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

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

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

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.

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

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

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.