Part 3: How to Procure Financing for Investment Properties

Part 3- How to Procure Financing for Investment Properties-150x150Question: Where can I get financing for residential real estate? I heard it’s easier to get financing for commercial real estate- is that true? Also, I would love some information on what variables affect a lender’s decision to give financing.

Answer: Many lenders are thought to prefer lending to commercial real estate investors rather than residential real estate investors. While that may be true, there are plenty of lender possibilities for residential real estate investment. In fact, here is a list of banks and lending institutions that provide loans for both commercial and residential real estate investment:

Lending Institutions for Real Estate Investment

  1. Wells Fargo
  2. PNC Real Estate
  3. MetLife
  4. Prudential Mortgage
  5. J.P. Morgan Chase & Co.
  6. Strategic Alliance Mortgage (SAM)
  7. KeyBank Real Estate Capital
  8. CBRE Group Inc.
  9. Northwestern Mutual
  10. Cornerstone Real Estate Advisers
  11. Berkadia
  12.  NorthMarq Capital
  13. CWCapital LLC
  14. Red Mortgage Capital LLC
  15. Walker & Dunlop
  16. Natixis Real Estate Capital LLC
  17. Pacific Life Insurance Co.
  18. Grandbridge Real Estate Capital
  19. Citi Community Capital
  20. Starwood Property Trust
  21. Beech Street Capital
  22. ING Investment Management
  23. M&T Realty Capital Corp.
  24. Principal Real Estate Investors

 What a Lender Looks for in a Borrower

Lenders seem to ask borrowers almost anything before considering them for a loan. The requirements are even tougher for first time borrowers. While some questions are predictable, lenders are becoming more inquisitive these days in order to minimize the risk of defaults. Lenders aggressively ask more questions so that they can provide reasonable proof to the underwriters that the borrower will actually manage to repay.

Except your family planning and health issues that are forbidden by the law, lenders want to know the following in a borrower:

  • Credit rating- a lender is first interested with your FICO or credit score. The score ranges between 350 and 850. The lender wants to know your outstanding debt in different types of accounts, the total outstanding debt and how well you’ve been paying your bills. Missed payments raise doubts with respect to risk of defaulting. Your credit history is very important to a lender and for this reason you should ensure that your credit report does not have any errors.
  • Debt income ratio- a lender wants to know the ratio of debt compared to your monthly income. The lender explicitly wants to know how much you have to spare each month after you’ve paid out all other debts excluding the mortgage. The debt income ratio disqualifies many people for a loan. You should therefore pay down many of your credit cards before applying for a loan.
  • LTV- this is the loan to value ratio which enables the lender to determine risk. LTV is determined by dividing the value of the home by the anticipated loan amount. In simple terms, it’s the amount of money a borrower is willing to pay for the house. The lower the amount put down by the borrower, the lower the level of doubt the lender will have about their creditworthiness.
  • Cash- lenders also love hard cash because it keeps them running the company. The lender will want to know how much a borrower has saved; this is not for purposes of down payment alone but also for meeting monthly mortgage repayments when they go into a financial stalemate.
  • Collateral- once the lender has assessed that your capacity and credit score meets expectations, collateral is the other most significant thing on the list. This is done by valuation of property by an independent appraiser in order to determine its current market value. The appraised value is used to determine the LTV.
  • Lawsuits- lenders are sensitive to risk, so they have to check out every possibility on your end that can make giving you a loan a bad idea. A lender will want to know whether you are the plaintiff or defendant in any lawsuit because if judgment goes against the borrower, then it will impact their financial position negatively.
  • Divorce- the number of divorces in the United States is on the rise. Lenders want to know the financial details in a borrower’s divorce because a borrower may be responsible for their ex-spouse’s debt. If a borrower includes alimony or child support as a source of income in their loan application, the lender will also want proof of such income.
  • Ethnicity- the Department of Housing and Urban Development (HUD) requires lenders to inquire about the borrower’s race for purposes of statistics. To avoid discrimination of an applicant, no further ethnic inquiries can be made. HUD also checks lender records routinely in order to ensure that they are not turning down applications from minorities or exploiting them by charging them unusually high fees.

This concludes the three part Q&A on procuring financing for investment properties. If you have other questions, send them our way and we’ll do our best to get answers to you shortly!

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Part 2: How to Procure Financing for Investment Properties

 Part 2- How to Procure Financing for Investment Properties-150x150Question: Which type of lender should you target for a real estate loan?

Answer: There are several types of real estate lenders out there. With all of the options, it can be difficult to make a decision as to the best choice for your situation. Whether you choose a mortgage bank, mortgage broker, or other type of lender, there are pros and cons associated with each. Let’s take a look at the advantages and disadvantages of each to find one that works for you!

Types of Real Estate Lenders

1. Mortgage banks- Mortgage banks sell their products in the secondary market. Once you complete an application for a loan, the bank’s employees will carefully review your application and then make a decision.

Advantages of mortgage banks

  • Speed- mortgage banks process loan applications faster than all other providers.
  • First time program implementers- if the federal government launches a new program, mortgage banks are always the first ones to implement it.
  • Reliability- a local mortgage bank is an established institution. It has strong ties with members of your community and follows state and federal regulations to the ‘T’.
  • Savings- since a mortgage bank is the loan originator itself, you will end up with a lot of savings on the loan offer based on the mortgage terms and your deposit in the bank.

Disadvantages of mortgage bankers

  • Limited options- mortgage banks only offer their programs. They tend to be inflexible to the borrower’s needs.
  • Economies of scale- a mortgage banker may not bother to listen to you extensively because of the large customer base. They can be bureaucratic at times.

2.    Mortgage brokers- Mortgage brokers are middlemen who have access to mortgage loan information from different lenders across the country. A broker aims at finding you a loan that matches your needs. After loan application approval, you can get in touch with the lender directly.

Advantages of mortgage brokers

  • Savings- you may definitely access a mortgage at a very low cost because a broker has access to a variety of lenders.
  • Variety- a mortgage broker simply finds you the best loan product that matches your needs because they compare hundreds of lenders.
  • Speed- since brokers are professionals in their field of work, they get you the right lender very fast.
  • Easy qualification- an experienced mortgage broker will even assist you in putting together the required paperwork before directing you to a lender who will easily accept you without hassle.

Disadvantages of mortgage brokers

  • Hidden charges- many mortgage brokers increase their profits by including their price in the loan offer.
  • Not guaranteed estimates- many mortgage brokers rush to seal the deal so that they can walk away with a profit. That’s why they may present you with an offer that does not necessarily coincide with the bank’s terms.
  • They may not compare all lenders- mortgage brokers may not compare all lenders in order to find you the best offer. Moreover, some lenders don’t deal with brokers.

3.    Commercial banks and credit unions- The most popular lender in the world is a commercial bank. Credit unions in the United States are also popular. Understanding their upsides and downsides can help you in making an informed decision.

Advantages of commercial banks and credit unions

  • Competitive rates- compared to other traditional mortgage lenders, commercial banks offer competitive interest rates with very reasonable repayment terms.
  • Always available- since commercial banks have to keep their customers’ money working and earning interest, they are always available at your service.
  • Better terms- commercial banks offer affordable and friendly loan terms compared with a traditional mortgagor.
  • Customers are the actual owners- both commercial banks and credit unions treat their customers very well because they also have a stake in the company.
  • Credit unions are actually non-profit institutions- the aspect of non-profit basically means that they share their profits with their customers. You also get to save in taxes because credit unions are exempt from federal tax.
  • More savings- in addition to the lower fees that a loan from a credit attracts, you will also benefit from lower interest rates as long as you have a high credit rating.

Disadvantages of commercial banks and credit unions

  • Delay in loan approval- if you need access to your loan very fast, then a commercial bank may not be the best option because they take a long time to approve loans.
  • Tough qualifications- commercial banks have tough requirements for low-interest loan qualification, which typically includes excellent credit score requirements.
  • Limited access to new technology with credit unions- credit unions sometimes aren’t up to speed technologically, which may make it difficult at times for you to access their services when needed.
  • Restricted membership- credit unions center their focus on particular communities, professions or groups of people. This can make it difficult to find a credit union for which you qualify.

4.    Real estate agencies and home builders- There are many real estate agencies and home builders. A number of them are affiliated with mortgage brokers and bankers. Additionally, their services can be accessed online.

Advantages of real estate agencies and home builders

  • Pricing prowess- real estate agencies can easily tell how much it will cost you.
  • Experience- approaching home builders gives you assurance of the best residential property because of the experience they have in developing such property.
  • Speed- home builders working together with real estate agencies process your loan request very fast.
  • They do all the paperwork- if you are not very familiar with real estate jargon or not experienced with paperwork, then real estate agencies may be the best for you because they will handle the loan documentation paperwork for you.
  • No closing problems- there are several pitfalls that can kill a deal in its final hours of execution. Real estate agencies ensure that your property is in order.

Disadvantages of real estate agencies and home builders

  • Ethical considerations- some agencies may not consider all of the professional ethical considerations in conducting their business. This may land the investor in trouble with legal authorities.
  • Extra charges- since real estate agencies and home builders don’t directly deal in the money lending business, using those results in an extra cost because they are middlemen.

5.    Internet lenders- The internet is a business powerhouse worldwide. Many lenders have flocked to the internet, giving people  access to a loan at competitive rates.

Advantages of internet lenders

  • Easy access- shopping for an internet lender is very easy because you can do it from your PC or smartphone. You can access them 24 hours a day, 7 days a week.
  • Competitive rates- unlike other mortgagors who have a physical office, they save you extra costs because they don’t pay property taxes and other overhead costs.
  • Comparative base- there are many online sites where you make comparisons on loan amounts awarded, interest rates and repayments.
  • Convenience- you can apply for a mortgage from an internet lender any time you want and wait for approval from the lender without strict deadlines.

Disadvantages of internet lenders

  • Lack of personal advice- since you don’t meet the lender face to face, a lack of personal touch may not be the ideal experience for you
  • Scams- there are many illegitimate internet lenders who may con you and disappear with your money when you give them your personal information.
  • Out of date sites- there are many online lenders’ sites that remain out of date. This may not give you the right idea of current mortgage rates today.

As you can see, there are many options for you when it comes to choosing a lender. This information should give you a complete overview of what to expect with each lending option. Look out for part 3 of this question, where we discuss lenders for both commercial and residential investment loans as well as what lenders are looking for in borrowers.

 

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Part 1: How to Procure Financing for Investment Properties

Part 1-How to Procure Financing for Investment Properties- 150x150

Question: How do I go about procuring financing for investment properties? What is a checklist of things that I need to have in order to get approved? 

Answer: One factor that kills the dreams of many potential real estate investors is lack of financing. Since lenders have requirements that borrowers ought to meet based on risk, it is important to prepare with the “risk factor” in mind. Below are some tips that can help                                                                        you to obtain funding from a lender:

Financing Tips for Investment Properties

  1. Check your credit report. Acquaint yourself with your credit report and get to know how it works. If you don’t have it, get it from AnnualCreditReport.com free of charge. Review your report carefully for any errors because they can affect your score negatively. However, note that fixing errors will take some time.
  2. Don’t procrastinate. Fear and hearing about your friends’ negative experiences may discourage you from making a move. Procrastination may lead to regret and lost opportunities. Don’t hesitate to start looking around for a loan- you never know what good deals you might find!
  3. Have access to a regular source of income. Many applicants are declined because they don’t have a regular source of income. When lenders learn that you don’t have a regular source of income, they often shy away because of the perceived higher risk of default in repayments. Teaming up with a partner’s income will increase the chances of getting a loan.
  4. Shop for the right lender. Shop around for the best lender who can meet your needs comfortably. It may be beneficial to ask for advice and recommendations on the internet or from family members, acquaintances, bankers, and financial consultants.
  5. Have all the documents. Check with your lender or the lender’s website in advance in order to find out what documents are required. Some lenders may see your organization as a great quality to have in a loan recipient and decide to make you a loan offer. Having everything ready for your lender will streamline the process and make it easier for both of you. Among the documents required for getting a loan are bank statements, tax returns, pay stubs and W-2 statements. Lenders will also like to see your business proposal and business plan in order to establish the profitability from your real estate investment.
  6. Be informed. Knowledge is power. Adequate preparation by asking the lender questions will help you land a deal. Be confident and forthcoming as you supply answers to the questions that the lender will ask you. The lender will want to know what loan amount you are seeking, what your plans are with the loan, how you intend to repay the loan, and what your backup plan is if you do not receive the loan.
  7. Have a referral. All banks are working hard to manage customers’ default risk. If you are able, find a current customer of the the lender and have them refer you to increase your chances of receiving a loan offer.
  8. Discuss business risks with your lender. It is a fact that all businesses have an element of risk. One thing that all lenders will want to know is how you intend to manage particular risks facing real estate business. It is important to discuss all of these risks with the lender. Don’t forget that your lender may ask you how you will manage the risk of over-ambition and too much perceived success.
  9. Apply for the loan. If you are applying for your first loan, it may be more difficult to get approved compared to if it was your second loan. Many lenders prefer giving loans to lenders who have a good credit history. Once you have officially applied, all you can do is wait to see if you’re approved!

These tips should be very helpful for you if you are interested in obtaining financing for investment properties. Be sure to look out for the next article where we answer the second part of this question, “What type of lender should I target?”.

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Financing Difficulties for Second Homes and Vacation Homes

Difficulties in Financing for Second Homes and Vacation Homes- 150x150Question: I work in a second home/vacation home market, and a lot of my customers have a hard time getting financed, even if they have very strong credit and assets. Some of my most common questions/roadblocks:

1. Does it really matter if it is a house or a condo? Why?
2. Why do I have to make such a big down payment? I only had to pay 20% down on my home in (some other state).
3. What’s the difference between an investment property and a                                                                       second home? What differences should I expect for each?
                                                          4. How will my insurance requirements be different for a                                                                                     vacation/second home vs. primary residence?

Answer: There are many factors to consider as a buyer when wanting to purchase a second property. Banks take on significant risk with customers that have two mortgages, so it will be more difficult for a home owner to obtain a second mortgage. We will go through and analyze each aspect of this situation so you are as informed as possible before attempting to purchase another place of residence.

Qualifications for a Second Home Mortgage

Many lenders have watertight requirements on second mortgage applicants. These are some of the requirements that need to be met:

(a) Location from the borrower’s principal residence- It is required that there is a reasonable distance between the location of the second home and the principal home. If the second home is located on a beach that is less than an hour’s drive away, then you will be granted a second mortgage. However, if it is farther inland, then the primary home must be located more than one hour’s drive away from the second/vacation home. The general distance accepted is at least 50 miles away.
(b) Must be occupied for some portion of the year- Lenders require that the second home be occupied for some portion of the year. Depending on the location of the home, this can be done seasonally or several times during the year. For properties located in a ski or beach area this can be seasonal. If it’s a lake house then you should make several visits there. The property must remain suitable for occupancy at any time during the year.
(c) Only one-unit properties can be financed- For purposes of a second home, only a one-unit property can qualify. Duplexes or multi-unit properties are considered to be investments by lenders. A condo is one of the houses that can qualify for a second mortgage.
(d) The property must not be rented out- Being your home, the lender is strict to ensure that you don’t rent it out or subject the property to a timeshare arrangement. The borrower must have exclusive control over the property. Agreements with property management firms to take control of the property are also not allowed.

Buying a Second Home

There are several options for purchasing a second home. These include:

(a) Cash- According to the National Association of Realtors, 36 percent of all home buyers in 2010 paid for their houses in cash. This is the best option, but the majority of people are unable to save enough money to purchase a home in cash.
(b) Conventional loan- This is the most common option that many borrowers tend to choose. Borrowers must be prepared to make a larger down payment (more than the usual 20 percent for the primary mortgage) for the loan to be processed. You will also pay interest at a higher rate and meet other tighter requirements compared to those of a primary mortgage. For a second home guaranteed by Freddie Mac or Fannie Mae, the down payment is 20 percent. However, the rate is higher for individual lenders, usually 30 or 35 percent. This rate is higher because lenders argue that a borrower has two loans and the risk of defaulting is high.
(c) Home equity loan- If a homeowner has substantial equity in their home, then a home equity loan becomes the best option. It’s only unfortunate that many homeowners have lost equity in their homes because the value of homes has drastically dropped in the market during recent years. Additionally, many lenders fear that if a homeowner bumps into financial difficulties then they will prefer to clear their primary mortgages in preference to second home mortgages.

Investment Properties and Second Homes: The Difference

Many people tend to use the terms “second home” and “investment property” interchangeably in an attempt to describe property that does not qualify as a primary residence. However, there are a number of differences between investment property and a second home.

Investment Property

Investment property can be defined as property that is purchased or acquired for purposes of generating income, taking advantage of particular tax benefits, or enjoying profit from appreciation. If you purchase property that will be used to make some gains instead of being your residence, then it is legally defined as investment property. It must not be your primary residence.

Different types of investment property include commercial property, residential rental property, and property purchased with an intention to resell.

In comparison with primary and second homes, loans for investment property are charged a higher interest rate. A larger down payment must also be made.

Second Home

A second home is defined as property that becomes your residence in addition to the primary residence you have already. In simpler terms, it is a vacation home that you visit occasionally.

Several conditions must be met if a property is to be allotted the name ‘second home’. They are referred to as the Second Home Rider. The conditions include:

  • Property must always be kept available for owner’s exclusive use and enjoyment whenever they wish
  • Borrower is the only occupant of the property, being the secondary residence
  • Property cannot be subjected to any agreements that need the owner to rent it or pass the rights to a property management firm
  • Property should never be subject to a rental pool or timesharing arrangement

A second home mortgage usually has a lower interest rate than an investment property loan. It may also have a lower down payment especially if it is approved by Fannie Mae or Freddie Mac.

Insurance Requirements for Different Places of Residence

Insurance coverage protects your home from storm damage, lightning, burglary, fire, vandalism and other perils. It may also include some minor cover for risks from accidents such as a dog bite, a slip-and-fall accident, or an injury as a result of an accident on the property itself.

Depending on the location and the weather conditions in the area where your second home is located, getting insurance coverage can be difficult. For instance, you will need to get a flood insurance cover for your second home because it is not covered in the standard insurance policy for a second home. If the home is located in a forested area, then installing a fire-prevention system will reduce the overall cost. Earthquake insurance is usually not covered and you will have to purchase this independently.

Second home insurance is generally higher than primary home insurance because it is more susceptible to burglars as a result of your absence many times during the year. Damages caused by storms may also be common because you are not always around to fix the house. Taking steps to keep your second home secured and maintained can save you more than 20 percent of the insurance cover.

The following tips can help you to keep the insurance cost lower:

  • Taking a nonsmoking discount if you are not a smoker (reduces risk of a fire) or a loyal customer discount
  • Taking discounts for an up-to-date second home that is fitted with the latest electrical systems, plumbing and the overall structure
  • Taking safety discounts for a second home with a security system, especially with an independent security agency
  • Taking a multi-policy discount for a homeowner that bundles their home and car insurance to one insurer

With all of this information, you should now feel confident and informed going into the process of purchasing a second home.

 

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The Power of Networking in Real Estate Investment

The Power of Networking in Real Estate Investment- 150x150Question: When it comes to finding out about real estate investment deals quickly, do I just have to network with the right people or is this a “boys club” situation?

Answer: Networking is a powerful tool in virtually any profession, so networking will certainly be advantageous in anything involved with real estate.

It is true that two heads are better than one. One of Warren Buffet’s investment rules is that “if you are alone you will move fast, but if you are more than one you will go far”. Networking is very important in securing success in real estate business. Real estate business networks enable real estate investors to create new relationships and sustainable models for real estate growth.

Networking Opportunities

  • Property Community- This is an excellent resource that enables you to find and join various social groups where you can connect with and meet real estate investors to discuss property trends and other real industry related information on forums. You will also find property listings by types and regions. Property Community saves you money on advertising costs for listings and should increase the likelihood of a fast sale. Also, you can easily ask questions about real estate and receive answers freely throughout the forums. Another benefit lies in the ability to send private messages to group members if you need to discuss a more private matter, such as negotiating a real estate deal.
  • Meetup- This is one of the most popular forms of networking for both formal and informal groups. Meetup.com enables you to find out about any real estate meetings and networks close to where you live. You can also start your own meetup so that others can join. Some networks have over 1,000 members. Most meetups have networking events where you can meet great connections within the industry.
  •  Real Estate Webmasters- Real Estate Webmasters provides you with realtor forums where you can easily introduce yourself and then start chatting about investment prospects. Real Estate Webmasters has links for easily finding properties for sale as well as for finding buyers for your property. You can discuss your experiences with Google, Facebook, Yahoo and Bing and tips for how these can help others. By joining this forum, you will gain access to a wide network of investors and real estate experts. As an investor, you will learn more about link building techniques and other useful online practices. If you want to develop a new website for your property listings, you will be able to meet various real estate web designers with ample experience. There will be a wide variety of real estate and related professionals on the forums so you will be sure to make plenty of worthwhile connections.

Real Estate Investment Clubs

There are usually several different investment clubs in most moderately large to major cities. Some clubs are even formed at the national level and may have local chapters. For some, local clubs may be more beneficial because they will be more tailored to discussion and resources for your area. On the other hand, a real estate investment club at the national level may create more opportunities in different states that may not be easily accessed otherwise.

A real estate investment club enables you to create useful networks, gain investment expertise as well as tips about commercial and residential properties available for sale and purchase currently. These clubs will also help you familiarize with various rules and regulations related to real estate in your local area and nationally. You can ask and answer questions while connecting with like-minded real estate investors who share common goals.

Real Estate Conferences

Conferences are invaluable knowledge centers for real estate investors. By attending conferences, you will gain access to engaging discussions about the future of real estate business and acquire more of the expertise required to achieve success in the constantly changing real estate industry. There will be most likely be a variety of meetings and events going on simultaneously at the conference, giving you multiple chances to network, creating new friendships, business partners, and finding more real estate deals.

Many of your questions will be answered as many professionals from government departments concerned with land and property are typically present. Emphasis will be on current investment opportunities and  future trends in real estate.

The Power of Business Cards

A business card is one of the most powerful networking tools. A business card represents you and your company as a brand. It informs them about your niche within the industry, services you offer, your contact information, and leaves an impression on the person it is given to. Even if you don’t end up working with the person that received the card directly from you, they may pass along your card or your name to others that may end up working with you.

Many real estate investors have formed fruitful friendships by handing out their business cards. There are some cultures that consider receiving a business card a great honor. Designing high quality business cards can improve the image of your business and make a memorable impression.

Real Estate Get-Togethers

They might start as informal groups with a few real estate professionals that you know. Just look at a get together as an ordinary hang out with some buddies. You get to interact with fellow investors, share challenges, ask questions and help one another. These get-togethers may grow into larger groups or simply closer knit groups. You never know, from these you may develop some invaluable real estate investment partners. The group will keep each other updated on new developments in local investments and you’ll be the first to know inside information. This can also save you time and money on advertising if someone in your group leads you to a deal.

The informal nature of a real estate get together means that you don’t incur subscription costs or abide by rigorous rules. They are becoming more and more common because you get to do business with like-minded friends in a sociable manner.

There are so many opportunities for networking in the real estate industry. With all of this information, there’s no excuse for you to not join in! Reap the benefits of a strong and influential network of real estate professionals and see what incredible things happen just because of the people you know.

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Insider Buying for Bank-Owned and MLS Properties

Q&A- Insider Buying for Bank-Owned and MLS Properties- 150x150Question: How much of an insider do I have to be to buy bank-owned properties before anyone else gets to see them?

I see properties on MLS (multiple listing services) for one day that are already under contract- what gives?

Answer: For those that have missed out on real estate deals because they were on the ‘outside’, it is understandably frustrating. If you know these tips, you’ll be an insider and get the deals you’re after!

Insider Buying Tips for Bank-Owned Properties

Bank-owned properties are often some of the best deals in real estate investment. But many investors complain that they find it very hard to land a deal because it’s already gone before they know about it. One secret to sealing a bank-owned property deal is to find a realtor that can assist you and give you much needed insight.

These are the three avenues for getting bank-owned real estate investment deals:

  • Pre-foreclosure period- this is the time when the bank begins issuing warnings to a defaulting homeowner. Having close communication with the bank’s agent can help you keep tabs on the process so that you’ll be one of the first to know when the home is available.
  • Auction time- you should be the first one to arrive each time an auction of foreclosed homes is announced. At this time you can buy the property at the lowest cost. If a proper buyer isn’t found, it will be listed as bank-owned property.
  • Bank-owned real estate listings- most people wait for this stage, but you will often find that the best deals have already been snapped up in earlier stages. However, you can still land a great deal if you check the listings regularly. You should also be on the lookout for publications on foreclosed properties so that you can keep updated on newly listed properties and ones that have recently come back up for grabs.

The best resource for foreclosure listings is the internet. Check the bank’s official websites for listings regularly. Consider establishing contact with a bank-owned property real estate agent to advise you accordingly on the best deals. The agent will also help you make an offer to the bank that they will hopefully find “too good” to reject.

Insider Buying Tips for MLS Properties

Many residential real estate investment deals are gone before they are ever listed on a public MLS. Expert RE investors say that this happens because real estate agents often pocket these listings and then hold off from listing them. Despite this happening, many others are still able to land great real estate deals from MLS. Since not all of us are RE brokers, here is some insight into getting these deals.

You need to look for the owners rather than the deals, and focus on those owners who need to sell rather than those who want to sell. Typically, real estate owners who are willing to sell their property at 60 percent or less of its original value never get a chance to list it because it is sold immediately.

You also need to know exact keywords to search for that will generate targeted search results of the best deals. Some great keywords for MLS include: tenant occupied, estate sale, military family, needs work, must sell, vacant, third-party approval required and fixer-upper among others.

Finding a motivated seller often means more savings for the buyer. As a simple tip to keep in mind, remember that the longer a property has stayed on MLS, the more motivated the seller will be.

 

 

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How Do I Find More Deals in Real Estate Investing?

Q&A- How Do I Find More Deals in Real Estate Investing- 150x150Question: How do I find more deals in real estate investing?

Answer: Honestly speaking, you don’t usually just find obvious real estate deals. Most of the deal lies in the negotiation process. There are three things you need to determine:

1. Why does somebody want to sell; what are they looking for?
2. What problems do you have to solve?
3. What are your proposed terms for negotiations?

But before you really go out there and start looking, you need to be very informed about real estate investment. Here are a few tips to help you get the best deals possible:

Tips and Tricks for the Best Deals

  • Find out what the insiders know

You must think and act like a professional in order to find a great real estate deal. First, you should know that residential properties are valued differently from commercial properties. For instance, you will make more money from multiplexes than single family homes. Leases on single family homes are also longer on average than those on multiplexes. In general, a multiplex commands a higher cash flow than a single family home.

  • Develop a plan of action

First of all, you should know specifics about things on your end. For instance, you need to know how much you can afford to pay, who the key players in the negotiation process are, your perceived profit you would make on the deal, the number of tenants occupying the property already, how much rent they pay, and any other questions that need to be answered.

  • Recognize a great deal fast

A residential real estate professional recognizes a good deal very fast. But how do they do it? The secret lies in their exit strategy. A good RE deal is one from which you can walk out easily when things are not working according to your plans. A keener look at damages that require repairs and the overall risk is a good start. Use the financial calculator to know if and when your financial goals will be met.

  • Acquaint yourself with the fundamental real estate metrics

Essentially this means that you need a deeper knowledge of the real estate market. The key metrics you need in order to assess residential real estate include the:           

1. Capitalization rate- it is used to calculate the net value of income generated from the property. It estimates the Net Present    Value of future cash flows or profits, a process better referred to as capitalization of earnings.

2. Cash on cash- this is a formula used by residential real estate investors in comparing the performance of their properties to others after the first year. This formula takes into account the fact that an investor does not necessarily require all 100 percent of cash in order to buy the property in question because some of the cash will be used to make mortgage repayments. In order to uncover the cash level, the RE investor must first determine the initial investment required to purchase the property.

3. Net operating income- it is determined by valuing the property’s gross operating income of the first year and then deducting all the operating expenses incurred during the first year. The RE residential deal is worthwhile if the net operating income is positive.

  •   Know the seller’s motive

The motive behind selling helps you to find a desperate seller who can throw away below the market value. If the seller isn’t willing to negotiate the price then they are not motivated enough to sell quickly. This, in a way, should be a red flag.

  • Check the neighborhood

Assume that you are the tenant in that residential property and the things you will need around you. If the property is located closer to social amenities like schools, shopping centers, a city, and highways, then the property will not only be in higher demand, but it will also mean more profit.

  • The three-pronged approach of property evaluation

You ought to be very diligent when searching for residential properties for sale in the market. The three most recommended searches are the internet, hiring bird dogs, and local classified ads. A real estate bird dog will help you find a great deal in exchange for a small fee.

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California’s Homeowner Bill of Rights

Q&A-California's Homeowner Bill of Rights-150x150Question: What are the most important aspects of California’s Homeowner Bill of Rights?

Answer: On January 1, 2013, the California Homeowner Bill of Rights became a law. It was designed to protect the rights of mortgage consumers that have long been needed for quite some time. Its provisions are designed to guarantee transparency and fairness to homeowners especially during foreclosure. The most important aspects of the bill include:

Important Aspects of the Bill

  • Tenant Rights- The purchaser of a foreclosed home is required to give a tenant at least 90 days before instituting eviction proceedings. The owner is obliged to honor the lease in case the tenant has a fixed-term lease that became active before title transfer during foreclosure. This notice, however, may not apply if the owner proves that exceptions intended to prevent a fraudulent lease apply.
  • Enforceability- Borrowers now have the authority to seek redress in case of material violations of the new foreclosure process provisions. A borrower will be entitled to damages after a sale and injunctive relief prior to a foreclosure.
  • Verification of Documents- Lenders who record and file unverified documents will be charged a penalty of $7,500 per loan in an action instituted by the civil prosecutor. Such lenders may also face litigation from the Departments of Corporations, Financial Institutions and Real Estate.
  • A Guaranteed Single Point of Contact- Under this bill of rights, homeowners are guaranteed a single point of contact, a specified team at the bank or person who is familiar with the facts of their case as they try to maintain their homes. This makes access to paperwork and an application for a mortgage loan modification very easy.
  • Dual Track Foreclosure Restriction- The California Homeowner Bill of Rights restricts mortgage servicers from starting the process of foreclosure when the homeowner in question is seeking a loan modification. If a homeowner has applied for loan modification, the foreclosure process will not proceed until the application has been reviewed.
  • Blight Curbing Tools- The bill has given receivers and local governments more tools to enable them to fight the blight caused by vacant homes in the neighborhood. This is aimed at ensuring that foreclosed homeowners are compelled to pay for the required upkeep in case they violate provisions of the mortgage code.
  • Mortgage Fraud Prosecution Tools- The bill has given the Attorney General the power to prosecute complex mortgage related crimes between 1 and 3 years. The AG’s office will be using a grand jury to investigate, prosecute and indict financial crime perpetrators.

 

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Understanding Private Mortgage Insurance

Q&A-Understanding Private Mortgage Insurance- 150x150Question: I am unclear on specifics with private mortgage insurance (PMI).

1. Why can the price can range from 80-300 for the same loan amount? 
2. How and when does it actually disappear when your loan-to-value is below 80%? For example- does that mean another appraisal is needed or does it go off of the purchase price, and what if you just happened to have an appraisal recently?

Understanding PMI Specifics

Answer:  Mortgage insurance rates vary from one type of mortgage to the other. Depending on the type of mortgage you’ve taken out, your mortgage premiums will depend on the rate capped on your mortgage type. Various types of mortgages include subprime, nonconforming, and jumbo, among others.

There are several factors affecting private mortgage insurance. They include:

1.    Loan-to-value (LTV) ratio

PMI heavily relies on the LTV ratio. LTV is the amount of the loan in relation to the value of the home expressed as a percentage. Most mortgagors require the mortgagee to purchase a mortgage insurance cover when the balance on the loan exceeds 80 percent of the home’s purchase price. The table below shows how LTV ratio affects the PMI rate.

As a general rule the higher the LTV, the higher the cost of insurance. A $350,000 loan at 85 percent will cost more to insure in comparison to a $150,000 loan at 85 percent. Similarly, a $120,000 loan at 85 percent will cost more to insure in comparison to a $120,000 loan at 90 percent. Mortgage insurance stops at the point when you’ve built 20 percent equity in your home. This is achieved when your LTV ratio has reached 80 percent. To discontinue insurance premiums, you should report to your lender so that they instruct your mortgage insurer to stop charging you mortgage insurance.

LTV

PMI Rate
for 30 year mortgage

PMI Rate
10, 15, 20 year mortgage
80.01% – 85%

.32

.19
85.01 – 90%

.52

.23
90.01% – 95%

.78

.26
95.01% – 97%

.90

.79

 

2.    Types of PMI

There are three types of PMI:

(a)   Borrower-paid PMI- it is the most popular option. The cost of insurance is added to the mortgage price and the lender pays it in the normal monthly principal repayment. The lender then submits it to the insurance company on your behalf.

(b)   Lender-paid PMI- the PMI rate is added to the current mortgage rate so that the borrower doesn’t have to make separate payments. Since PMI isn’t deductible, you’ll enjoy interest deductions because it is combined with the mortgage rate. This means that a borrower with a lender-paid PMI is likely to pay a lower amount to the mortgage insurer than the borrower with a borrower-paid PMI.

(c)    Piggyback loan- it is referred to as a “piggyback” loan because a second mortgage is pinned to the original mortgage and it simultaneously closes with the original mortgage. There are several variations, but many lenders use the 80-10-10 criterion. Here, the borrower can take an 80 percent first mortgage, automatically avoiding PMI. The second mortgage becomes 10 percent and the other 10 percent is cleared as a down payment.

3.    Location of the property

The location of a home influences PMI premiums significantly. A home located in a place where the value of homes is consistently declining will be charged a higher mortgage insurance rate or even fail to be covered completely. In some parts of the country, condominiums are charged higher mortgage insurance rates than single-family homes because they are prone to value volatility. The location of a home can therefore cause a significant difference in the mortgage insurance payable on the same type and amount of loan for different borrowers.

4.    Borrower’s credit score

The credit score of a borrower affects the interest rate on any type of mortgage. The impact can be so huge as to exceed the mortgage rate, resulting in hundreds of dollars of additional expenses. PMI has been designed to protect the mortgagor from default. Even though various ways can be used to structure a mortgage to avoid PMI, a poor credit score may hamper such efforts.

Lenders use the borrower’s credit score to gauge the risk of default. Therefore the lower the borrower’s credit score, the higher the PMI rate. This means that two borrowers in the same loan category and amount can pay different insurance costs. The FICO credit score ranges from 350 to 850 and most Americans lie between 600 and 800. A score below 620 qualifies in a subprime mortgage category, which has a higher PMI charge than other types of mortgage loans.

 

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Financing for Investment Properties

Q&A- Financing for Investment Properties- 150x150Question: I work in a second home/vacation home market, and a lot of my customers have a hard time getting financed, even if they have very strong credit and assets. Some of my most common questions/roadblocks:

1. Does it really matter if it is a house or a condo? Why?

2. Why do I have to make such a big down payment? I only had to pay 20% down on my home in (some other state).

3. What’s the difference between an investment property and a second home? What differences should I expect for each?

4. How will my insurance requirements be different for a vacation/second home vs. primary residence?

[Compare the latest mortgage rates from dozens of lenders, updated daily.]

Understanding Finances for a Second Home

Answer:  1. Many lenders have watertight requirements on second mortgage applicants. It matters more specifically how the house or condo is used, where it is located in relation to the primary residence, and a few other factors. These are some of the requirements that need to be met:

(a)  Location from the borrower’s principal residence. It is required that there is a reasonable distance between the location of the second home and the principal home. If the second home is located on a beach that is less than an hour’s drive away, then you will be granted a second mortgage. However, if it is further inland, then the primary home must be located more than one hour’s drive away from the second/vacation home. The general distance accepted is at least 50 miles away.

(b)  Must be occupied for some portion of the year. Lenders require that the second home be occupied for some portion of the year. Depending on the location of the home, this can be done seasonally or several times during the year. For properties located in a ski or beach area this can be seasonal. If it’s a lake house then you should make several visits there. The property must remain suitable for occupancy at any time during the year.

(c)  Only one-unit properties can be financed. For purposes of a second home, only a one-unit property can qualify. Duplexes or multi-unit properties are considered to be investments by lenders. A condo is one of the houses that can qualify for a second mortgage.

(d)  The property must not be rented out. Being your home, the lender is strict to ensure that you don’t rent it out or subject the property to a timeshare arrangement. The borrower must have exclusive control over the property. Agreements with property management firms to take control of the property are also not allowed.

2. There are several options for purchasing a second home, which typically includes a larger down payment than with a primary home. These include:

(a)  Cash. According to the National Association of Realtors, 36 percent of all home buyers in 2010 paid for their houses in cash. This is the best option, but the majority of people are unable to save enough money to purchase a home in cash.

(b)  Conventional loan. This is the most common option that many borrowers tend to choose. Borrowers must be prepared to make a larger down payment (more than the usual 20 percent for the primary mortgage) for the loan to be processed. You will also pay higher interest rates and meet other tighter requirements compared to those of a primary mortgage. For a second home guaranteed by Freddie Mac or Fannie Mae, the down payment is 20 percent. However, the rate is higher for individual lenders, usually 30 or 35 percent. This rate is higher because lenders argue that a borrower has two loans and the risk of defaulting is high.

(c)  Home equity loan. If a homeowner has substantial equity in their home, this becomes the best option. It’s only unfortunate that many homeowners have lost equity in their homes because the value of homes has dropped drastically in the market during recent years. Additionally, many lenders fear that if a homeowner bumps into financial difficulties then they will prefer to clear their primary mortgages in preference to second home mortgages.

3. Many people tend to use the terms “second home” and “investment property” interchangeably in an attempt to describe property that does not qualify as a primary residence. However, there are a number of differences between an investment property and a second home.

Investment Property

Investment property can be defined as property that is purchased or acquired for purposes of generating income, taking advantage of particular tax benefits, or enjoying profit from appreciation. If you purchase property that will be used to make some gains instead of being your residence, then it is legally defined as investment property. It must not be your primary residence.

Different types of investment property include commercial property, residential rental property, and property purchased with an intention to resell.

In comparison with primary and second homes, loans for investment property are charged a higher interest rate. A larger down payment must also be made.

Second Home

A second home is defined as property that becomes your residence in addition to the primary residence you have already. In simpler terms, it is a vacation home that you visit occasionally.

Several conditions must be met if a property is to be allotted the name ‘second home’. They are referred to as the Second Home Rider. The conditions include:

  • Property must always be kept available for owner’s exclusive use and enjoyment whenever they wish
  • Borrower is the only occupant of the property, being the secondary residence
  • Property cannot be subjected to any agreements that need the owner to rent it or pass the rights to a property management firm
  • Property should never be subject to a rental pool or timesharing arrangement

A second home mortgage usually has a lower interest rate than an investment property loan. The down payment is also lower especially if it is approved by Fannie Mae or Freddie Mac.

4. There are different insurance recommendations for second homes for a variety of reasons.

Insurance protects your home from storm damage, lightning, burglary, fire, vandalism and other perils. It may also include some minor cover for risks from accidents such as a dog bite, a slip-and-fall accident, or an injury as a result of an accident on the property itself.

Depending on the location and the weather conditions in the area where your second home is located, getting an insurance cover can be difficult. For instance, you will need to get a flood insurance cover for your second home because it is not covered in the standard insurance policy for a second home. If the home is located in a forested area, then installing a fire-prevention system will reduce the overall cost. Earthquake insurance is usually not covered and you will have to purchase this independently.

Second home insurance is generally higher than primary home insurance because it is more susceptible to burglars as a result of your absence many times during the year. Damages caused by storms may also be common because you are not always around to fix the house. Taking steps to keep your second home secured and maintained can save you more than 20 percent of the insurance cover.

The following tips can help you to keep the insurance cost lower:

  • Taking a nonsmoking discount if you are not a smoker (reduces risk of a fire) or a loyal customer discount
  • Taking discounts for an up-to-date second home that is fitted with the latest electrical systems, plumbing and the overall structure
  • Taking safety discounts for a second home with a security system, especially with an independent security agency
  • Taking a multi-policy discount for a homeowner that bundles their home and car insurance with one insurer

If you are buying a condo, the condo association will provide the insurance cover.

Keeping a watchful eye on your home by appointing a caretaker may help to convince the insurer that you are responsible. This may lower the cost of insurance.

 

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