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How to Buy and Manage a Long-Distance Rental Property

Ethan Roberts is a real estate writer, editor and investor. He’s a frequent contributor to InvestorPlace.com, and his work has been featured on Money.msn.com and Reuters.com. He was one of five contributing editors to TheTycoonReport.com and has also written for MarketGreenhouse.com and SeekingAlpha.com. He’s been investing in real estate since 1995 and a Realtor since 1998.

Investors sometimes ask me whether it makes sense to buy rental property in a city or state that’s different from where they live. Often, they’re curious about exploring other areas because there are few good deals left where they live, or they’ve heard that certain towns in other states are booming.

During the peak real estate years of 2003–2007, investors from as far away as California were calling real estate agents in states like Arizona, Georgia and Florida to snap up investment properties — often without even seeing the homes in person! That was crazy investing then, and it’s just as reckless now. As it turned out, that kind of blind fervor for real estate investing portended an end to the bubble.

However, that doesn’t mean investors shouldn’t buy out-of-town or out-of-state properties today. You just have to be prudent and take certain precautions.

Why be a Long-Distance Landlord?
There are pros and cons inherent with long-distance real estate investing. Let’s take a look at the pros first:

1. You have the freedom to invest in more affordable areas.
By not restricting yourself to the area in which you live, you open up a whole new world of investing possibilities. Many investors in high-cost-of-living states like New York, California and Massachusetts can no longer afford to buy homes where they live, but are finding the Midwest and Southern states to be much more affordable. In addition to cheaper sales prices, these areas also have lower taxes and dwelling (i.e. rental property) insurance premiums.

2. You can fund your future retirement home.

Some investors buy a home in a retirement community with an eye toward living there one day. They may buy a condo near the beach, or a country cabin in the mountains. Then they rent the home out with either short- or long-term leases, and in the process, their tenants pay down the loan principal until the investor is ready to retire. By then, the mortgage might be fully paid off.

3. You may gain new tax deductions.

Many parents have children who attend college in another state. Instead of spending a fortune on a dorm room and semi-annual visits, they buy a modest three-bedroom home near campus. The student lives in this home and rents the other two bedrooms to some friends. The parents save on dorm fees and offset a good part of the total mortgage payment with the rent collected from the other students (or better yet, their parents). Furthermore, each time that the parents travel to visit the child, 50 percent of their total trip expenses can be legally written off on their income taxes because they’re also inspecting their property!

Handling the Disadvantages of Long-Distance Real Estate Investing
Make no mistake: Owning rental property far from home can be a complex undertaking. There are several challenges long-distance landlords often encounter:

  • Lack of knowledge about the area in which they’re investing
  • Lack of familiarity with good local service providers
  • Relying on others to take care of day-to-day problems or repairs
  • Difficulties in getting the rent paid on time

But these obstacles don’t have to prevent you from purchasing long-distance rental property. Here are some ways to make your investment a success:

1. Do your homework and learn about the area.
Begin by hiring a good real estate agent from the area you’re interested in. You can browse online to get the names of several real estate agents in the area who regularly work with investment properties. Interview each agent by phone, and ask those you like best to send you listings of homes for sale that meet your criteria. Browse rental properties online to get a feel for the return that you can expect on homes in your price range.

Once you’ve selected a real estate agent, plan to visit the area and view properties together. Desirable, modestly priced homes sell quickly, so a home that interests you on Tuesday could have a contract on it by the time you arrive on Saturday. You’ll want to create a list of eight to 10 homes to tour.

Because there are more expenses involved in buying and managing long-distance real estate — such as the travel expenses you’ll incur to visit the property — don’t rule out foreclosures, short sales and other distressed properties that can be purchased at a substantial discount to comparable homes in the area. This type of home probably won’t be move-in ready, but after you make the necessary improvements, it should yield some start-up or “sweat” equity.

2. Develop a go-to list of local service providers.
Ask your real estate agent for the names of service providers — like plumbers, electricians and handymen — with good reputations that you can depend on for ongoing property maintenance. Try to use smaller “mom-and-pop” companies; they often have better pricing and tend to be more honest about the actual repairs needed. Larger companies have been known to tell long-distance landlords that they need a whole new water heater, AC unit or roof, when less expensive home repairs or replacements might have done just fine.

If possible, you’ll want to contact the recommended service providers before you close, introduce yourself and tell them you’d like to use their services for your investment property. Be sure to ask what forms of payment they accept, as most service providers like to be paid when they finish the job.

3. Manage the property yourself.
It’s not very difficult to make the necessary calls as problems arise, but if you find that landlord duties such as managing repairs and collecting rents is becoming too stressful, ask your real estate agent if his or her company provides property management services. The monthly fee for property management will range from 10 to 12 percent of the rent.

4. Automate or simplify rent collection.
There are a couple of ways to handle collecting rents on time. Some tenants can have their rent automatically deposited into your bank account. I have two Navy tenants who have the rent deducted from their pay on the first of the month and immediately deposited to my account. Most banks let you transfer money online between accounts as well.

You can also have tenants deposit the money into an account at a local bank — you’ll get the rent faster than if they mailed you a check. To encourage timely payment, send them an email or text reminder as the first of the month approaches.

Once you’ve rehabbed the property and your tenants are in place, your rental should run on autopilot for quite awhile. If your tenant calls with an occasional repair problem, you can simply pick up the phone and contact one of the service providers on your list.

In sum, there are many advantages to buying long-distance real estate, and while there are some disadvantages, they can be easily handled if you’ve done your initial research and set up a network of reliable resources.

This information was originally published on Auction.com, LLC, the nation’s leading online real estate marketplace. Founded in 2008, the company has sold nearly $20 billion in assets since 2010. Auction.com has more than 900 employees and offices in Irvine and Silicon Valley, California as well as offices in Atlanta, Austin, Denver, Miami and Newport Beach. Visit us at www.auction.com, or on Twitter, Facebook and LinkedIn.

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Tips for Flips: 4 Ways to Boost Your Profits

Ethan Roberts is a real estate writer, editor and investor. He’s a frequent contributor to InvestorPlace.com, and his work has been featured on Money.msn.com and Reuters.com. He was one of five contributing editors to TheTycoonReport.com and has also written for MarketGreenhouse.com and SeekingAlpha.com. He’s been investing in real estate since 1995 and a Realtor since 1998. This is the first of a two-part series.

Many investors today have realized that it can be lucrative to “flip” homes — buy an underpriced house, fix it up and quickly re-sell it for full neighborhood value. It’s so easy to believe the real estate cable TV shows that promise huge profits on every deal.

But they leave out all of the other expenses — closing costs, real estate commissions, taxes, insurance, utilities and miscellaneous property maintenance — that come with a real estate transaction. In real life, the actual net profit is often far less.

If you want to maximize your profits, it’s imperative that you learn how to minimize costs while rehabbing. Here are several tools that I’ve used over the many years of my real estate investment career.

1. Use cash or cash equivalents.

The least expensive way to flip a home is by using cash. Although you tie up those funds for a few months, when you sell the home, your return on investment should be substantial and much higher than parking your money in a savings account or CD.

If you don’t have enough cash to purchase a home, the next cheapest source is a home equity line of credit (HELOC). These are low-interest, variable-rate lines of credit that are secured by either your primary residence or an investment property. Typically, the HELOC rate is set about 1 to 2 percent above the prime rate, which is currently 3.25 percent. You need to put the HELOC in place before you bid on any homes; then you can bid on the home as a “cash deal,” rather than as a “financing deal.”

Just remember that a HELOC, just like a regular mortgage, puts a lien on the property that it secures. If you don’t make your payments, you could lose that property to foreclosure.

Many investors use hard money loans or other conventional mortgages to finance their flips. Because of the higher interest rates and points paid at closing, both will reduce your net profit considerably, and are not recommended for flips unless absolutely necessary.

2. Target homes that will sell quickly.
When choosing a property to buy and flip, make sure that you buy one that has the best chance of being re-sold quickly. That means you want to buy a home in an area that has a good reputation, good schools and a low crime rate, among other features. You should also buy one that will re-sell in a price range that attracts the largest number of potential buyers. For example, if you flip a home that’s really cheap, there may not be people in the area whose credit scores will qualify them for a loan.

Conversely, if you buy a very expensive home to re-sell, there will be fewer people who can afford to purchase it, and it will take longer to sell. Look for homes that you can flip into that sweet spot in the middle of the area’s price range.

I suggest flipping homes that are somewhat cookie cutter, perhaps even boring, simply because they’re the easiest to sell. Unique floor plans or locations may look intriguing on the cable shows, but in real life, they take longer to sell and thereby reduce the potential profit. I advise against buying difficult-to-re-sell mobile homes, homes on dirt roads or way out in the “boonies,” or homes with past damage from fire or floods.

Finally, avoid buying old historic homes that might be difficult to renovate or have mandated neighborhood preservation requirements. They’re more expensive to rehab and appeal to a smaller group of buyers, so they’ll take longer to re-sell.

3. Learn to estimate repair costs accurately.
One of the biggest errors that I see new investors make is that they don’t accurately estimate structural repair costs like re-roofs and heating and cooling system replacements, or cosmetic enhancements such as paint, new flooring and fixtures.

If you underestimate the costs, you’ll spend weeks rehabbing the home, only to discover when you resell it that your profit will be far less than you expected. Conversely, if you overestimate the cost of a project, you might either make a bid that’s too low to be accepted by the seller, or be outbid by a rival investor who estimated correctly.

The best way to learn how to estimate costs correctly is by spending time walking the aisles of your local home improvement stores to see what materials actually cost. Network with your local service providers, and team up with those who can do a dependable quality job at the lowest possible cost.

Finally, learn to estimate jobs the way contractors do — by listing a range of costs for each repair, rather than one fixed price. Here’s one way to do it. First, compile the total list of materials needed, and record a low and high price estimate for each. Once you have that, add both columns of numbers to get the total cost range.

For example:

MATERIALS LOW / HIGH

Paint: $1,000 / $1,200
Carpet: $2,000 / $2,500
Tile: $700 / $1,200
Doors: $200 / $500
Windows: $300 / $400

TOTAL COSTS $4,200 / $5,800

Then add the two totals ($4,200 + $5,800 = $10,000), and divide by two to get the average cost ($5,000). The actual cost may be higher or lower, but this is the most accurate way to figure the approximate cost.

You’ll find that some of your estimates will run low because of unexpected problems or repairs, while other major costs you anticipated will turn out to be nominal. I can remember times when I thought an air conditioning unit might need replacing for $3,000 or $4,000, only to happily learn that a simple $200 repair made it work like new. And by shopping carefully, I can find materials on sale that reduce the costs below my estimates.

4. Consider getting a real estate license.
If you have a real estate license, each time you buy a property for yourself, you’re entitled to a commission that generally averages about 3 percent of the purchase price. On a $100,000 purchase, that commission would be $3,000 (minus your broker’s cut), which will reduce your materials cost considerably and add to your total return. In addition, when you sell the property, you may only have to pay 3 to 3.5 percent in commission, rather than 6 to 6.5 percent.

While there are annual costs involved in getting a real estate license, such as Realtor® board and Multiple Listing Service (MLS) fees, if you buy one or more homes per year, you’ll still come out far ahead.

Next week: How to minimize costs during the rehab process and when you’re ready to sell.

This information was originally published on Auction.com, LLC, the nation’s leading online real estate marketplace. Founded in 2008, the company has sold nearly $20 billion in assets since 2010. Auction.com has more than 900 employees and offices in Irvine and Silicon Valley, California as well as offices in Atlanta, Austin, Denver, Miami and Newport Beach. Visit us at www.auction.com, or on Twitter, Facebook and LinkedIn.

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Buying Foreclosures in Any Market

Joel Cone is a freelance writer based in south Orange County, California. For nearly a quarter century Joel’s career — both as a journalist and as a marketing communications specialist — has focused on the residential and commercial real estate industries, as well as the legal community. After a decade as a staff writer for the Daily Journal Corp. group of newspapers, Joel was a regular contributor to California Real Estate magazine for the California Association of Realtors; was the original
Orange County reporter for GlobeSt.com; wrote executive profiles for OC Metro magazine; and has been published in a number of real estate-related publications. 

There are many reasons why homes end up in foreclosure and a number of opportunities to purchase foreclosure properties at various stages of the process no matter what economic conditions exist at the time.

During the nation’s most recent economic downturn foreclosure activity came in two waves: the first caused by the crash of both the stock market and the U.S. economy resulting in millions of homes losing equity and going “underwater,” and the second wave caused by high levels of unemployment.

It would be a misconception to assume, however, that foreclosures only occur during bad economic times. The fact is that foreclosures never totally disappear in any real estate cycle. But buying them requires patience and tenacity.

Available Options to Purchase Foreclosure Properties
The foreclosure process consists of three basic stages, each of which presents homebuyers and real estate investors opportunities to purchase a home potentially below current market value. Those stages — laid out by the state foreclosure laws — include the pre-foreclosure stage, the auction stage and the bank-owned stage.

The Pre-Foreclosure Stage
Once the decision to foreclose has been made, the lender must record the borrower’s default in the county where the property is located. In a non-judicial foreclosure state the paperwork filed is called a Notice of Default (NOD), while in judicial foreclosure states it is a Lis Pendens (LIS) — meaning “litigation pending.”

To locate these homeowners in default, buyers can go to the county recorder’s office and check out the default notices themselves; find a real estate professional who is familiar with the foreclosure process and has resources to garner that information; or subscribe to a service like RealtyTrac, which provides a listing of default notices for a monthly fee.

There are downsides to working in the pre-foreclosure stage. First, homeowners in default have the opportunity to bring the loan current. Secondly, if they can’t afford to “cure the loan,” you are potentially working with people who can be in a highly emotional state of financial distress and can therefore be unrealistic in their expectations.

For buyers who are willing to deal with highly charged emotional situations, working with distressed homeowners to find a viable solution to their financial problems by getting them out from under their mortgage may result in a successful purchase at a reasonable discount.

The Auction Stage
Once the pre-foreclosure period allowed by the state’s law has passed, the foreclosing lender can set a date for public sale of the property at auction to the highest bidder.

This is the most difficult stage of the foreclosure process for inexperienced buyers to pursue foreclosure properties. These are all-cash purchases, and the competition is fierce as professional investors come prepared with cashier’s checks to buy as many properties as they are interested in on any particular day.

For the uninitiated, it is a good idea to attend an auction to familiarize yourself with the process before trying to participate. With today’s lower inventories, properties that do make it to auction typically end up selling for far less of a discount than they used to during the market crash.

Still, the auction process is a viable way to buy foreclosure properties. For those who want to pursue buying at this stage of the process, there are online sources such as Auction.com that provide lists of upcoming auctions — including date, location, time and amount of the opening bid. Remember to bring lots of cashier’s checks with you!

The Bank-Owned Stage
Many times during the foreclosure auction no bidders are interested in buying a particular property for a number of reasons. Sometimes it is as simple as the opening bid is so close to the amount owned on the loan being foreclosed that is not enough of a profit margin to make sound financial sense.

Properties that do not sell to interested third parties at auction go back to the foreclosing lender as an REO (real estate owned) property. These bank-owned properties are then sold, in most cases, by real estate agents who have been pre-approved by the lender to represent them in the sale of the property. These properties are then listed on a Multiple Listing Service (MLS), making their availability known to a largest potential buyer pool possible.

Today’s inventory of REOs is much lower than normal. With fewer properties available comes more competition and multiple offers – many times coming in at a price well above the list price.

Also, don’t forget about U.S. government agencies. They are also in the business of selling off the REOs in their portfolios. For properties owned by Fannie Mae check out HomePath; for properties being sold by Freddie Mac check out the inventory at HomeSteps; and the U.S. Department of Housing and Urban Development (HUD) has homes in inventory as well. Check out the HUD website for REO properties for sale.

In Conclusion
Whether you are a homebuyer or a real estate investor, so long as you have the patience and tenacity to work the system, you can be successful in buying foreclosure properties in any market.

When it comes to buying foreclosures, however, the most successful buyers tend to be those who select one of the three purchase strategies — working either the pre-foreclosure, auction or bank-owned stages of the process – and then stick with it.

This information is provided by Auction.com, LLC, the nation’s leading online real estate marketplace. Founded in
2008, the company has sold nearly $20 billion in assets since 2010. Auction.com has more than 900 employees and offices in Irvine and Silicon Valley, California as well as offices in Atlanta, Austin, Denver, Miami and Newport Beach. Visit us at www.auction.com, or on Twitter, Facebook and LinkedIn.
 

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10 Tips for New Real Estate Investors

Looking to buy your first investment property but not sure how to start? Ethan Roberts is a real estate writer, editor and investor. He’s a frequent contributor to InvestorPlace.com, and his work has been featured on Money.msn.com and Reuters.com. He was one of five contributing editors to TheTycoonReport.com and has also written forMarketGreenhouse.com and SeekingAlpha.com. He’s been investing in real estate since 1995 and a Realtor since 1998. Here’s some of the advice he shares when he teaches classes on investing in residential real estate.
Many investors today want to add real estate to their investment portfolios, but they don’t understand the complex nuances of real estate investing or how to begin the process. Real estate investing is substantially different from investing in stocks, bonds and CDs, and it can seem overwhelming to brand-new investors.

Several years ago, an investor called me to buy a rental property after losing a great deal of money in the stock market. He was excited to begin his real estate investing career, but was terrified of investing in something new. In fact, at his first closing, his hands shook so much that he could hardly sign his name on the documents. Today, he owns eight houses and has become quite successful. We laugh whenever we recall how nervous he was in the beginning.

But real estate investing doesn’t have to be difficult or scary. When I teach people how to invest in real estate, my philosophy is to maximize return while minimizing the risks. When done correctly, real estate investing is one of the safest and best long-term wealth-building tools in the world. With that in mind, here are 10 tips to help you successfully launch your real estate investing career.

1. Real estate investing is a business, and you should treat it as such. 

Start by developing a good business plan, detailing the nuances of starting and running your business, with realistic goals over time frames of one, three, five and 10 years. If you don’t know how to write a business plan, you can find help at the Small Business Administration’s website (www.sba.gov).

2. Check your credit report to determine your ability to finance investment property. 

Most lenders today require a 700 or better FICO (Fair Issac Co.) credit score from borrowers who want to buy investment property. Also, make sure that your total debt-to-monthly-income ratio is low. Often it makes sense to pay down outstanding credit card debt or car loans in order to improve your debt ratios. You’re entitled to one free credit report per year from the three major credit bureaus (Trans Union, Equifax and Experian), but they’ll only provide your history, and not your score. Instead, try Credit Karma (www.creditkarma.com) to get both.

3. Find a good bank or mortgage broker in your area if you’re financing your investments. 

Real estate agents are good sources for recommendations, or you can ask other investors whom they’ve used. You might want to do this even before you start your property search. If you’re paying cash, you’ll need to prove you have the funds by submitting a recent bank or brokerage statement when you make an offer.

4. Determine the best areas to look for properties. 

Some new investors make the mistake of limiting their search to areas close to their home. But often better rental areas may be located a little farther away. New investors may think they need to live near their properties in case tenants call about repairs or other problems. But in reality, if the home is put into good repair before your tenants move in, those calls should be few and far between.

5. Talk with other investors about local real estate. 

Join a real estate club in your area (do a quick Google search to find them). Real estate clubs are great places to network with other investors, lenders and repair service providers. You can often pick up helpful advice about your local market from other club members. Some communities offer courses on real estate investing through adult education or local real estate brokerages. If you can’t find a real estate club or course, consider an online investing forum. Yahoo Groups lists dozens of real estate groups. The Real Estate Investors Forum of Tampa Bay, for example, has been around since 2002 and has more than 1,100 members.

6. Consider multiple sources for buying properties. 

New investors may think they can only purchase homes through their local Multiple Listing Service (MLS), or by banging on doors in run-down neighborhoods looking for distressed sellers. But sometimes you can find much better deals on real estate auction sites, and these sites make it possible for buyers to easily make purchases in locations beyond their immediate area.

7. Spend time reading about real estate investing. 

A tremendous amount of free information exists today online about real estate investing. When purchasing a book, look for those that offer practical guides on buying, flipping, renting and selling properties. Avoid books that claim you can make huge sums of money in 30 to 60 days or 25-year-old books detailing techniques that may no longer work.

8. Find a good real estate agent to help you locate properties. 

Not all agents are experienced or even adept at helping investors. Before the real estate crash in 2007 and the subsequent onslaught of foreclosures, only a small percentage of real estate agents would even work with investors. Since then, agents have taken courses and suddenly claim to be “experts” on foreclosures. Make sure that you choose an agent who has sold a large number of investment properties, and also understands concepts such as return on investment (ROI), net operating income (NOI) and debt service.

9. Look for a return greater than 1 percent per month of sales price. 

An old maxim of real estate says that a rental property yielding 1 percent of the sales price per month is a good deal. In other words, if the home cost $100,000, you should get $1,000 per month in rent, or about 12 percent annual yield. But in many areas of the United States today, home values have declined substantially and investors can now achieve greater than 1 percent per month returns.

Let me share two examples of homes that I purchased with cash in 2013. The sales price of the first was $62,000. It rents for $1,050 per month, an annual yield of more than 20.3 percent. I bought the second one for $39,900, and it rents for $795 per month, an annual yield of 23.9 percent! Even factoring in repairs and other initial expenses, the yields are still 15 percent and 18 percent respectively on the two homes.

10. Learn from the best. 

To achieve success, model your investing decisions after what other successful real estate investors in your area have done. Search Google for real estate clubs in your city, or try Meetup.com.

Above all, remember that like anything else, the harder you work and the more effort you put into your real estate investment business, the greater your ultimate reward will become over time. Good luck!

This information was originally published on Auction.com,
LLC, the nation’s leading online real estate marketplace. Founded in
2008, the company has sold nearly $20 billion in assets since 2010.
Auction.com has more than 900 employees and offices in Irvine and
Silicon Valley, California as well as offices in Atlanta, Austin,
Denver, Miami and Newport Beach. Visit us at www.auction.com, or on Twitter, Facebook and LinkedIn.

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Short Sales: 4 Things Buyers Must Do

This is the second in a two-part series. Click here for part one.

When the value of a property falls so much that the home is worth less than the mortgage, it causes a quandary for both the bank and the borrower. A short sale — in which the bank agrees to accept less than the amount owed — addresses the problem and helps all parties involved. The bank gets something rather than nothing; the homeowner gets out from under the mortgage. Both avoid the expensive and time-consuming process of a foreclosure. But if you’re the buyer, there are some important steps you need to take before moving forward with a short sale offer.

1. Fully evaluate the condition of the property before you make an offer.

When lenders evaluate a short sale request, one of the first things they review is the financial shape of the borrower. The borrower must prove financial distress; at a minimum, the borrower must be at least two or three payments behind. The lender will also review a borrower’s liquid assets to see if they could be used to pay the delinquent amount.

How does this affect you, the buyer? You need to remember that borrowers who are continuously late on their mortgage payments are also likely to defer maintenance on the home. Maybe the hot water heater doesn’t get so hot and needs replacing, but there’s no money to buy a new one. Shingles might be missing from the roof, or some electrical outlets might not work. While this can work to your advantage — you may not have as much competition for a home that needs some work — you also need to estimate how much those repairs are going to cost.

Homeowners who qualify for a short sale must provide a property disclosure form that highlights any known issues — and not just obvious problems but the not-so-obvious ones as well. Say that a pipe burst within a wall and briefly flooded the dining room. That must be disclosed. The seller should also indicate that there may be mold issues behind the walls due to the water damage, even if there’s no visible problem. Read the property disclosure form carefully.

With a short sale, you’re often able to inspect the property before the sale at an open house or by appointment. Take advantage of this opportunity. You may even want to hire a licensed home inspector to make a full report of all potential issues. At the very least, drive by.

2. Research the title.

A title report lists all current and previous owners as well as any other entity that has an existing legal interest in the property. Upon a successful offer, you’ll have time to examine the preliminary title report showing all current liens. A lien indicates a legal interest in the property that must be satisfied before the home can be transferred. A mortgage is a lien, for instance. But there are others. If a contractor performed any work on the home but hasn’t been paid, there may be a mechanic’s lien that can only be released when the contractor has been paid in full. Delinquent property taxes and federal and state income taxes may also be a problem.

An owner may have more than a second (or even third) mortgage, a home improvement loan or even a home equity line of credit. In a short sale, these liens will still need to be paid in full or otherwise resolved. The bank with the first mortgage may agree to a short sale, but the others may not.

A divorce can also be an issue. When couples split and the divorce decree is signed, the ex-spouse may remain on title. If so, the “ex” will have to deed the ownership back to the person living in the home before the home can be sold.

3. Check the listing agent’s experience with short sales.

Before the housing debacle, many banks weren’t used to short sale requests and didn’t have properly trained staff to evaluate, approve and manage them. Today, short sales are much more common, and as more and more occur, the time it takes to process a short sale request has shrunk. When you approach the listing agent, ask if he or she is experienced dealing with short sales. (A real estate agent who has the “SFR” designation has been certified as a short sale and foreclosure specialist.)

The agent representing the seller should have experience working with a bank’s short sale department and be up to speed on what documentation the bank requires and the steps that need to be completed. Without the proper presentation, the short sale request could be bungled, delayed or perhaps declined solely because the agent and the owner did not follow the proper bank protocol.

4. Get pre-approved for financing.

When a bank first evaluates an offer, you want to make it as appealing as possible. That means the bank needs to be convinced of your ability to close on time. Along with your signed sales contract, you should include an approval letter from your lender. This letter should be on the lender’s letterhead along with your loan officer’s contact information, and it should highlight the amount for which you’re qualified, which just happens to be the very same as the short sale amount.

The letter should also state the items that your bank reviewed when issuing your approval. It doesn’t have to list how much money you make or how much you have in your bank account, but the letter should point out that your income, assets and credit have been evaluated and approved, and all that’s needed is a property address. The very one listed in the sales contract!

The pre-approval letter is still a key part of the short sale approval process if you’re the winning bidder, so make sure to get one from your lender before bidding. Then, you’ll be ready to bid on the home you want!

This information was originally published on Auction.com,
LLC, the nation’s leading online real estate marketplace. Founded in 2008, the company has sold nearly $20 billion in assets since 2010. Auction.com has more than 900 employees and offices in Irvine and Silicon Valley, California as well as offices in Atlanta, Austin, Denver, Miami and Newport Beach. Visit us at www.auction.com, or on Twitter, Facebook and LinkedIn.

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The Short Sale Primer for Real Estate Investors

Thanks to the housing crisis of the last decade, most consumers are familiar with real estate terms like “foreclosure” and “subprime,” even if they don’t fully understand them. But one term that might not be as familiar is “short sale.” Yet short sales provide a good opportunity for novice real estate investors to buy real estate below current market value.

Short Sale Math
A short sale, by definition, means that a lender has agreed to accept less than what’s owed on the mortgage as a debt paid in full. Short sales have been around for decades, but their existence was relatively unknown to the general public until lenders and agents alike began promoting the option. Here’s a typical short sale situation:

A homeowner buys a home five years ago for $500,000 and puts 10 percent down, borrowing $450,000. Over the next few years, not only does the home value fall, it falls to $300,000 based upon the relative selling price of nearby homes. But when property owners sell, they have to satisfy all existing liens on the property. In this example, the loan balance using a 30-year fixed-rate loan at 5 percent would pay down the mortgage to just over $413,000 after five years.

If the homeowner wanted to sell, the mortgage lender would say, “Fine, but you still owe us $413,000.” If the property value is $300,000, the seller needs to bring in $113,000 more just to cover the existing mortgage.

This scenario played out across the country during the housing crisis and still does to this day. Thousands of homeowners everywhere are “upside down” on their mortgages. That’s where a short sale comes into play and why real estate investors should be aware of them.

With a short sale, you’re negotiating more with the lender and less so with the owner. Why? Because the lender has the final say in whether they will accept less than what’s owed.

When a lender considers a short sale request, there are two possible outcomes: The home goes into foreclosure and the bank has another house in its inventory, or it accepts less than what is owed at a price closer to the current market value.

Advantages of Buying a Short Sale
So, what are the advantages to buying a short sale?

A better price. The primary advantage is a better price. Short sales are often priced below market, so a buyer can get a property for less than it would be worth if it were a traditional sale. The lender may be more anxious to negotiate a lower sales price in lieu of moving forward with a costly foreclosure. On Auction.com, buyers have the advantage of seeing each bid that is submitted. This transparency lets buyers know exactly what they need to pay in order to purchase a home, without overspending.

A chance to inspect the property. With a short sale, you also have the opportunity to inspect the property before finalizing the sale. In contrast, you may have some degree of difficulty inspecting a home that’s already been repossessed — a full inspection may not even be an option. But when the home isn’t yet foreclosed upon, the owner may be more accommodating and allow you to hire an inspector to get a solid understanding of the property’s current condition. With that in mind, the property owner is required to provide you with a list of any known issues with the property, such as recent flooding or appliances that need repair. Auction.com works closely with listing agents to ensure that buyers can view properties at open houses or by appointment.

Less competition. Considering a short sale purchase can also mean less competition. Investors who only concentrate on foreclosures — rather than pre-foreclosures — miss the short sale opportunity. In areas where housing inventory is in short supply, investors can take advantage of the short sales available exclusively on Auction.com.

Financing is often available. Foreclosure or bank-owned sales typically require that you pay cash. With bank-owned sales, this is especially true if the property is in bad condition. In contrast, lenders are more likely to finance a short sale. Because the property owner still has a financial interest in the property — and is probably still living in it — short sales are by nature less “distressed.” A majority of the short sales offered on Auction.com are financeable.

The Short Sale Timeline
Short sales do have some challenges. One major consideration is the time it takes for a bank to approve a short sale request package. Some short sale approvals can take up to 60 days or more, although banks today seem to be reducing that timeframe as more and more short sales are approved. Remember, you’re negotiating with the lender, and the real estate agent listing the home may not have very much experience with the short sale process, much less the owner.

Patience is important here. If the lender rejects your offer, you may receive a counteroffer that you can accept, counter and resubmit — and so on. This isn’t the case with Auction.com, where the auction is the negotiating process. Since the bidding process is transparent, buyers on Auction.com know what amount they need to bid online in order to win the auction. Also, the auction purchase process is often shorter, since Auction.com has a direct relationship with the mortgage servicer and experience processing thousands of short sales.

Finding a Short Sale
There are several ways to find a short sale. First, you can pay attention to “For Sale” signs that have a “Short Sale” rider attached with the contact information for the listing broker. The sign means the bank is open to a short sale request.

Another way is enlist the services of an experienced real estate agent. He or she will know the market and will give you advice on whether a property is overpriced or underpriced. Do some of your own research on real estate websites, but keep in mind that their valuations of a property may not be entirely accurate.

You can also visit the local county recorder’s office and investigate “pre-foreclosure” notices or a Notice of Default. These are the first legal steps that lenders will take before filing for foreclosure. These notices show the property owner, contact information and the lender, along with other characteristics of the home. At this stage, the lender may be open to a short sale request but the owner must make the request, not you.

Understandably, these options can entail a lot of legwork on your part.

One of the most convenient ways to find short sales as potential investments is to check the listings on Auction.com. Here, the initial work has been done for you: The lender has already accepted a short sale request — all that’s needed is a buyer. Property details and photos are available for buyers to review before choosing to place a bid.

If you have your financing options ready to go and can find a short sale in this manner, not only will it streamline the process, but you’ll also have the opportunity to get a great deal at the same time.

This information was originally published on Auction.com, LLC, the nation’s leading online real estate marketplace. Founded in 2008, the company has sold nearly $20 billion in assets since 2010. Auction.com has more than 900 employees and offices in Irvine and Silicon Valley, California as well as offices in Atlanta, Austin, Denver, Miami and Newport Beach. Visit us at www.auction.com, or on Twitter, Facebook and LinkedIn.

Categories
The Home Search

Finding a Measure of Foreclosure

Foreclosures are in vogue.

Yecch. What a thing to say.

But it’s true, in one sense: For every disappointed, aching homeowner in default on his mortgage, there seem to be plenty of folks thinking this is their moment to “get into foreclosures,” as they seem to be fond of phrasing it.

I know, because I hear from them all the time, e-mailing me for guidance on how to get started. For the record, I am unequivocally unable to give anybody any guidance. But I have had enough experience as a detached observer to know this much: Foreclosures seem to exist in some kind of parallel real estate universe filled with its own jargon, procedures and — this is important — risk.

Recently, I sat through what is known as a “sheriff’s auction” (though no sheriffs were involved) as dozens of foreclosed properties went up for bid. The experienced investors who filled the room took a pass on every single property offered because there wasn’t enough equity in any of them to make them worth buying. That is, their mortgages were greater than the value of the homes.

This so-called “upside-down” condition is the sad byproduct of the easy-lending era that seems to have played out so suddenly — homes bought with tiny down payments or no down payments or homeowners who have gotten carried away with their ability to use their home equity as a cash register — with the presumption that home values can only go up, up, up.

But there’s another variety of foreclosure auctions, and their growth is a sign of our times. Lenders, having gotten stuck with properties after nobody bid on them at the sheriffs’ sales, are hiring auction companies to sell literally hundreds of homes at a time. Though foreclosure sales have been around for a long time, they’re ballooning in size.

For example, in August the Texas-based auction firm Hudson & Marshall offered about 200 Chicago-area homes in a single sale, according to a company spokesman. She said the firm held a similar auction here last year, with only about 25 homes on the block.

“It’s like an avalanche,” said Crystal Wright, who represents the company. Her firm came into the Chicago auction on the heels of an auction of 200 homes in one sale in Southern California and 400 in Northern California, she said.

What these mega-auctions offer is title insurance and a chance to inspect the properties before the sale, neither of which go with the so-called sheriff’s sale properties.

“We’re starting to see more and more homes ending up being owned by lenders,” says Chicago auctioneer Rick Levin of Rick Levin & Associates. “The lender is looking for an efficient outlet to sell large quantities of these homes quickly.”

Levin points out that despite the popular perception that foreclosure auctions offer a chance to buy a home for pennies on the dollar, lenders aren’t giving these places away.

But they have to do something with these homes, he says. “Banks are in the business of lending money, not in the business of owning property,” he says.

“We’re in a cold climate, and owning vacant properties through the winter isn’t prudent.”

Plus, he says, more are undoubtedly in the pipeline: Housing industry analysts predict that 2008 will see a mother lode of foreclosures because of the sheer numbers of homes purchased in 2005 with adjustable-rate mortgages that are starting to adjust to uncomfortable heights.

So, he says, lenders are motivated, and there can be deals at these sales, though nothing is guaranteed. Typically, potential buyers at these auctions have to come armed with a cashier’s check for several thousand dollars, payable to themselves, that would serve as earnest money; there are numerous other requirements to insure that the bidder is sincere. The auctioneer will add a premium to each sale (in Levin’s case, 7.5 per-cent), which is something to keep in mind if you think you’ve stumbled on the deal of the century.

And, having said that I’m not in the guidance business, I’ll offer this pitch for prudence: Would-be buyers have to do their homework. If it looks too good to be true …

Hear Mary Umberger on WBBM Newsradio 780 at 6:21 p.m. and 10:22 p.m. each Thursday and Friday and 7:20 a.m. each Saturday and Sunday.

via Chicago Tribune
Syndicated with permission.

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Articles Deciding Virtual Agent

Foreclosure Looming? Here’s How to Avoid It

The foreclosure clock is ticking for Patricia Jennings. She has missed three months of mortgage payments on her Pontiac, Michigan, home. She owes $1,800, but she has been out of work since November.

So she put up a For Sale By Owner sign on her home. And recently, Jennings tried to get more answers on the foreclosure process during a seminar run by the Detroit branch of the Federal Reserve Bank of Chicago and others.

Tamara Orza-Ramos, resource-development coordinator for the Oakland Livingston Human Service Agency in Michigan, told homeowners at the seminar that the first step to avoiding foreclosure is to work out an emergency budget by cutting spending — and if possible, increasing your income.

“At this time, your priority should be to keep your home,” she said.

Homeowners need to keep up with the mortgage payment, utilities, auto insurance, health insurance and groceries.

Another option: If you have a student loan, you may apply for a deferment for economic hardship or un-employment to suspend making payments for a limited time. See salliemae.com for details.

You do not want to just skip a student-loan payment. Instead, get a deferment. The quicker you act, the easier it may be to prevent foreclosure.

Alert the mortgage lender immediately. Be as pleasant as possible. Talk to someone in the loss-mitigation department, not collections.

Here are some other tips for avoiding foreclosure:

Make an appointment with a housing counselor approved by the U.S. Department of Housing and Urban Development at 1-800-569-4287.

Go to www.hud.gov/foreclosure for a brochure that explains how to avoid foreclosure.

Stay away from foreclosure scams. Don’t sign up with a service that charges you upfront to fix the problem.

If you’re selling the house yourself to avoid foreclosure, check out the buyer. Scam artists offer to buy homes, too. Don’t fall for a buyer who rushes you into signing over a deed. HUD warns that the so-called buyer might collect rent for a while, not make any mortgage payments and then allow the lender to foreclose. Remember, signing over your deed to someone does not necessarily relieve you of your obligation on the loan.

Go to aarp.org for tips for reverse mortgages — one possible option for those 62 or older who have equity in their homes but trouble paying their bills. The Web site also offers tips on avoiding predatory lending.

via Orlando Sentinel
Syndicated with permission.

Categories
The Home Search

How Foreclosures May Strain the Rental Market

With more homes going into foreclosure, many people are entering or reentering the rental market. We spoke with Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University, about the effect this will have. Retsinas is editor of the forthcoming book “Revisiting Rental Housing: Policies, Programs, and Priorities.”

Question: With a significant number of homes going into foreclosure, will there be — or has there been — a discernible effect on the rental market?

Answer: All those owners are now becoming renters, and Economics 101 goes into effect.

If you have high demand and a restrained supply the only result is higher prices.

In the near term, you will also see rents go up. People, who in the past could qualify for homeownership, will no longer have access to those sub-prime mortgage products and now will become renters.

Question: When will all this occur?

Answer: I expect that we will see rents rising steadily over the next two to three years — possibly even into the next five years.

That will be offset a little because some of those foreclosed properties will not be able to be sold and some of them will be converted into rentals.

Question: Compared with other states, is the rental market here reacting any differently to the foreclosures?

Answer: I think California is a particularly interesting case because it still has a growing population. That is in large measure due to record immigration over the last seven or eight years. Those immigrant families . . . might have in the past gotten very low-interest-rate mortgages, but today those are not available.

So instead of buying a home, they are going to have to stay in the rental market, and that will also drive up prices.

Question: Do you think people who are going through foreclosures in Los Angeles or in other expensive markets are likely to move to more affordable markets out of state?

Answer: It is a case-by-case situation. It usually depends on a couple of things. The career of that person is usually the biggest factor in whether they move to another state. But by definition, foreclosures transform owners into distressed renters looking for affordable places to live.

Question: When will people going through foreclosures try to become owners again?

Answer: Foreclosures represent the end of a long line of missed payments. As a result, credit scores plummet, making it unlikely that they will qualify for a mortgage and become homeowners again in the near future. The experience will also be a wake-up call that owning a home is not without risk. We need to make people more aware of those risks.

The housing finance system bears responsibility too. The problem in the recent past is that we had so many incentives to buy.

The question is not if someone can buy a home but if they can sustain in owning a home over time.

More emphasis needs to be put on that.

via Los Angeles Times (Los Angeles, California) Syndicated with permission.

Categories
The Home Search

Foreclosure Foresight

A foreclosure overhang still shadows home sales in many states. But if hard-hit Florida is any indicator, opportunities are firming up for buyers who know the latest rules of the game. At the most recent ForSaleByOwner.com consumer seminar, held in late June in Ft. Lauderdale, Matt Brown, ForSaleByOwner.com’s business manager, outlined five top tips for buying a foreclosed property.

1. Understand how banks price foreclosures.  Yes, banks price foreclosed houses below comparable neighboring houses … but they also price them very low in hopes that buyers will sense a bargain, rush in and bid up the price. These days, many Florida foreclosures are selling for 10% to 15% more than the list price. If you really want the property, expect to compete for it.

2. Banks won’t tell you what you don’t know.  Due diligence is your responsibility, said Brown, so add extra time in the sale contract for inspections, reviews by municipal building authorities, and examining the finances of the homeowners’ association to detect any upcoming special.

3. Liens and other claims against the property might be working their way through the court system, unbeknownst to the purchaser of a foreclosure. Cover future losses with ‘gap insurance,’ available through your title insurer, which reimburses you if a legitimate lawsuit, lien or other claim emerges after you have bought the house.

4. Don’t panic. Increasingly, banks are requiring that foreclosures be officially on the market for at least 10 days so that plenty of potential buyers can see them – and line up to make offers. (See #1.)  Yes, you have to move promptly. But you don’t have to make your best offer within 24 hours.

5. Buyers who still have some equity can take advantage of the ForSaleByOwner.com guarantee:  make a good effort to sell the house through ForSaleByOwner.com, but if a deal doesn’t land on your doorstep, you can get back the ForSaleByOwner.com fee by listing with an agent in our network. That means that selling by owner is all upside: if it works, you keep maximum equity, and if it doesn’t, you get your initial fee back at closing when you use a ForSaleByOwner.com agent.