Zoning in on Zoning

Knowing what you can and can’t do with a piece of property is crucial; it can make or break many deals. I highly suggest you determine this before getting started in any real estate transaction. This can save you a lot of money, time, and energy. I am not kidding about the money part. So what is zoning, and why is it important?

Local governments create zoning ordinances to map out the physical boundaries of different zoning districts, which can occasionally be modified. To determine what your lot is currently zoned as, you will want to go to the municipal building. Zoning and some other ordinances can often be found online. However, do not, I repeat, do not rely solely on that as your only resource. Always go to the primary source to double check your information, especially if it’s a deal you intend to do yourself or invest in.

Now you are probably wondering, why the big fuss over zoning? Well, zoning determines what land uses are permitted in each district or classification. Some examples of classifications may include, but are not limited to residential, mixed residential, commercial, and conservation. Zoning ordinances also lay out all the juicy specifics, like lot size minimums and maximums, setbacks, and height restrictions. Please remember that land use and regulation laws vary from state to state. Therefore, you need to be familiar with the states you work with or at least know where to find the right information when needed.

Like stated earlier, zoning is a very important variable when doing any real estate transaction. Please familiarize yourself with zoning before you end up paying to do it later. Either way, you will have to know it. Now, take this and get out there and apply it.

How to Use Market, Rental and Housing Statistics to Determine a Market

Statistics are used to identify market trends and to measure and evaluate the potential success of marketing programs. The most important statistcs an investor should know are the rental and housing statistics. So, how does one use this data to determine a market?

According to current trends, the number people who choose to rent instead of buy properties has gone up. This, in large part, is due to the enormous wave of foreclosures that swept the nation after 2008 and the economic upheaval of the Great Recession. Because more people have decided to rent, the number of sales and the availability of properties has been impacted. Adjustments need to be made when this happens, from house prices to interests rates and transactions. One should look within these current statistics to find the market they should target. They need to identify the demographic and behavioral patterns within these statistics to make sense of which people to target. Focus on what problems can be solved and identify what the demographic needs. For example, those who rent spaces will most definitely rent, so they fall under the target market for rental homes or properties with a negotiable mortgage that would fit their income. The price and costs for housing and renting may differ a lot and the demand for certain properties varies from location to location, so these things should also be considered.

The fine point where all these people’s needs and wants meet in the middle is what should be identified and targeted, and a close observation of the behavior of this demographic will surely produce valuable data. The secret to successful marketing is to identify the target market accurately.

What is a Real Estate Absorption Rate and How Does It Apply to You?

In real estate, absorption rate is basically the length of time it takes to sell a house that is listed on the market. The rate is mostly based off of the number of months it takes before the home is sold. Absorption rate is a concept that helps people in the real estate world determine prices and sales activities.

Let’s take a large, urban area for an example. In the past six months, there were 20,000 homes sold. Six months is the common baseline when it comes to home sales. The number of homes sold will now be divided by 6. The result will be 3,333. This number will then be used as a divisor to the number of homes listed on the market. If the number of homes listed for sale is 15,000, the outcome will now be 4.5. Therefore, there will be 4.5-month supply of homes for sale on the market.

It is easy mathematics but that does not make it less important. In order to anticipate home prices and market activities, the absorption rate history of a certain market will be necessary. Absorption rate is vital to real estate agents because agents regularly need to determine the value of the properties they are selling. It is also helpful for buyers to understand the state of demand and supply for properties that agents will be presenting to them. All in all, absorption rates aid in decision-making when it comes to buying a property.

Most potential property buyers are wise and do extensive research before going face-to-face with real estate agents. If you are a seller who cares less about the absorption rate of your market, you’re making a big mistake. To become a top producing realtor, you must be well-equipped with knowledge about absorption rates and market activities. Awareness of the absorption rate of a specific market will help your success.

How to Calculate the Value of a Multi-Unit Property

A multi-unit property is a building with separate housing units that are available for residential inhabitants. There are various forms of multi-unit properties, such as duplexes, quadruplexes, and townhomes, but the most common is an apartment building. Multi-unit properties are designed to house families by giving them separate units that are clustered in one structure.

If you own a multi-unit property, calculating its value is not a difficult task. All you need is the operating data. The NOI (Net Operating Income) is an important inclusion for the calculation of the value of the property. This is because the computation will derive from an income approach appraisal. NOI can be obtained by subtracting all the expenses from the gross income generated by the property. These expenses usually include management, landscaping, taxes, repairs, insurance, and maintenance.

The next important thing to consider is the capitalization rate. We need to divide the NOI using the value of the capitalization rate to come up with an accurate market value. Capitalization rate can be determined with the help of brokers, lenders, and appraisers. They are expected to know the market cap rate, which is the average of the cap rates for properties with common characteristics in one specific region. These cap rates are computed by dividing the purchase price with the NOI; variables that are presented upon purchase.

When the NOI and the capitalization rate are finally known, you can start calculating the market value of a specific multi-unit property by using the following formula:

Capitalization Rate/ NOI = Property Value

 

For example, if the capitalization rate is 7.5% and the NOI is $330,800, we will have the following equation:

$330,800 / .075 = 4,410,666.67

Property Value = 4,410,666.67

 

It is important to note that these variables are not constant. You should be able to understand how they work together to quickly come up with an accurate market value. Once you have the accurate operating data and accurate information from the real estate experts, computing the market value of a multi-unit property is just a calculator away.

Determining Market Value

A key first step in real estate investing is determining the Market Value or ARV – After Repair Value of a property.

Criteria used by many real estate investors and professionals includes the following:

Properties that –

  1. Were sold less than 1 mile away
  2. Were sold less than 6-8 months ago
  3. Have square footage that is 20% more or less than the square footage of the property you are looking at. For example:
    1. If you’re looking at a property with 1,400 sf then your range is 1,200-1,600 sf.

You should be looking for 3-5 comparable properties that are as close as possible to the number of beds, baths and square footage you want. Also try to find the same style of construction, as it is difficult to justify comparing a single-story ranch style home to a multi-level property.

Look at both online sources and sources from real estate professionals. With that in mind, here is a 3-step process:

  1. Local real estate brokers and agents have a great source of market knowledge, especially for obtaining both the average price that properties are selling for and the average price per square foot that the same properties are selling for.
  2. “Paid Sites” has their advantage in that the software they have available pulls from both County Records as well as the Multiple Listing Service (MLS). Do your homework and look for online customer reviews and compare them with other websites with the same claims. Here is a short list of some of those sites.
    1. https://www.realquest.com/jsp/rq.jsp?action=switch&page=main
    2. You can also check with the MLS in your area and ask about the fee for their temporary/limited access for investors. This is a great tool to use for searching and evaluating properties and determining market value.

There are many others but these are quite adequate for getting started.

The Importance of Demographic Research

Demographics is statistical data relating to the population and the particular groups within it. It is the kind of information that makes working in the real estate world a pretty challenging feat. Also, it is an indispensable part of the business, since it plays a great role with marketing houses and properties.

How important is demographic research? Well, this research provides the data that describes the composition of a population, such as age, race, gender, income, migration patterns and population growth. These statistics are an often overlooked but are a significant factor in how real estate is priced, what types of properties are in demand, and who is interested in buying what. Major shifts in the demographics of a nation can have a large impact on real estate trends for several decades. For example, the baby boomers who were born between 1945 and 1964 are an example of a demographic trend which will likely influence the real estate market.

There are numerous ways this type of demographic shift can affect the real estate market, but for an investor, some key questions to ask might be: How would this affect the demand for second homes in popular vacation areas as more people start to retire? Will they be able to even find buyers for their homes if they do decide to sell their property? These and other questions can help investors narrow down the type and location of potentially desirable real estate investments long before the trend has started. Basically, the ever-changing results in demographic research determine the demands, prospective buyers and also the prices of properties. Who is buying what? Who is interested with what? Is it part of their priorities?

Know this important data in your market because the more information at hand, the better decisions you will make.

Land Banking

Land banking refers to the keeping of land for future sale or development. In this post, we discuss land banking and keeping land for future use, especially for purposes of using it as an investment and selling it at much higher price than its current value. There are numerous advantages that are associated with this area of real estate.

One of the most renowned advantages of land banking is the fact that it enables land owners to generate profit from the sale of their land. If you own a piece of land that is likely to be useful in the future, you can keep that land and sell it at a time when its value has risen. In this way, you will be able to generate more profit from the sale of your land.

Sometimes land banking can enable you to sell a piece of land at a price that is far higher than its current value. This usually happens if the land is likely to be more costly in the future. Many land owners have benefited greatly from the sale of land at prices based on future price projections.

There are times when land becomes scarce or very expensive. However, you can buy a certain piece of land at a very low price and still develop it many years later. While your colleagues will be searching for cheaper pieces of land, you will be enjoying a piece of land that has the ability to appreciate.

Understanding Trust Deed Investment

Trust deed investments are nothing new. In fact they have existed for a long time, yet many prospective investors do not know much about them. In essence they are just like mortgages except for one difference: Apart from a borrower and a lender there is a third party involved – an investor.

Nowadays and in the current economic climate, trust deed investments help many mortgage borrowers who are in need of bridge loans. Mortgage brokers who partner with third party lenders are able to assist with a loan and it is part of their job to explain all associated risks.

Trust deed loans can bring above the average profits but only if all risks have been calculated and adjusted to the particular client’s needs. Hence a broker would have to ensure that the client’s future plans and financial resources are compatible with the financial risks involved.

Ever since the recession has hit the market such investments have created losses with similar percentages. Such losses were worsened in the past five years by brokers who failed to risk assess and inform their clients properly and offered inappropriate trust deed loans.

Today the dislocation capital markets means that many commercial banks are not equipped to provide bridge loans on strong collateral, even to customers who would have qualified previously. As such, investors can now provide private loans secured by quality collateral to strong borrowers with less risk than afforded previously.

Trust Deeds: What you should know

Trust deeds, also referred to as deeds of trust or notes, are deeds whereby the legal title of real estate property is transferred to a trustee. This individual holds the deed as a form of security for a loan secured between the borrower and lender. In other words, trust deeds are formal documents that outline terms of a trust agreement and serve as additional security.

With trust deeds, the official property title is maintained by the trustee until the loan on the property is paid in full. Although the trustee is not involved with the agreement between the borrower and lender, this person is responsible holding the note unless the borrower defaults on the loan, at which time the trustee has the legal right to sell the property.

Additional Factors

Certain steps are taken in setting up deed trusts, including:

  • Real estate purchases are typically structured so the lender provides the borrower with money to buy the property.
  • In exchange for paying the seller, the buyer receives a grant deed for the property.
  • Immediately, the borrower executes a trust deed whereby the property is given to the trustee to be held in a trust until the loan between the borrower and lender is paid.

An escrow holder is always used when dealing with deeds of trust to ensure the transaction will not close until the funds, grant deed, and trust deed are handed over. With that, the transaction can be rolled back if for any reason one of the parties involved cannot complete his or her end of the deal.

Trust deeds are different from mortgages since the deed always involves a minimum of three parties: the borrower, lender, and trustee. The legal title for a mortgage goes to the mortgage company, whereas for a deed of trust, it goes to the trustee. In both scenarios, the borrower retains the equitable title. While there are distinct differences between mortgages and trust deeds, essentially, they are both security instruments.