dues, unexpected expenses are kept to a minimum.

 

Cons of Condo Ownership

Homeowners Association Fees: On top of a regular mortgage payment, most condo owners are responsible for monthly homeowners associations (HOA) payment. Most HOA fees range from $200-$400 per month[1]. This can be costly on top of mortgage payments.

Privacy: If you live in a condo, be prepared to share a wall with your neighbors. Even though proximity to your neighbors can offer increased security and safety, condo owners do give up privacy.

Rules and Regulations: Most condo developments have strict rules and guidelines for residents. There are small rules such as no outdoor grills or parking restrictions. You are also limited to the improvements you can make to your unit. If you want to install solar panels, for example, you will have to get permission from the HOA.

Appreciation: Condo owners are purchasing a unit, not the land. Land is one of the main forces behind appreciation, so condos appreciate slower than single-family homes[2].

Pros and Cons of Condo Ownership

Condos ownership is an excellent option for a prospective homeowner looking for a safe, low- maintenance, affordable living situation with access to amenities. If you are looking for freedom from rules and regulations, an appreciating asset, low additional monthly expenses and privacy, condo ownership many not be the best option.

 

 

 

[1] http://www.investopedia.com/articles/mortgages-real-estate/08/housing-appreciation.asp

[2] http://www.investopedia.com/articles/mortgages-real-estate/08/homeowners-associations-tips.asp

9 Keys for Successful Comps.

9 Keys for Successful Comps.

Using comparable properties, also known as comps or comparables, is the best way for you to get an accurate after repair value (ARV) for a property you are interested in making an offer on. Your goal is to get a minimum of 3 good comps, you will take as many as are available, but you need at least 3.   Here are 9 steps that will help you get the best comps on potential properties you would like to make an offer on:

  1. All comps have to be sold properties.  You do not want listed properties or properties that are under contract.  The sales process has to be completed.
  2. No fore-closures, short sales, or rehab properties. You want move in ready properties only.
  3. Look for comps that have sold within the last 3 months.  If you need to go back further because you did not get at least 3 comps. you can, but you do not want to go back further than 1 year. 
  4. Comps should be within a half mile to one mile away from your subject property.  If you do not have enough comps with in the mile radius you can expand your area further to find sold properties that would make good comps.  This is most common in rural areas and I have seen comps go out to 3 miles away the subject property. 
  5. Interior square footage needs to be similar.  Use a range of 500 square feet or 20% whichever is greater.  Here is an example of how to use your square footage range:  Your subject property is 1258 square feet, so, you should get all properties that fall into a range from 1000 square feet to 1500 square feet.  That gives you your 500 square foot range.  When using the 20% rule take 20% of your subject properties square footage for your range.  For example: your property is 3500 square feet.  When you take 20% of the square footage you get 700 square feet.  Now you will use 700 square feet as your range.  Your comp range would be 3150 to 3850
  6. Your comps should have the same number of bedrooms and bathrooms as your subject property.
  7. Structure of the comp property needs to be the same as your subject property.  For example: If you have a 2 story home you want 2 story homes for comparables. 
  8. Acreage or lot size of your comps needs to be similar to your subject property. 
  9. Age of properties comps should be within 20 years of your subject property. 

The closer you can get your comps to what your subject property is the more accurate your ARV will be.   By using these steps, you can assure yourself that your comps will give you the best ARV available and helping you create a more accurate potential value for your subject property.

Pros of Using Trust Deeds

Pros of Using Trust Deeds

Buying and holding trust deeds is a great way to offset buying and holding a property. Trust deeds are also known as real estate notes, seller financed notes, and/or mortgage notes. Notes are usually created by the seller of the property to help finance all or part of the transaction. This service the seller provides usually attracts a lot more buyers for them. The terms, conditions, down payment, interest rate, due dates, payment amount, late charges (if any), length of the loan, and anything else associated with the note will already be negotiated between the buyer and seller of the property. Therefore, you do not have to renegotiate anything. As the investor buying the deed, you need to review the entirety of the note and decide if this is something you want to buy. Deeds are a great investment opportunity for investors. The pros of using trust deeds as an investment tool are as follows:

  • Usually a higher rate of return, meaning better cash flow for you.
  • Less risky than owning the property out right or investing in stocks.
  • No management of the property is needed.
  • No need to pay mortgages, taxes or insurance.
  • You are in first lien position on the property, meaning the trust deed is secured by the property.
  • You can possibly sell your note to other investors, usually at a higher profit than at what you acquired it.

Simply put, you are acting as the bank when you own a trust deed. Your investment is secured by the property, which means if the borrower is not able to make payments to you, you have the right to foreclose on the property, as long as you are in first lien position. Investing in deeds is a great investment strategy to add to your portfolio. I would suggest only getting notes that are first lien position notes. You can find other type of notes, but for now stick to these kinds and you will be in good shape.

Understanding the HUD-1 Settlement Statement

Understanding the HUD-1 Settlement Statement

Before being able to purchase or sell a property there are a lot of legal documents to prepare. One of the most important documents required by the government in securing a mortgage loan is the HUD-1 Settlement Statement. HUD is the acronym for Housing and Urban Development.  Housing and Urban Development is a department of the government that is responsible for any legal transactions concerning real estate ownership and property development. It is the branch of the government that develop and enforce fair housing laws.

According to the Real Estate Settlement Procedure Act (RESPA), the HUD-1 Statement is a standard form used by a settlement or closing agent to account for all of the charges and fees incurred for a real estate transaction.  The HUD-1 statement is given to both the borrower and the lender with a complete breakdown of all the costs and adjustments involved before a loan is approved. The HUD-1 is sometimes referred to as a “settlement form” or a “closing sheet”. The borrower has the right to view the Settlement Statement one business day before settlement.

The HUD-1 Settlement Statement comes in three pages and divided into sections that are required to be filled. The first page of the form is composed of three main sections.

  1. Sections A – is the title of the document and does not need
  2. Sections B-I – asks for the basic information aboutthe buyer, seller, Title Company, lender.
  3. Sections J and K – are the transaction summaries of the buyer and the seller. The borrower’s details will be found on the left side and seller’s details on the right.

The second page of the HUD-1 settlement is where the entries of the fees and settlement charges are shown. Again, the buyer’s charges are in the left column and the seller’s charges in the right column.  These fees and charges are then added together and totalled at the bottom of the page. The total costs are reflected at the first page and added to the appropriate columns of the buyer and the seller. Generally, it is an inquiry of who pays and the total costs incurred. Often there are missing and unanticipated charges but these are common mistakes and the HUD-1 statements are changed before the closing.

The third page of the HUD-1 is divided into two sections. The first section at the top is a side by side comparison of the Goof Faith Estimate and the charges for the borrower that is also listed on the second page of the HUD-1. The Good Faith Estimate or GFE is an estimate of all the costs the borrower expects and is similar to the actual cost of the settlement statement. It is just an “educated guess” but it does not guarantee the actual closing costs.

This section of the third page summarizes the key terms of your home loan, from interest rates to closing costs. There are certain charges that cannot increase at all; other charges that, in total, cannot increase more than 10%; and other charges that can change.

The second section of the third page specifies the Loan Terms in detail.  It include the question of how much is the loan amount, what are the loan terms, the interest rate, the monthly principal, the interest and the mortgage insurance payment. It asks whether or not the interest rate can rise, and if so, by how much and when. It also lists if there is a pre-payment penalty and the total monthly amount owed. Basically, it indicates by how much the final closing costs can legally change as compared to the estimated costs shown in the GFE.

It is very important to thoroughly check the HUD-1 settlement form for errors to be able to make adjustments before the final approval and not be ashamed to ask questions to the closing agent if there are discrepancies in the figures or something is unclear.

Value of Land Banking

Land Investments

The Value of Land Banking

Have you ever seen a property and thought it would have been a great investment had you gotten involved a few years back? If people only knew how much value a property could have after a few years, they would likely get involved as an investor sooner. Fortunes have been made with Land Banking.

If you’d like to possess a property with hopes it will appreciate over time, then Land Banking is an area of real estate to look at. This is a process of acquiring future property development sites now, at the present value (speculating the increase of value in the coming years).

Numerous property development enterprises purchase large pieces of land and place them in their land bank. This assures them that they will have enough land available for future property developments or parcel sales.

Even though big profits have been generated from holding a bank of land by numerous developers, there is also a flip side. Land Banking has caused the ruin of some developers when the values of the banked real estate declined. As always, take these risks into account.

When land banking, you’re basically banking on

  • The fact that you think the value of the land will increase over time.
  • In due time, you could very well move forward with a property development plan.
  • Sell the property at a higher value.

Land Banking is a good investment method. The value of land can appreciate every year. You can even decide to build on the land to further increase its value.

Land banking, much like the buy and hold strategy, takes time. But, that time can also lead to an increase in value and a greater ROI for you as the investor.

Tortoise or hare? Why buy and hold makes for a winning strategy.

buy and hold real estateTortoise or Hare? Why Buying and Holding Real Estate Makes for a Winning Strategy.

Buying and holding Real Estate is a long-term approach to real estate investment. Instead of flipping for a quick lump sum, you’ll hold on to your investment and use the rental market to earn a regular income.

Buy and Holding Real Estate – why should I be interested?

There are heaps of benefits for investors who choose to hold onto their property portfolio. Flipping houses can be lucrative but risky. If you’re unlucky enough to hit a dip in the market you could be left with the dilemma of either selling for reduced profit or paying off a high-interest loan until the market improves.

Buy and hold also involves fewer transactions – and the cost is spread over a longer period of time. It’s also good news on the taxation front. Not only can the tax paid on long-term capital gains be lower but might only be due if you sell the property.

How should I go about it?

Properties that need maintenance, reconfiguring or repairs create value from the get-go– your work has just increased its asking price. Your investment needs to start paying, so get the property ready for the rental market as soon as possible.

The highest rent you can achieve isn’t always the best strategy – go for a low but regular turnover, so you’re not constantly on the lookout for new tenants.

So why should you go with buying and holding real estate? Hanging on to your investment makes the most of long-term market stability and gives a good rate of return. Flipping might sound exciting but playing the long game can give you a solid financial income – without losing sleep.

Benefits to Look Forward to with Buy and Hold Real Estate

buy and hold real estate

The Benefits You Should Look Forward – with Buy and Hold Real Estate

A buy and hold real estate strategy is one of the most effective ways of quickly establishing regular cash flow. There is a number of ways you can go about dealing with real estate. It’s important for you as an investor to weigh your options.

Rest assured, you will come to realize that using the buy and hold strategy in real estate is a great option. If you still are not convinced, here are a few benefits:

Value Appreciation

Generally, the price of land only appreciates. This means that as an investor, your equity will increase exponentially over the time you hold the property.

Great Source of Income

You have to keep in mind that not all investments are going to work the same way. Some will offer the potential for equity appreciation or a consistent return, but in the case of real estate, it offers both.

The latest findings have shown that the average annuity pays out no more than 3% per year, but an investor who makes even a half decent buy and holds investment can beat these rates any day.

Depreciation Is Not Necessarily a Bad Thing

Most people are not aware that the IRS writes off any property that is more than 27.5 years old. Depreciation is not exactly an income and is referred to as a liability.

Depreciation is only an expense on paper. The costs of keeping a property in good condition can be paid out of the rent earned. This actually leads to the elimination of tax obligations due to ‘losses’ on the positive cash flow from the real estate property.

These are 3 of the benefits of buy and hold real estate.

Using your IRA To Acquire Investment Properties

Using Your IRA to Acquire Investment Properties (Updated)

Depositing savings into a self-directed IRA could be a wise choice for those who are looking for long-term tax-free real estate investment (specifically buying investment properties). Whether this is a good choice for you depends on the circumstances.

Eligible properties

The purchased real estate must be used for business purposes an example would be private homes, secondary residences or weekend estates do not qualify. Similarly, purchasing a property already in your possession is not allowed.

The governing rules state that in any case, it has to be a new purchase directly into the IRA.

On the other hand, you would be allowed to buy real estate into a self-directed IRA for flipping purposes. There is an annual limit on the number of purchases and sales you can make, all profits will be tax-deferred or tax-free. Thus your IRA will grow without any deductions.

IRA investment concerns

You are not allowed to get a mortgage loan in an IRA. If you’re planning on keeping real estate as a long-term rental it’s essential to have enough cash from your IRA to purchase the property. Don’t forget the IRA carries administration costs, that should be considered in your financial plans.

The IRA investment depreciation or other kinds of losses will not result in tax savings.

Have a Plan B

Most people will lose out because they fail to diversify their savings. Considering the option of failure and spreading out your investment. Investing wisely and having a plan B can save you a lot of money in the long term.

Disclaimer: The Company introduces general information and education concepts about self-directed retirement accounts (such as 401(k) and IRA accounts). Like any investment, there is a risk in using retirement funds for investing in real estate assets.

It is possible to lose a portion or all of an investment in real estate – including those purchased with retirement funds.

Please review IRS Publication 3125 regarding the use of retirement funds for alternative investments. The document can be found at http://www.irs.gov/pub/irs-pdf/p3125.pdf. Every individual is different, with unique circumstances. We do not offer tax, accounting, financial or legal advice.

Prior to acting upon this information, consult your own accounting, legal and financial advisors to evaluate the risks, consequences, and suitability of that transaction. The Company is not a retirement account custodian, trustee, or securities dealer.