A wrap around loan, commonly referred to as a wrap envelopes an existing loan and any equity into one loan payment. This is sometimes rather difficult process to grasp, so if you would like to ask any questions or seek clarification on key points, email me at whflood@yahoo.com and I will be happy to answer your questions.
So...How Does a Wraparound Loan work?
Let’s say a seller owns a property worth $100,00 and has an existing loan of $60,000. That loan is at 6% and has 23 years remaining to pay. The payment is $400 a month. He is willing to finance the remaining $40,000. But, rather than setting it up where you take over the existing loan and he accepts a second mortgage, he wants to set it up as a wraparound loan. It would work like this:
He sets up the loan terms on $100,000 at 7.5% for 30 years, payable at $700 a month. You pay him the $700 each month. He pays out his original mortgage payment of $400 and keeps the remaining $300 for payment on his equity.
You may be asking, “what’s the difference between the wrap and him just accepting a 2nd mortgage?” Actually, there are several reasons. First, he is in a more secure position because he is ensuring the underlying first is getting paid. And, if you noticed an odd detail or two, it’s actually to his financial advantage – he pays out at 6%, but collects at 7.5%. Thus, he is getting 1.5% on money that isn’t even his! And, the existing loan is due to be paid off in 23 years, but you would be paying for 30 years, so he gets 7 years of money even when the underlying loan is paid off!
Now, wraps can be tricky and there are some pitfalls such as the original owner failing to pay the underlying loan. It’s a good idea to get a trust company or bank trust office involved to make sure everyone is doing what they say. You wouldn’t want to make your payments only to find out the seller isn’t paying the underlying loan! So, you’d set it up so your payment would be made to the trust office. That office would, in turn, pay the underlying loan and send the seller his proceeds every month. It will cost a few dollars a month to set that up, but it is well worth it!
Next time, we’ll be continuing the discussion on creative financing by looking at Land Contracts, Options, Lease options & lease purchases, Private money & partnerships (equity sharing), Hard money, Selling notes, and the use of unsecured credit lines.
Until next time, this is Bill Flood, your host for the Coast to Coast Real Estate Investor. Live your real estate dreams!
Monday, November 3, 2008
Tuesday, June 24, 2008
Financing (part 6) - Subject To's
In the place of the non-qualifying (or qualifying) assumable loan is another – more complicated – strategy for taking over existing loan obligations. It is commonly referred to in real estate investing circles as taking the loan "subject to" the existing mortgage.
A purchase contract can be written to buy the property “subject to” the existing loan, which means taking over the obligation of the owner. While this may sound similar to an assumption, it has a clear difference. With an assumable loan, you are contractually taking over the obligation to pay. The loan, in essence, transfers to your name. When a loan is taken “subject to”, the original borrower is actually still on the note and obligated to pay if you don’t. You can see that would be a dicey situation, and it’s best for both parties in the transaction to have legal advice as to what’s involved.
The Due on Sale Clause Landmine
Commonsense legalities aside, there are a few landmines related to subject-to deals. Since most loans today have a due on sale clause, which means the loan balance is due and payable upon sale or transfer of the property, taking over a loan "subject to" can still cause that clause to be invoked which can lead to a big financial mess. Because of this, subject to strategies are best done with the advisement of your attorney.
There are a lot of investors today who use the subject-to approach to take over people's payments and avoid having to get new financing. Typically, these investors are targeting homeowners in the early stages of defaulting on their loan. Their idea is to either give the owner some cash and/or take over the payments without formally assuming the loan. Their general game plan is to either:
a) try to mask the transaction from the bank so the bank won't know the property has been transferred, which would potentially lead to the loan being called, or;
b) simply not worrying about the bank at all, doing the subject to deal, and operating from the premise that the bank won't call a loan that is being paid on time, etc.
Both of these approaches assume that a bank will ultimately be or feel better off with an investor who is keeping up the payments rather than a homeowner who is slipping into foreclosure. Along with that belief is that a bank won't call a loan when it's performing, so the due on sale clause is somewhat meaningless....that calling a loan never happens when the payments are being made, and certainly not in this market.
Banks Do Call Loans - Don't Let Anyone Tell You it Never Happens
Let me tell you -- banks can and do call loans due and payable all the time under subject-to and similar arrangements. I just came across one in Phoenix within the last month, with the investor faced with the foreclosure. More important - it's really the original home seller who is now faced with the foreclosure because his name is still on the loan! Again...lots of landmines, and this technique should be guided by some professional legal advice.
But it's Popular with Wholesalers
I'll also note that investors who utilize the subject-to approach regularly are principally short-term "flipping" types of investors. The reason why the due on sale clause doesn't worry them is that they don't plan on holding the house long enough for the bank or anyone else to uncover that it's been transferred. These types of investors are in, get their money, and get the property in the hands of someone else before any of this potentially matters. But, for the long-term investor who wants to build wealth, the chances are, the due on sale clause is likely to rear it's head at some point. Then, you either have to negotiate with the bank to put your name on the loan (assume it) or get refinanced real quickly.
The Bottom Line
So, the bottom line on subject-to deals: useful for the short term investor, not so good for the long-term holding-type investor, and always have a lawyer in your corner.
Wednesday, May 21, 2008
Financing (part 5) - Assumptions
To assume a loan means you are legally taking over responsibility for its payment. In other words, you are agreeing to take on someone else's loan, transfer the obligation to you, and make the payments from that point forward. When available, assumable loans are just about an investor's best friend!
The Good Old Days!
There is an issue, however. Prior to the mid 1980’s all government loans were assumable, and many conventional ones were as well. At one time, there were even many "non-qualifying" assumable loans for which you only had to sign your name to take over.
Assumable Loans Today
By the end of the 1990’s most existing assumable loans were either paid off or refinanced away. And, nearly all new loans, conventional or government had clauses denying the ability for someone to assume the loan (these are called a due on sale clauses). So, you have the compound effect of most older assumables being gone one way or another, and new loans not allowing for assumption. Still, there are a few of the older assumables still around, and occasionally you'll find them.
What's On the Horizon
Today, however, we see a resurgence in assumable loans both government-backed and private. Essentially all of them are what are known as “qualifying assumables” which mean that the purchaser has to go through some semblance of qualification before taking over the loan. In that pre-1980 era there existed that non-qualifying variety, where all a person had to do was sign their name to take over the note. Those days, unfortunately, are gone. Today, even when you can find an assumable loan, you'll be scrutinized as to your income, debt, credit and so forth. The good new is that qualifying for an assumable loan is generally easier and less thorough than for getting a brand new loan.
What to Look For
Perhaps the best-known assumptions are available with Federal Housing Administation (FHA) loans and Veterans Administration (VA) loans. Currently, FHA loans can be assumed with modest lender approval, but only for owner occupants. Investors may not assume them - but my belief is that will eventually change. VA loans can be assumed by anyone as long as they go through the qualifying process and are approved by the lender. It's also important to note that many conventional lenders (not government-backed) are offering assumable loans once again...of course, expect qualification to be part of the process.
Understand the Benefits of Assumable Loans
The beauty of assuming a loan is that you don't have to pay points, loan origination fees, and junk lender fees to get the loan. Keep in mind that with a brand new loan origination, you could get hit with up to 3% of the loan amount just for various lender fees and requirements. That's a hefty amount to pay in addition to a down payment. With an assumable, you only pay a small (often only a few hundred dollars) assumption fee. You don't even typically pay for an appraisal unless you want one! The bottom line is, it's a relatively easy form of financing to access.
It's All in the Numbers!
What's even more valuable is related to the math behind an existing loan. You are probably aware that in the early days most of your payment goes towards interest, with very little contributing towards the principal payoff. That ratio starts to change around year 7 of a 30-year loan, and by year 15, the principal and interest portions are equal. Past year 15 and the principal portion is the larger amount.
Often people get all hung up on the interest rate of a new loan in the current climate - say, 6.75% versus what's usually a higher rate for an existing assumable loan. Let's say, 8.25%. The untrained eye will alway say the lower rate would be the better deal. That may be the furthest thing from the truth. What if the assumable only had 14 years remaining to pay? With the new loan nearly all of your payment is going to interest (makes the bank fat). With the assumable, more than half is going into your principal paydown (basically the same as putting it in the bank!). And, you don't have 30 years to wait to pay it off -- you only have 14. Run the numbers and you'll find tens of thousands of dollars saved because it was the old loan-holder who paid all of that interest.
So, keep your eyes and ears open for assumability of loans. If you find one, look at the numbers. In most cases you'll find you have stumbled onto a real treasure.
The Good Old Days!
There is an issue, however. Prior to the mid 1980’s all government loans were assumable, and many conventional ones were as well. At one time, there were even many "non-qualifying" assumable loans for which you only had to sign your name to take over.
Assumable Loans Today
By the end of the 1990’s most existing assumable loans were either paid off or refinanced away. And, nearly all new loans, conventional or government had clauses denying the ability for someone to assume the loan (these are called a due on sale clauses). So, you have the compound effect of most older assumables being gone one way or another, and new loans not allowing for assumption. Still, there are a few of the older assumables still around, and occasionally you'll find them.
What's On the Horizon
Today, however, we see a resurgence in assumable loans both government-backed and private. Essentially all of them are what are known as “qualifying assumables” which mean that the purchaser has to go through some semblance of qualification before taking over the loan. In that pre-1980 era there existed that non-qualifying variety, where all a person had to do was sign their name to take over the note. Those days, unfortunately, are gone. Today, even when you can find an assumable loan, you'll be scrutinized as to your income, debt, credit and so forth. The good new is that qualifying for an assumable loan is generally easier and less thorough than for getting a brand new loan.
What to Look For
Perhaps the best-known assumptions are available with Federal Housing Administation (FHA) loans and Veterans Administration (VA) loans. Currently, FHA loans can be assumed with modest lender approval, but only for owner occupants. Investors may not assume them - but my belief is that will eventually change. VA loans can be assumed by anyone as long as they go through the qualifying process and are approved by the lender. It's also important to note that many conventional lenders (not government-backed) are offering assumable loans once again...of course, expect qualification to be part of the process.
Understand the Benefits of Assumable Loans
The beauty of assuming a loan is that you don't have to pay points, loan origination fees, and junk lender fees to get the loan. Keep in mind that with a brand new loan origination, you could get hit with up to 3% of the loan amount just for various lender fees and requirements. That's a hefty amount to pay in addition to a down payment. With an assumable, you only pay a small (often only a few hundred dollars) assumption fee. You don't even typically pay for an appraisal unless you want one! The bottom line is, it's a relatively easy form of financing to access.
It's All in the Numbers!
What's even more valuable is related to the math behind an existing loan. You are probably aware that in the early days most of your payment goes towards interest, with very little contributing towards the principal payoff. That ratio starts to change around year 7 of a 30-year loan, and by year 15, the principal and interest portions are equal. Past year 15 and the principal portion is the larger amount.
Often people get all hung up on the interest rate of a new loan in the current climate - say, 6.75% versus what's usually a higher rate for an existing assumable loan. Let's say, 8.25%. The untrained eye will alway say the lower rate would be the better deal. That may be the furthest thing from the truth. What if the assumable only had 14 years remaining to pay? With the new loan nearly all of your payment is going to interest (makes the bank fat). With the assumable, more than half is going into your principal paydown (basically the same as putting it in the bank!). And, you don't have 30 years to wait to pay it off -- you only have 14. Run the numbers and you'll find tens of thousands of dollars saved because it was the old loan-holder who paid all of that interest.
So, keep your eyes and ears open for assumability of loans. If you find one, look at the numbers. In most cases you'll find you have stumbled onto a real treasure.
Monday, April 14, 2008
Financing (Part 4) Owner Firsts, Owner Seconds, and Balloon Notes
Structuring Owner Finanancing With Owner First Mortgages and Owner Held Second Mortgages
You start to get real resourceful with owner financing when you consider the ways you can address first mortgages and/or second mortgages in creative fashion. For example, an owner might not be willing to hold 100% owner financing, but want 30% down and be willing to carry the rest as owner financing. You might seek out the 30% you need with a bank loan or a line of credit.
In reverse, perhaps you can get a conventional mortgage for 70% of the purchase price, but don’t have the 30% down payment. You might be able to work out owner financing with the seller for that 30%, in effect making it a no money down transaction. Many banks don't like to do this right now, but that's not universal, and I predict that once the credit crunch is over, it will be a technique back is common use.
Balloon Loans
Generally, with owner financing the seller doesn’t want to drag out the payments for 20 or 30 years. In many cases, they are willing to take the monthly payments but want to be cashed out sooner, and being sensitive to their needs will help you structure financing that works for both of you (win-win). You’ll do this through the use of a “balloon” loan which stipulates that the balance is due and payable at a certain point before the loan is actually paid off.
Let’s say our seller above is willing to do owner financing. But, she doesn’t want to carry the loan any more than 7 years. So, there would be a balloon clause in the seller financing that states the remaining balance is due to her at the seven year mark. We can still structure the payments on a 20 or 30 year schedule to keep the payments low, but at year 7 we have to pay it off.
The tougher the credit market, the more valuable owner financing becomes - learn these techniques because they can make the difference between being able to finance and property and not getting it at all.
You start to get real resourceful with owner financing when you consider the ways you can address first mortgages and/or second mortgages in creative fashion. For example, an owner might not be willing to hold 100% owner financing, but want 30% down and be willing to carry the rest as owner financing. You might seek out the 30% you need with a bank loan or a line of credit.
In reverse, perhaps you can get a conventional mortgage for 70% of the purchase price, but don’t have the 30% down payment. You might be able to work out owner financing with the seller for that 30%, in effect making it a no money down transaction. Many banks don't like to do this right now, but that's not universal, and I predict that once the credit crunch is over, it will be a technique back is common use.
Balloon Loans
Generally, with owner financing the seller doesn’t want to drag out the payments for 20 or 30 years. In many cases, they are willing to take the monthly payments but want to be cashed out sooner, and being sensitive to their needs will help you structure financing that works for both of you (win-win). You’ll do this through the use of a “balloon” loan which stipulates that the balance is due and payable at a certain point before the loan is actually paid off.
Let’s say our seller above is willing to do owner financing. But, she doesn’t want to carry the loan any more than 7 years. So, there would be a balloon clause in the seller financing that states the remaining balance is due to her at the seven year mark. We can still structure the payments on a 20 or 30 year schedule to keep the payments low, but at year 7 we have to pay it off.
The tougher the credit market, the more valuable owner financing becomes - learn these techniques because they can make the difference between being able to finance and property and not getting it at all.
Wednesday, April 2, 2008
Financing (part 3) - Owner Financing
Knowledge of owner financing techniques is what separates professional real estate investors from the speculators who, while they could (emphasis on could in the 2008 mortgage market) qualify for traditional mortgages really don’t know much about the real estate investment game beyond the commonplace.
Owner financing is the original form of creative financing. Historically, owner financing was actually more common than financing through institutions, and its important to note that. It’s only over the last 3 or 4 decades that conventional financing has usurped the use of owner financing and I have full confidence that owner financing will come back into vogue more now that the mortgage world is in tumoil.
What do we mean by owner financing? Well, perhaps a corollary example would help you understand the principles. Let’s say you find a classic car for sale for $10,000. The owner owns it outright and you want to buy it. But, you don’t have $10,000. So, you make an offer to the owner to pay $800 a month for 14 months. That totals $11,200 - $10,000 for the car and $1,200 as “interest” for the privilege of paying over time.
This is a simplistic example, and requires that the owner’s car loan be paid off for it to work effectively. As well, the seller will more than likely requiring some kind of security instrument that states he has the right to repossess the car if you don’t complete payment. But, as simplistic as it is, it shows how the process works.
Now, on to a property purchase. The principle works the same way. Let’s say you have found a seller of a property you want to buy. She owns it free and clear and is selling it for $70,000. Rather than pay her $70,000 in cash, or get a loan from a bank for $70,000 you suggest paying her $542 a month for twenty years at 7% interest.
She would get a good return (7% in this case), secured by something she knows and understands – her property. If you default on the loan, she can foreclose and take the property back.
How can this benefit you as an investor? You can acquire a property without the cost, qualification, and scrutiny of a conventional loan. You can get a below market rate while at the same time providing a better than market return to the seller.
What’s more important is that, in a tough credit market like we have now, where investor mortgages are like pulling wisdom teeth to get, you can finance a transaction. That means you get to buy and the seller gets to sell – which is what keeps deals flowing. Moreover, there’s a degree of likelihood that you won’t even need to qualify for the financing because it’s a function of whether the seller has faith in you or not – and, they probably wouldn’t know how to qualify you efficiently anyway.
So, you have a wonderful potential package of benefits – financing when you couldn’t get it otherwise, a good rate, and little to no qualification issues. At the same time, the seller gets the property sold, and gets a good return on the equity the economy has given her through her property. It’s a good case of the win-win.
Owner financing is the original form of creative financing. Historically, owner financing was actually more common than financing through institutions, and its important to note that. It’s only over the last 3 or 4 decades that conventional financing has usurped the use of owner financing and I have full confidence that owner financing will come back into vogue more now that the mortgage world is in tumoil.
What do we mean by owner financing? Well, perhaps a corollary example would help you understand the principles. Let’s say you find a classic car for sale for $10,000. The owner owns it outright and you want to buy it. But, you don’t have $10,000. So, you make an offer to the owner to pay $800 a month for 14 months. That totals $11,200 - $10,000 for the car and $1,200 as “interest” for the privilege of paying over time.
This is a simplistic example, and requires that the owner’s car loan be paid off for it to work effectively. As well, the seller will more than likely requiring some kind of security instrument that states he has the right to repossess the car if you don’t complete payment. But, as simplistic as it is, it shows how the process works.
Now, on to a property purchase. The principle works the same way. Let’s say you have found a seller of a property you want to buy. She owns it free and clear and is selling it for $70,000. Rather than pay her $70,000 in cash, or get a loan from a bank for $70,000 you suggest paying her $542 a month for twenty years at 7% interest.
She would get a good return (7% in this case), secured by something she knows and understands – her property. If you default on the loan, she can foreclose and take the property back.
How can this benefit you as an investor? You can acquire a property without the cost, qualification, and scrutiny of a conventional loan. You can get a below market rate while at the same time providing a better than market return to the seller.
What’s more important is that, in a tough credit market like we have now, where investor mortgages are like pulling wisdom teeth to get, you can finance a transaction. That means you get to buy and the seller gets to sell – which is what keeps deals flowing. Moreover, there’s a degree of likelihood that you won’t even need to qualify for the financing because it’s a function of whether the seller has faith in you or not – and, they probably wouldn’t know how to qualify you efficiently anyway.
So, you have a wonderful potential package of benefits – financing when you couldn’t get it otherwise, a good rate, and little to no qualification issues. At the same time, the seller gets the property sold, and gets a good return on the equity the economy has given her through her property. It’s a good case of the win-win.
Wednesday, March 12, 2008
Financing Part 2 - Insitutional Financing
Traditional Mortgage Instruments
Let’s begin by looking at the traditional mortgage marketplace. No investor would turn their back on conventional financing, particularly when the mortgage marketplace is good. The problem is, right now, it’s not, which is why I’ll be spending so much time on upcoming posts about alternative financing. Still, it only makes sense for investors to know as much as possible about traditional mortgages, particularly when it’s so tough to obtain conventional money. The more you know, the better off you’ll be when seeking out conventional money.
Traditional mortgages can be broken down into 2 categories:
Government-backed loans underwritten by either the Federal Housing Administration (the FHA) or by the Veteran’s Administration (the VA) and conventional mortgages that are, in essence underwritten by investors.
What’s important to note about FHA loans is that the organization opened it’s doors up more for second home/vacation home purchases over the last decade, and even developed more programs accessible by investors. It’s somewhat the same with VA – programs available for purchases other than one’s primary home are now available.
Conventional lending over the last ten years went absolutely crazy. Qualifications all but diminished, interest rates fell to a low of around 4%, and money was creatively offered by even the biggest lenders. As short as two years ago, it was common to see investor money for 100 to even as high as 125% of the purchase price being offered. But as quickly as those lenient doors opened, they closed within these last two years. Common terms for investor financing today is 10% down, with several months of reserves – and that’s if you are a good credit risk! I will note, however, that the credit markets are easing a bit and some more creative terms are beginning to pop up. I’ve recently seen multiple lenders offering a product based on 70% of the appraisal value as opposed to 70% of purchase price. Thus, if you can buy low enough (or are dealing with a rehab project) you can get virtually the entire thing financed.
To be effective with conventional lending, it’s important to understand and know how to work with first and second mortgages. Most people think that if they want to finance a property with 100% financing, they need a loan for 100% of the purchase price. In reality, the more likely scenario would be a first mortgage for, say, 80% of the purchase price, and a second mortgage for 20% of the purchase price. This is called a blended loan, and the rationale behind them is that in a case of default, the holder of the first mortgage is in a more secure position since the house is worth more than the loan balance. The holder of the second mortgage is in more jeopardy because their loan represent that top 20% that could get wiped out in a foreclosure auction with a low-ball price. That’s why the second mortgage has a much higher interest rate than the first – because it’s riskier.
It’s also important to note two additional things. First, is that the lower the first mortgage balance is to the property’s value, the more likely you will get qualified. In other words, an your chances of getting financed for a 70% first mortgage are higher than for a 90% first mortgage. If you had the 30% in cash to put down, most banks would be willing to talk with you regardless of a lot of negative financial factors you might have. If you don’t have the cash, that’s where the second loan comes in, and the qualification really takes place more on that loan. The next item is that a blended loan will help you avoid the payment of mortgage insurance, which is generally required on a first mortgage with a balance of higher than 80% of the properties value. That’s really an unnecessary expense to your monthly payment and you should look at ways to avoid it.
At any rate, being able to talk coherently and deal in combinations of loans is your route to securing traditional financing for higher loan amounts. You can think in terms of many combinations – here’s just one example: a 70/25/5, which means a combination of a 70% first loan, a 25% second loan, and 5% down.
It’s important to note that blended loans – at least those where both loans were offered by the same lender have virtually disappeared in this credit crunch, but I have faith they will return in short order.
Another piece of the traditional lending puzzle is that of home equity lines of credit and home equity loans. The difference between the two is fairly simple. Home equity lines of credit are much like credit cards. You are extended an open line of credit. You pull from that line as you need it. As you pay down your balance, the payment amount drops and your available balance goes up accordingly. With a home equity loan, it’s a fixed loan, you are loaned the money, and you have a fixed period of time to pay it back, generally with fixed payments.
Both home equity lines and loans are good options because they are relatively easy to qualify for, and in most cases can be had with little to no lender fees. Whereas a mortgage for $70,000 might cost you $1500 in appraisals, title insurance, underwriting and other “junk” fees, a $70,000 line of credit may cost you a mere $300 in underwriting.
The downside to both is that they require an equity cushion in the property – normally you will have difficulty getting a home equity line or loan for more than 90% of the property’s value if it’s a residence, and it’s common right now to see 80% for an investment property. It’s also important to note that they will be at higher interest rates than standard mortgages. Figure a full 1-3% in interest rates over the cost of a regular mortgage in most cases.
One of the great benefits of a home equity line for an investment purchase, is that when you pay down the loan and open up your available credit, that’s money you can access for another purchase.
And, both lines and loans are good ways to pull your own equity out of a property for purchases or other investment needs. One of the really amazing things about holding property over the long haul is that you don't have to sell a property to get cash from it. With sufficient equity, you can refinance and pull out cash and keep the property too! It's a clear case of having your cake and eating it too. Plus, money borrowed in this way is not taxable. If you sell a property, you pay hefty taxes on the profits. If you refinance, it's tax-free money!
Until next time....
Contact me at william@thecoasttocoastinvestor.com if you have any questions you'd like answered.
Let’s begin by looking at the traditional mortgage marketplace. No investor would turn their back on conventional financing, particularly when the mortgage marketplace is good. The problem is, right now, it’s not, which is why I’ll be spending so much time on upcoming posts about alternative financing. Still, it only makes sense for investors to know as much as possible about traditional mortgages, particularly when it’s so tough to obtain conventional money. The more you know, the better off you’ll be when seeking out conventional money.
Traditional mortgages can be broken down into 2 categories:
Government-backed loans underwritten by either the Federal Housing Administration (the FHA) or by the Veteran’s Administration (the VA) and conventional mortgages that are, in essence underwritten by investors.
What’s important to note about FHA loans is that the organization opened it’s doors up more for second home/vacation home purchases over the last decade, and even developed more programs accessible by investors. It’s somewhat the same with VA – programs available for purchases other than one’s primary home are now available.
Conventional lending over the last ten years went absolutely crazy. Qualifications all but diminished, interest rates fell to a low of around 4%, and money was creatively offered by even the biggest lenders. As short as two years ago, it was common to see investor money for 100 to even as high as 125% of the purchase price being offered. But as quickly as those lenient doors opened, they closed within these last two years. Common terms for investor financing today is 10% down, with several months of reserves – and that’s if you are a good credit risk! I will note, however, that the credit markets are easing a bit and some more creative terms are beginning to pop up. I’ve recently seen multiple lenders offering a product based on 70% of the appraisal value as opposed to 70% of purchase price. Thus, if you can buy low enough (or are dealing with a rehab project) you can get virtually the entire thing financed.
To be effective with conventional lending, it’s important to understand and know how to work with first and second mortgages. Most people think that if they want to finance a property with 100% financing, they need a loan for 100% of the purchase price. In reality, the more likely scenario would be a first mortgage for, say, 80% of the purchase price, and a second mortgage for 20% of the purchase price. This is called a blended loan, and the rationale behind them is that in a case of default, the holder of the first mortgage is in a more secure position since the house is worth more than the loan balance. The holder of the second mortgage is in more jeopardy because their loan represent that top 20% that could get wiped out in a foreclosure auction with a low-ball price. That’s why the second mortgage has a much higher interest rate than the first – because it’s riskier.
It’s also important to note two additional things. First, is that the lower the first mortgage balance is to the property’s value, the more likely you will get qualified. In other words, an your chances of getting financed for a 70% first mortgage are higher than for a 90% first mortgage. If you had the 30% in cash to put down, most banks would be willing to talk with you regardless of a lot of negative financial factors you might have. If you don’t have the cash, that’s where the second loan comes in, and the qualification really takes place more on that loan. The next item is that a blended loan will help you avoid the payment of mortgage insurance, which is generally required on a first mortgage with a balance of higher than 80% of the properties value. That’s really an unnecessary expense to your monthly payment and you should look at ways to avoid it.
At any rate, being able to talk coherently and deal in combinations of loans is your route to securing traditional financing for higher loan amounts. You can think in terms of many combinations – here’s just one example: a 70/25/5, which means a combination of a 70% first loan, a 25% second loan, and 5% down.
It’s important to note that blended loans – at least those where both loans were offered by the same lender have virtually disappeared in this credit crunch, but I have faith they will return in short order.
Another piece of the traditional lending puzzle is that of home equity lines of credit and home equity loans. The difference between the two is fairly simple. Home equity lines of credit are much like credit cards. You are extended an open line of credit. You pull from that line as you need it. As you pay down your balance, the payment amount drops and your available balance goes up accordingly. With a home equity loan, it’s a fixed loan, you are loaned the money, and you have a fixed period of time to pay it back, generally with fixed payments.
Both home equity lines and loans are good options because they are relatively easy to qualify for, and in most cases can be had with little to no lender fees. Whereas a mortgage for $70,000 might cost you $1500 in appraisals, title insurance, underwriting and other “junk” fees, a $70,000 line of credit may cost you a mere $300 in underwriting.
The downside to both is that they require an equity cushion in the property – normally you will have difficulty getting a home equity line or loan for more than 90% of the property’s value if it’s a residence, and it’s common right now to see 80% for an investment property. It’s also important to note that they will be at higher interest rates than standard mortgages. Figure a full 1-3% in interest rates over the cost of a regular mortgage in most cases.
One of the great benefits of a home equity line for an investment purchase, is that when you pay down the loan and open up your available credit, that’s money you can access for another purchase.
And, both lines and loans are good ways to pull your own equity out of a property for purchases or other investment needs. One of the really amazing things about holding property over the long haul is that you don't have to sell a property to get cash from it. With sufficient equity, you can refinance and pull out cash and keep the property too! It's a clear case of having your cake and eating it too. Plus, money borrowed in this way is not taxable. If you sell a property, you pay hefty taxes on the profits. If you refinance, it's tax-free money!
Until next time....
Contact me at william@thecoasttocoastinvestor.com if you have any questions you'd like answered.
Monday, March 3, 2008
Financing Investments in the Current Climate
Hello everyone, this is Bill Flood, and welcome to another edition of the Coast to Coast Real Estate Investor.
Today, I’m going to begin a multipart series on how to finance properties. Knowledge of creative financing techniques is a dying art, and given the current credit crunch is absolutely necessary to finance your acquisitions. I want to do a brain dump on how to finance deals whether it's with conventional finacing or with the dozens of other techniques that don't involve banks and mortgage companies!
Let's go back 5 or 6 years. With the advent of mortgages at 5%, interest only, and the only qualification being you needed to fog up a mirror when you breathed on it, other forms of financing really fell by the wayside.
But, times are different now, and the sub-prime game is all but over. It’s essentially difficult for even the best qualified investor to get 100% institutional financing for purchase right now. 95% financing is remotely available to those with good credit, income and assets, but even that is shrinking to the point of non-existance. Ten percent down is the norm for those with good credit, and often lenders want 6 to 12 months of payments in reserve. You can see that, right now, institutional financing is problemmatic at best - useless at worst.
Another problem, which is exacerbated by out of state buying is that sooner or later, no matter how qualified you are, you will run into a ceiling on what you can borrow conventionally. So, if you want to continue investing past your own qualification ceiling, you need to find ways other than banks and mortgages companies to finance your deal. Buying a second home with conventional funding is still pretty do-able, so if you haven't pursued a second or vacation home, that's something that should be on your radar. Getting into your first true investment property, on the other hand, will pose lots of new challenges related to financing.
So, the successful national (or local) investor needs a repertoire of tools at their disposal for the financing of property purchases.
Creative Thinking
I am always amazed at the current crop of supposed real estate gurus who are touting that the old-school real estate methods are dead. This self-proclaimed experts want to convince you to buy expensive websites, subscribe to high-dollar leads subscriptions and a myriad of other tools that you supposedly can't live without in the current real estate game. In fact, the reality is that the old school folks had it right all along! Go back to the early books on real estate investing and you will find all you need to be successful investing...over your lifetime. Sure, things change, but the underlying bedrock principles never change.
One of those bedrock skills is having a creative mindset when it comes to making deals - and in particular, to financing properties. Bank financing is not the only way to go, and you need to be open to many different avenues for how you can put a deal together. For example, over the next few editions, I'll be talking about lease options, least purchases, owner financing, credit lines...this list is quite long.
A creative mindset recognizes that there's more than one way to get a job done. It's the old adage of "looking outside of the box" for novel ways of solving a problem. By way of example, could you actually be better off renting a person's property as opposed to buying it? Could there be a way of making payments to the owner at zero percent interest? Could you control a property for several months without having to make payments? These are all the kinds of strategies I'll be discussing.
Win-Win
Another of the old school philosophies that I consider to be bedrock is that your deal making needs to be win-win...that is, to benefit both parties. I'll take that thinking one step further and suggest that your highest and best deal will be found when you uncover and try to solve the seller's problem.
Right now, there are thousands of people all over the country with their budgets strained due to escalating mortgage payments...losing their homes to foreclosure...who had to move out of state to pursue direly needed employment but who've now been saddled with two house payments. You can come in and solve those problems in a way that truly helps the other party while at the same time creates a winning opportunity for you.
This, again, is where I differ from the current crop of gurus who seem to be all about grabbing as much equity as possible so they can flip a property and take a Caribean cruise. I've seen vulture investors who think absolutely nothing about putting the proverbial "little old lady" out in the street through a one-sided deal that benefits them while taking advantage of the homeowner...and there are gurus out there who have no trouble in professing such tactics. That's unfortunate, because you don't have to be a vulture. Win-win always has been, and always will be the best strategy by which to operate your investing, and is the crux of nearly any kind of creative financing. I'll say it again...you don't need to take advantage of people. You will find your highest and best deal by solving the problems of the seller - that your best profit-making solution will be found in the solution of the owner's problem if you have a creative eye.
So come with me over the next couple of weeks and learn dozens of ways to put deals together with and without banks. From this point forward your investing need not be driven by what's going on in the mortgage market!
Get in touch if you have any questions:
william@thecoasttocoastinvestor.com
Until next time, this is Bill Flood, for the Coast to Coast Real Estate Investor. Live your real estate dreams!
Today, I’m going to begin a multipart series on how to finance properties. Knowledge of creative financing techniques is a dying art, and given the current credit crunch is absolutely necessary to finance your acquisitions. I want to do a brain dump on how to finance deals whether it's with conventional finacing or with the dozens of other techniques that don't involve banks and mortgage companies!
Let's go back 5 or 6 years. With the advent of mortgages at 5%, interest only, and the only qualification being you needed to fog up a mirror when you breathed on it, other forms of financing really fell by the wayside.
But, times are different now, and the sub-prime game is all but over. It’s essentially difficult for even the best qualified investor to get 100% institutional financing for purchase right now. 95% financing is remotely available to those with good credit, income and assets, but even that is shrinking to the point of non-existance. Ten percent down is the norm for those with good credit, and often lenders want 6 to 12 months of payments in reserve. You can see that, right now, institutional financing is problemmatic at best - useless at worst.
Another problem, which is exacerbated by out of state buying is that sooner or later, no matter how qualified you are, you will run into a ceiling on what you can borrow conventionally. So, if you want to continue investing past your own qualification ceiling, you need to find ways other than banks and mortgages companies to finance your deal. Buying a second home with conventional funding is still pretty do-able, so if you haven't pursued a second or vacation home, that's something that should be on your radar. Getting into your first true investment property, on the other hand, will pose lots of new challenges related to financing.
So, the successful national (or local) investor needs a repertoire of tools at their disposal for the financing of property purchases.
Creative Thinking
I am always amazed at the current crop of supposed real estate gurus who are touting that the old-school real estate methods are dead. This self-proclaimed experts want to convince you to buy expensive websites, subscribe to high-dollar leads subscriptions and a myriad of other tools that you supposedly can't live without in the current real estate game. In fact, the reality is that the old school folks had it right all along! Go back to the early books on real estate investing and you will find all you need to be successful investing...over your lifetime. Sure, things change, but the underlying bedrock principles never change.
One of those bedrock skills is having a creative mindset when it comes to making deals - and in particular, to financing properties. Bank financing is not the only way to go, and you need to be open to many different avenues for how you can put a deal together. For example, over the next few editions, I'll be talking about lease options, least purchases, owner financing, credit lines...this list is quite long.
A creative mindset recognizes that there's more than one way to get a job done. It's the old adage of "looking outside of the box" for novel ways of solving a problem. By way of example, could you actually be better off renting a person's property as opposed to buying it? Could there be a way of making payments to the owner at zero percent interest? Could you control a property for several months without having to make payments? These are all the kinds of strategies I'll be discussing.
Win-Win
Another of the old school philosophies that I consider to be bedrock is that your deal making needs to be win-win...that is, to benefit both parties. I'll take that thinking one step further and suggest that your highest and best deal will be found when you uncover and try to solve the seller's problem.
Right now, there are thousands of people all over the country with their budgets strained due to escalating mortgage payments...losing their homes to foreclosure...who had to move out of state to pursue direly needed employment but who've now been saddled with two house payments. You can come in and solve those problems in a way that truly helps the other party while at the same time creates a winning opportunity for you.
This, again, is where I differ from the current crop of gurus who seem to be all about grabbing as much equity as possible so they can flip a property and take a Caribean cruise. I've seen vulture investors who think absolutely nothing about putting the proverbial "little old lady" out in the street through a one-sided deal that benefits them while taking advantage of the homeowner...and there are gurus out there who have no trouble in professing such tactics. That's unfortunate, because you don't have to be a vulture. Win-win always has been, and always will be the best strategy by which to operate your investing, and is the crux of nearly any kind of creative financing. I'll say it again...you don't need to take advantage of people. You will find your highest and best deal by solving the problems of the seller - that your best profit-making solution will be found in the solution of the owner's problem if you have a creative eye.
So come with me over the next couple of weeks and learn dozens of ways to put deals together with and without banks. From this point forward your investing need not be driven by what's going on in the mortgage market!
Get in touch if you have any questions:
william@thecoasttocoastinvestor.com
Until next time, this is Bill Flood, for the Coast to Coast Real Estate Investor. Live your real estate dreams!
Monday, February 4, 2008
A Summary of the Free Services Available to You Through the Coast-to-Coast Real Estate Investor
I wanted to spend some time giving you a central description of all of the free services that The Coast-to-Coast Real Estate Investor offers. All of these I’ve mentioned at one point or another in my blog or Podcast, but I thought it would be prudent to give you all of them in one central place. It just seemed important to collect everything into one location where I can put it all out there to you.
Let me begin with the Coast-to-Coast Real Estate Investor website. The site is very much under construction, as I have concentrated most of my energies on the blog and Podcast. What you’ll soon find on the website is a central source to access all of the Coast to Coast Real Estate Investor resources instead of having to access each one separately.
The address for the website is: www.thecoasttocoastinvestor.com.
Of course, there’s this blog. The purpose of the blog is to provide continuous real estate investor information and training for those who want to learn how to invest in any marketplace. If you look back on some of the recent editions of the blog you’ll see articles such as a multi-part series on valuing property remotely, and how to find properties in which to invest. In coming editions I’ll be discussing financing, working with professionals like realtors and property managers, and will constantly discuss up-and-coming markets for your purchases.
The Coast-to-Coast Real Estate Investor Blog address is: http://www.coast2coastinvestor.blogspot.com/
(of course that’s in your browser window currently!)
My intention with both my blog and Podcast was to make them ad-sponsored and keep them free to the public. Each time you access the blog you’ll see useful real estate-related advertisers on the blog pages, so pay them a visit and learn what they have to offer.
Then, there’s my flagship, the audio Podcast available at http://www.talkshoe.com/talkshoe/web/talkCast.jsp?masterId=20058&cmd=tc
The Podcast is a weekly audio informational and training broadcast on how to invest in real estate; it’s indispensable whether you invest at home, or anywhere in the country. One of the beauties of the Podcast is that most of the time I run it in a “live” call-in format, similar to a radio call-in show. So, you can come on live, ask questions, and interact with me, or my guests directly. And, if you can’t be on live, you can listen to or download the episodes to your computer or MP3 player.
I’ve had episodes on subjects ranging from how to value property remotely to hiring property managers to creative financing, and am starting to bring in guest speakers – people to fill up your Rolodex as resources. There’s always more to come.
To be a live show, you'll need to make sure you've registered with my Podcast host www.talkshoe.com, and you've logged in for the evening.
The Coast-to-Coast Real Estate Investor audio Podcast link is:
http://www.talkshoe.com/talkshoe/web/talkCast.jsp?masterId=20058&cmd=tc
You can also go to www.talkshoe.com and search for "real estate investing" or "coast to coast". The show will display about halfway down the list.
To get on a live call-in show, you'll need the following information to access the show:
Phone Number: (724) 444-7444My Talkcast ID: 20058
Registration is free, and only takes a couple of seconds, but you'll want to do it in advance of the show. On the night of a show, to get on live just dial the number and you'll be prompted for the Talkcast ID# and the PIN you set up when you registered. You don't need a microphone on your PC because you'll use your phone, and if you are shy about speaking you can even use Talkshoe's chat window to type! It's a really simple program to use, and you'll feel like you are on a live call-in radio show.
If you just want to listen or download a broadcast, you can just go to Talkshoe and look for my broadcast. All the previous episodes are there for your benefit.
Keep in mind that you’ll want to get my weekly bulletin so you’ll know when the broadcast is running and what the subject will be. I’ll give you the information for getting my bulletin in just a moment.
One service I am really proud to offer is the set of audio discussion boards for the Coast-to-Coast Real Estate Investor. There are many text-based discussion boards for real estate investing available (including mine), but I’ve taken the concept to the next level – now you can have discussions with investors and professionals in audio rather than text. The idea came to me like an epiphany – that people miss out on a great deal of value in communication when it’s just typing. The subtleties of having a conversion – like inflection and volume communicate so much…not to mention that speaking is less time-consuming than typing! It's much more like a face-to-face…or at least a phone conversation then any text board can offer. So, now you have a place where you can actually talk to other real estate investing folks, ask questions, have discussions, listen to and learn from others’ conversations and so forth.
I use a wonderful service now in it’s second version called www.Vaestro.com.
The link to my real estate forum is: www.vaestro.com/viewforum-371
Keep the link handy – it’s easier to access all the boards if you have the link rather than trying to use Vaestro's searching tool.
You do not need to register to participate in the boards, but to make use of it, you will need a microphone and speakers. If you don't have one, a headset microphone runs as little as about $8 at places like Best Buy or Circuit City. Do yourself a favor and invest a couple of bucks for the opportunity to tap into this one-of-a-kind resource.
Finally – and something that I am really excited about - is my social networking platform for the Coast-to-Coast Real Estate Investor. In case you are not familiar with the term social networking, I’ll mention the Internet phenomena of Myspace.com and Facebook.com – those you may have heard of. If not, social networks are communities where like-minded people can get together to meet, interact, socialize around favorite topics (in this case real estate investing), network, learn, and access hosts of resources. They are the latest thing on the Internet, and are hot, hot, hot!
So, if you are a www.facebook.com or www.myspacecom user, you'll love this! It's the Facebook for real estate investing! If you aren’t a www.facebook.com or www.myspace.com user…you’ll love this!
I'm using a wonderful easy-to-use social networking site called www.Ning.com.
The web address for the Coast-to-Coast Real Estate Investor community is: http://coast2coastinvestor.ning.com/
One of my big objectives with the site is to develop a central resource of investor-friendly lenders and private money investors. If you grasp how difficult the credit market is right now, you’ll understand how valuable this resource is going to be. And, don’t be shy to contribute to it!
My Ning site is really in it’s infancy, so I’d like to encourage all of you to jump in there and get it off to an exciting start. Remember – like all these other resources, it’s free!
Finally, I want to affirm that you are welcome to get in touch with me directly. Every day, I have investors and newbies contact me with a variety of questions. Some have basic questions regarding investing concepts, and others have questions regarding specific deals. Sometimes, they are just making contact for networking, and that’s fantastic!
Whatever your motivation, feel free to contact me at william@thecoasttocoastinvestor.com
Additionally, please pass along all this information to your friends and associates. I welcome having new folks join the group. Send along their (or your) contact information and I’ll get it into my mailing list for my weekly bulletin that announces the Podcast topic and any upcoming news. As well, if you know of anyone who is interested in real estate investing, whether beginner or otherwise, please tell them about these resources. And, have them contact me at william@thecoasttocoastinvestor.com so I can include them in the mailings, and let them know of upcoming episodes and provide the other resources I have available.
Once again, you are your associates can contact me at william@thecoasttocoastinvestor.com
Have a great week,
William Flood
Let me begin with the Coast-to-Coast Real Estate Investor website. The site is very much under construction, as I have concentrated most of my energies on the blog and Podcast. What you’ll soon find on the website is a central source to access all of the Coast to Coast Real Estate Investor resources instead of having to access each one separately.
The address for the website is: www.thecoasttocoastinvestor.com.
Of course, there’s this blog. The purpose of the blog is to provide continuous real estate investor information and training for those who want to learn how to invest in any marketplace. If you look back on some of the recent editions of the blog you’ll see articles such as a multi-part series on valuing property remotely, and how to find properties in which to invest. In coming editions I’ll be discussing financing, working with professionals like realtors and property managers, and will constantly discuss up-and-coming markets for your purchases.
The Coast-to-Coast Real Estate Investor Blog address is: http://www.coast2coastinvestor.blogspot.com/
(of course that’s in your browser window currently!)
My intention with both my blog and Podcast was to make them ad-sponsored and keep them free to the public. Each time you access the blog you’ll see useful real estate-related advertisers on the blog pages, so pay them a visit and learn what they have to offer.
Then, there’s my flagship, the audio Podcast available at http://www.talkshoe.com/talkshoe/web/talkCast.jsp?masterId=20058&cmd=tc
The Podcast is a weekly audio informational and training broadcast on how to invest in real estate; it’s indispensable whether you invest at home, or anywhere in the country. One of the beauties of the Podcast is that most of the time I run it in a “live” call-in format, similar to a radio call-in show. So, you can come on live, ask questions, and interact with me, or my guests directly. And, if you can’t be on live, you can listen to or download the episodes to your computer or MP3 player.
I’ve had episodes on subjects ranging from how to value property remotely to hiring property managers to creative financing, and am starting to bring in guest speakers – people to fill up your Rolodex as resources. There’s always more to come.
To be a live show, you'll need to make sure you've registered with my Podcast host www.talkshoe.com, and you've logged in for the evening.
The Coast-to-Coast Real Estate Investor audio Podcast link is:
http://www.talkshoe.com/talkshoe/web/talkCast.jsp?masterId=20058&cmd=tc
You can also go to www.talkshoe.com and search for "real estate investing" or "coast to coast". The show will display about halfway down the list.
To get on a live call-in show, you'll need the following information to access the show:
Phone Number: (724) 444-7444My Talkcast ID: 20058
Registration is free, and only takes a couple of seconds, but you'll want to do it in advance of the show. On the night of a show, to get on live just dial the number and you'll be prompted for the Talkcast ID# and the PIN you set up when you registered. You don't need a microphone on your PC because you'll use your phone, and if you are shy about speaking you can even use Talkshoe's chat window to type! It's a really simple program to use, and you'll feel like you are on a live call-in radio show.
If you just want to listen or download a broadcast, you can just go to Talkshoe and look for my broadcast. All the previous episodes are there for your benefit.
Keep in mind that you’ll want to get my weekly bulletin so you’ll know when the broadcast is running and what the subject will be. I’ll give you the information for getting my bulletin in just a moment.
One service I am really proud to offer is the set of audio discussion boards for the Coast-to-Coast Real Estate Investor. There are many text-based discussion boards for real estate investing available (including mine), but I’ve taken the concept to the next level – now you can have discussions with investors and professionals in audio rather than text. The idea came to me like an epiphany – that people miss out on a great deal of value in communication when it’s just typing. The subtleties of having a conversion – like inflection and volume communicate so much…not to mention that speaking is less time-consuming than typing! It's much more like a face-to-face…or at least a phone conversation then any text board can offer. So, now you have a place where you can actually talk to other real estate investing folks, ask questions, have discussions, listen to and learn from others’ conversations and so forth.
I use a wonderful service now in it’s second version called www.Vaestro.com.
The link to my real estate forum is: www.vaestro.com/viewforum-371
Keep the link handy – it’s easier to access all the boards if you have the link rather than trying to use Vaestro's searching tool.
You do not need to register to participate in the boards, but to make use of it, you will need a microphone and speakers. If you don't have one, a headset microphone runs as little as about $8 at places like Best Buy or Circuit City. Do yourself a favor and invest a couple of bucks for the opportunity to tap into this one-of-a-kind resource.
Finally – and something that I am really excited about - is my social networking platform for the Coast-to-Coast Real Estate Investor. In case you are not familiar with the term social networking, I’ll mention the Internet phenomena of Myspace.com and Facebook.com – those you may have heard of. If not, social networks are communities where like-minded people can get together to meet, interact, socialize around favorite topics (in this case real estate investing), network, learn, and access hosts of resources. They are the latest thing on the Internet, and are hot, hot, hot!
So, if you are a www.facebook.com or www.myspacecom user, you'll love this! It's the Facebook for real estate investing! If you aren’t a www.facebook.com or www.myspace.com user…you’ll love this!
I'm using a wonderful easy-to-use social networking site called www.Ning.com.
The web address for the Coast-to-Coast Real Estate Investor community is: http://coast2coastinvestor.ning.com/
One of my big objectives with the site is to develop a central resource of investor-friendly lenders and private money investors. If you grasp how difficult the credit market is right now, you’ll understand how valuable this resource is going to be. And, don’t be shy to contribute to it!
My Ning site is really in it’s infancy, so I’d like to encourage all of you to jump in there and get it off to an exciting start. Remember – like all these other resources, it’s free!
Finally, I want to affirm that you are welcome to get in touch with me directly. Every day, I have investors and newbies contact me with a variety of questions. Some have basic questions regarding investing concepts, and others have questions regarding specific deals. Sometimes, they are just making contact for networking, and that’s fantastic!
Whatever your motivation, feel free to contact me at william@thecoasttocoastinvestor.com
Additionally, please pass along all this information to your friends and associates. I welcome having new folks join the group. Send along their (or your) contact information and I’ll get it into my mailing list for my weekly bulletin that announces the Podcast topic and any upcoming news. As well, if you know of anyone who is interested in real estate investing, whether beginner or otherwise, please tell them about these resources. And, have them contact me at william@thecoasttocoastinvestor.com so I can include them in the mailings, and let them know of upcoming episodes and provide the other resources I have available.
Once again, you are your associates can contact me at william@thecoasttocoastinvestor.com
Have a great week,
William Flood
Tuesday, January 22, 2008
Valuing Property Remotely (part 4)
Online Valuation Sites
I know my next piece will be at odds with what a lot of investors believe, but there are good, valuable resources on the internet to help you ascertain value. They are useful IF you put them in context of all that I’ve mentioned, and don’t try to use them as a substitute for something like a true appraisal. Sites like www.zillow.com can be inaccurate, and they have their limitations. But, don’t overlook their usefulness in giving you ballpark information…just don’t rely upon them for professional opinion. As of now there is nothing available online, free, paid, or otherwise that substitutes for a professionally-crafted appraisal where an individual is scrutinizing the property face-to-face. It just doesn’t exist.
With that caveat, I’ll recommend four valuation sites:
www.zillow.com is the most widely known, and probably the site that gets the most criticism. But, if you understand it’s an estimator, and doesn’t replace a true appraisal, it’s a very useful tool. One thing that’s really useful for the remote investor are the birds-eye views that allow you to look at the property from a satellite photo, and see the surrounding area. I’ve come across more than one property in Arizona that otherwise looked good, but ended up backing up to a highway – or worse, a junkyard, which I caught on the Zillow aerial view.
www.domania.com by lending tree is another good site. The free “solds” listing is really a good tool. And, for $30 you can get a reasonably complete property report that borders on being an appraisal, or can be automatically put with a realtor to get comps.
www.Cyberhomes.com by Fidelity is another really good tool. What’s particularly helpful with this site is the valuation map which gets pulled up automatically when you input data. So, not only do you see estimates for the property in question, but also for all the adjacent houses as well.
The national real estate firm of Coldwell Banker (www.coldwellbanker.com) has a good valuation tool, and a unique “Live Market Data” interactive map where you can zoom in to an area and it will pull up the listings for sale in that map coordinate. It’s a fantastic visual way of seeing what’s going on in an area and its surrounds. Trulia (www.trulia.com) is a similar service.
Also, if you are not using something like Zillow or Cyberhomes which provide a map, Google’s satellite map tool is really useful for getting arial views. That helps with locating the unit in its environs. For example, you can see where a house is located in proximity to a community lake or whether it backs up to a freeway.
All of these recent blog entries on valuation are a lot to consider - if you have any questions, email me at william@thecoasttocoastinvestor.com and I can help you with anything or answer any questions you have.
My next series of blog entries is going to be absolutely vital for you - they are about property financing, and given the current credit situation in the country, you need to learn how to finance properties using traditional and creative means. Financing is the one thing that is going to make or break deals over the next couple of years, so you'll want to get these postings.
So, until next time, I’m Bill Flood; this is the Coast to Coast Real Estate Investor…live your real estate dreams!
I know my next piece will be at odds with what a lot of investors believe, but there are good, valuable resources on the internet to help you ascertain value. They are useful IF you put them in context of all that I’ve mentioned, and don’t try to use them as a substitute for something like a true appraisal. Sites like www.zillow.com can be inaccurate, and they have their limitations. But, don’t overlook their usefulness in giving you ballpark information…just don’t rely upon them for professional opinion. As of now there is nothing available online, free, paid, or otherwise that substitutes for a professionally-crafted appraisal where an individual is scrutinizing the property face-to-face. It just doesn’t exist.
With that caveat, I’ll recommend four valuation sites:
www.zillow.com is the most widely known, and probably the site that gets the most criticism. But, if you understand it’s an estimator, and doesn’t replace a true appraisal, it’s a very useful tool. One thing that’s really useful for the remote investor are the birds-eye views that allow you to look at the property from a satellite photo, and see the surrounding area. I’ve come across more than one property in Arizona that otherwise looked good, but ended up backing up to a highway – or worse, a junkyard, which I caught on the Zillow aerial view.
www.domania.com by lending tree is another good site. The free “solds” listing is really a good tool. And, for $30 you can get a reasonably complete property report that borders on being an appraisal, or can be automatically put with a realtor to get comps.
www.Cyberhomes.com by Fidelity is another really good tool. What’s particularly helpful with this site is the valuation map which gets pulled up automatically when you input data. So, not only do you see estimates for the property in question, but also for all the adjacent houses as well.
The national real estate firm of Coldwell Banker (www.coldwellbanker.com) has a good valuation tool, and a unique “Live Market Data” interactive map where you can zoom in to an area and it will pull up the listings for sale in that map coordinate. It’s a fantastic visual way of seeing what’s going on in an area and its surrounds. Trulia (www.trulia.com) is a similar service.
Also, if you are not using something like Zillow or Cyberhomes which provide a map, Google’s satellite map tool is really useful for getting arial views. That helps with locating the unit in its environs. For example, you can see where a house is located in proximity to a community lake or whether it backs up to a freeway.
All of these recent blog entries on valuation are a lot to consider - if you have any questions, email me at william@thecoasttocoastinvestor.com and I can help you with anything or answer any questions you have.
My next series of blog entries is going to be absolutely vital for you - they are about property financing, and given the current credit situation in the country, you need to learn how to finance properties using traditional and creative means. Financing is the one thing that is going to make or break deals over the next couple of years, so you'll want to get these postings.
So, until next time, I’m Bill Flood; this is the Coast to Coast Real Estate Investor…live your real estate dreams!
Wednesday, January 9, 2008
Valuing Property Remotely (Part 3)
Local Auditor Sites
Local auditor sites are very helpful. In many counties and municipalities across the country the local property tax auditor’s information is online and available for public access. Now, you have to understand that what you see on an auditor’s site might require some interpretation. A tax assessment is different from an appraised value (assessments are typically lower), and auditor’s values have a reputation for being inaccurate. But, it’s still good data, and if you learn how assessed value is computed, it can provide you with at least a reasonable figure for comparison. What’s even more valuable, though, is if the auditor provides the prices at which units have sold. For example, here in Columbus, our auditor goes back the last 3 or 4 transactions, so we can accurately see what people paid for a property. That can be amazingly helpful when you are crafting an offer, particularly if a bank foreclosure is involved.
Another area where certain auditor’s software is tremendously helpful is when they’ll map values or sold prices. Again, here in Central Ohio, we’re blessed with a system that will do that. I can pull up a neighborhood map that will show each lot, what it’s assessed value it, what it last sold for and when. You can do your own comps that way, really easily!
Title Company Reports
Title Companies can often provide a property abstract free of charge that will provide you with information about assessed value (most of it will come right from the auditor’s site) as well as any liens on the property. How can this be useful? Let’s say you know a property is an estate sale, and is worth $150,000 with an existing loan that has only $40,000 remaining. That situation could be ripe for an aggressive price because there’s lots of equity, or potential owner financing. If you found out it had a loan of $149,000 it’s a different situation.
Now, title companies will not wantonly give out preliminary property reports for free. You have to be very much a two way street – start by meeting with them and finding the one that you’d do your business with. See if they can easily produce this kind of information for you and would be willing to do so if you committed to them being your title company. And, don’t overdo it. You don’t send 15 properties to a title company for their reporting. You check on the one or two that really interest you enough to put a contract on. Additionally, the more business you send their way in the form of closings and referrals, the more they will be willing to reciprocate by running quick reports for you!
Appraisals
Appraisals, of course, are the best option, but appraisals cost money. Nothing substitutes for a hand-crafted, professionally addressed appraisal. Those run anywhere from about $200 to about $400 for a residential property. So, if you are really serious about a property, you might want to consider ordering an appraisal (and will have to pay for one if a bank loan is involved). It’s money well-spent if you want to know what a property should really be worth and to utilize that data in your negotiations on price. Three hundred dollars invested in an appraisal is a bargain if you manage to get a $300,000 house for $240,000.
There are a handful of sites that will do "appraisals" online running in the area of approximately $50. I don't place a tremendous value in these, because they are primarily relying on the same kinds of data I'm describing to you in these blogs on property valuation. Sure, they will save you some time, and they may get you data you could not normally access. In that sense they provide a good service. But they are not, in fact, full appraisals, so don't get suckered into thinking they are. Nothing substitutes for a real person going to the property and inspecting it inside and out to see what's really going on. Keep in mind a simple issue -- a property's condition will blatently influence its value, and no online service can uncover that; it's something that a real person needs to do.
Until next time, I’m Bill Flood; this is the Coast to Coast Real Estate Investor…live your real estate dreams!
Local auditor sites are very helpful. In many counties and municipalities across the country the local property tax auditor’s information is online and available for public access. Now, you have to understand that what you see on an auditor’s site might require some interpretation. A tax assessment is different from an appraised value (assessments are typically lower), and auditor’s values have a reputation for being inaccurate. But, it’s still good data, and if you learn how assessed value is computed, it can provide you with at least a reasonable figure for comparison. What’s even more valuable, though, is if the auditor provides the prices at which units have sold. For example, here in Columbus, our auditor goes back the last 3 or 4 transactions, so we can accurately see what people paid for a property. That can be amazingly helpful when you are crafting an offer, particularly if a bank foreclosure is involved.
Another area where certain auditor’s software is tremendously helpful is when they’ll map values or sold prices. Again, here in Central Ohio, we’re blessed with a system that will do that. I can pull up a neighborhood map that will show each lot, what it’s assessed value it, what it last sold for and when. You can do your own comps that way, really easily!
Title Company Reports
Title Companies can often provide a property abstract free of charge that will provide you with information about assessed value (most of it will come right from the auditor’s site) as well as any liens on the property. How can this be useful? Let’s say you know a property is an estate sale, and is worth $150,000 with an existing loan that has only $40,000 remaining. That situation could be ripe for an aggressive price because there’s lots of equity, or potential owner financing. If you found out it had a loan of $149,000 it’s a different situation.
Now, title companies will not wantonly give out preliminary property reports for free. You have to be very much a two way street – start by meeting with them and finding the one that you’d do your business with. See if they can easily produce this kind of information for you and would be willing to do so if you committed to them being your title company. And, don’t overdo it. You don’t send 15 properties to a title company for their reporting. You check on the one or two that really interest you enough to put a contract on. Additionally, the more business you send their way in the form of closings and referrals, the more they will be willing to reciprocate by running quick reports for you!
Appraisals
Appraisals, of course, are the best option, but appraisals cost money. Nothing substitutes for a hand-crafted, professionally addressed appraisal. Those run anywhere from about $200 to about $400 for a residential property. So, if you are really serious about a property, you might want to consider ordering an appraisal (and will have to pay for one if a bank loan is involved). It’s money well-spent if you want to know what a property should really be worth and to utilize that data in your negotiations on price. Three hundred dollars invested in an appraisal is a bargain if you manage to get a $300,000 house for $240,000.
There are a handful of sites that will do "appraisals" online running in the area of approximately $50. I don't place a tremendous value in these, because they are primarily relying on the same kinds of data I'm describing to you in these blogs on property valuation. Sure, they will save you some time, and they may get you data you could not normally access. In that sense they provide a good service. But they are not, in fact, full appraisals, so don't get suckered into thinking they are. Nothing substitutes for a real person going to the property and inspecting it inside and out to see what's really going on. Keep in mind a simple issue -- a property's condition will blatently influence its value, and no online service can uncover that; it's something that a real person needs to do.
Until next time, I’m Bill Flood; this is the Coast to Coast Real Estate Investor…live your real estate dreams!
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