by Dennis Henson
Most of the time success in business is the result of what you know. In every industry there are key elements—secrets—that if known will help to insure success but if not known, will certainly lead to failure. Real Estate investing is no different. Success begins with knowledge. What are some of the critical lessons that every real estate investor should know? Here are ten of them for starters…
The first secret is probably the most important of all the others—using other people's knowledge. There are only two ways to gain knowledge. Either you gain it from other peoples mistakes or make the mistakes yourself. If you refuse to learn from other people's mistakes—you are destined to learn from your own mistakes. The secret is to learn from others and avoid the pain of learning the hard way. Here is the secret—you can jump start your investing success by getting a good mentor and constantly reading and listening to CDs by successful real estate investors.
The second secret is also very important—it is the power of consistently making a lot of quality offers. In order to become a successful real estate investor, it is absolutely necessary to place many offers that, if accepted, will result in great deals. Without offers there can be no good deals and good deals are the basis of success in real estate investing. If you do not ask you will not receive.
Secrets three through seven are the skills that will have to be developed in order to run a successful real estate investing business. These skills are:
3. Finding good deals
4. Obtaining the money to purchase the good deals you find
5. Fixing up the property so that it is marketable
6. Effectively marketing the property
7. Property management
Master each of these skills and real estate investing becomes much easier but fail to develop them and you are in for a rough ride.
Secret number eight is that you must prepare quality offers that have a chance of being accepted. These offers must be high enough so that some of them will be successful. But they must be low enough so that, when one is accepted, it will result in a substantial return on your investment of time and money. This can be easily accomplished by using some of the effective software on the market today such as Turbo-Bidder or similar real estate analysis software.
The ninth real estate investing secret is that you must be able to determine the true value of property. True value is the amount that the property can be sold for in a reasonable period of time. The quickest way of determining true value is by paying a professional appraiser to work their magic. But that is not necessarily the best way. It doesn't make sense to be paying an appraiser to look at thirty properties when you only expect to purchase one of those deals. That means that you must find an inexpensive way to determine true value. There are professional realtors who work with investors. These realtors can provide accurate comparable sales (comps) of similar properties. These comps can give you a very good idea of what a property is worth.
And finally, secret number ten is you need to have a burning desire to become successful. Your attitude and drive can make up for lots of early mistakes and pitfalls that might sink a lesser person. As Calvin Coolidge once said, "Nothing in the world can take the place of persistence".
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by David Fialk
Initial Deposit
Be prepared to write a deposit check when making a contract offer to purchase real estate. Commonly referred to as a Binder, more commonly known as the initial deposit, this is the check made out to the Selling Real Estate Office when submitting a contract offer. In simple terms, it is a good faith deposit to express interest in purchasing real estate.
What is the required amount of a binder deposit? There is no law as to a required amount, but local real estate practices may determine what is acceptable. Common sense should prevail in determining the amount of the Binder deposit however. Writing a check for $100.00 shows good faith, but what kind of statement is that making to the owner when the contract offer is presented to them?
Would a more substantial initial deposit, say $1,000.00, make a stronger statement? How about $5,000 as an initial deposit, or even more? Wouldn’t a larger initial deposit check make a stronger impression with a seller in making a decision to accept a contract offer or in contract negotiations?
The Binder is generally not deposited by the Real Estate Broker until there is offer and acceptance, a signed contract of sale. However, there are State Real Estate Licensing Laws which regulate how long a Real Estate Broker can hold a deposit check without depositing it into the Company’s Trust Account. In cases where contract negotiations are prolonged, perhaps beyond five business days, most Real Estate Brokers will either deposit the check into their Trust Account during contract negotiations, or ask the buyer to write a new check as contract negotiations continue.
If the contract offer is not accepted, the Binder is returned to the buyer. If the contract is accepted and signed by the owner, the Binder will be deposited in the Broker’s Trust Account and will be applied to the buyer’s down payment and the purchase price.
Earnest Money Deposit
Commonly referred to as the second deposit, this is the additional upfront deposit made in the purchase of real estate and is also part of the buyer’s total down payment. The earnest money deposit could be 10% of the purchase price depending on the real estate market the home is being purchased in, the price range or the total amount of the down payment being used by the buyer.
It is quite common in many real estate markets that homes are purchased where the total down payment is less than 10% of the purchase price. In these type real estate transactions, the earnest money deposit will generally be some portion of the total down payment, or perhaps the entire amount of the down payment in a transaction where the buyer has a total down total payment of 3.5 % to purchase a home. The amount of earnest money deposit is something that may eventually be determined during contract negotiations.
The earnest money deposit is generally paid within a certain time frame or after completion of Attorney Review. It is generally paid to the Selling Broker, unless local real estate practices provide otherwise, or there is a change made to the contract of sale during the Attorney Review process where the Seller’s Attorney requests to hold all deposit monies in their Trust Account.
There are times when a contract of sale is terminated after Attorney Review, such as home inspection problems, mortgage denial and others. In those situations where a contract to purchase is cancelled in accordance with the terms of the contract, all deposit monies previously paid by the buyer are refunded.
Many buyers, and buyer agents, under estimate the importance of these two aspects of contract preparation, and the benefits they can provide in contract negotiation. The Initial Deposit and Earnest Money Deposit can be the difference in whether a contract offer gets accepted and signed by the seller, especially in multi-contract presentations.
Mortgage Considerations
A contract to purchase real estate will include a mortgage contingency clause which provides a time period for the buyer to apply for a mortgage of a specific amount and obtain mortgage approval in order to complete the purchase of a home. This is commonly referred to as the “mortgage contingency clause” in real estate contracts. The time frame for mortgage approval varies from buyer to buyer, and is determined by the type of mortgage being obtained (Conventional, FHA, and VA) and how complete the mortgage pre-approval process was. A buyer’s Real Estate Agent or Mortgage Representative can help in providing more information about the time frame required in processing the formal mortgage application and obtaining the written mortgage loan commitment.
It is recommended that a buyer reviews their Mortgage Pre-Approval when submitting a contract offer, and provide a copy to their Buyer’s Agent. Review is necessary in order to verify that the mortgage amount in the contract offer is the amount in the Mortgage Pre-Approval, or less.
All too often buyers begin their home search in one price range and later find that they need to increase their price range, and increase the mortgage amount, to find a home they like. Obtaining an updated and revised Mortgage Pre-Approval to reflect the mortgage amount in the contract offer is highly recommended.
Mortgage Interest Rates and Mortgage Rate Lock-Ins
Another important consideration is mortgage interest rates. Mortgage interest rates may fluctuate from day to day and mortgage rate lock-in may vary from one mortgage lender to another. Buyers should obtain a current interest rate quote when making a contract offer as the current mortgage interest rate may be different from the quoted interest rate when the Mortgage Pre-Approval was issued.
The interest rate affects mortgage payments, mortgage qualifying and price range.
Closing Date
A closing date is included in the contract offer. This date may be important to the seller in contract negotiations as it relates to their time frame in moving. It is also a consideration for the buyer with regard to their time frame in moving and perhaps with a mortgage interest rate lock in.
Mortgage lenders have various interest rate lock-in policies. Consult with the Mortgage Representative to obtain more information on interest rate lock-in policies and length of interest rate lock in period.
A contract offer to purchase real estate includes sales price, mortgage to be obtained and down payment.
Down Payment
The buyer’s down payment is somewhat fixed. It is generally the amount of money a buyer has saved, or has available, for the purchase of a home. However, there are minimum down payment requirements depending on the type of mortgage to be obtained.
When applying for a mortgage loan, the lender does verify the buyer’s assets. Commonly referred to as deposit verification, this occurs during the mortgage application process to insure that the buyer has the funds for the down payment as well as additional monies for closing cost expenses.
In making a contract offer, it is highly recommended that a buyer be aware of the various costs involved with the purchase of a home and obtain a reliable estimate of closing costs either from their Buyer’s Agent, Mortgage Lender or Attorney. Some of the costs related to closing title are directly related to the home being purchased, others are fees paid for services provided and then there are the costs related to obtaining the mortgage.
It is quite common for buyers to get assistance for the down payment, or closing costs, from family members. The mortgage lender will require a “gift letter” from the donor, and will also verify that these monies are available. While it is great that a family member says they will help in the home purchase, it is very important that a buyer in this situation obtains a commitment for an exact amount they will be given and explains the verification process in advance to the donor in order to avoid any complications later. A mortgage lender can provide specific details.
There are times when gift money is provided in advance of the home purchase and mortgage application. It is important that the buyer creates a paper trail with a copy of the check received, and the deposit slip depositing the money in their bank account. During the mortgage application process, the lender will ask for an explanation on any recent large deposits.
Mortgage Payment
The mortgage amount, and monthly mortgage payment, is determined by the buyer’s income qualifications. There are buyers who choose to maximize the amount of the mortgage as it relates to income qualifications, while there are other buyers who choose to mortgage less than their income warrants in order keep the monthly mortgage payment at a more affordable amount. That is all about personal choice.
When applying for a mortgage loan, the lender does verify the buyer’s income, requires copies of current pay stubs and prior income tax returns. Commonly referred to as income verification, this occurs during the mortgage application process to insure that the buyer has sufficient income to qualify for the mortgage loan requested.
A monthly mortgage payment includes principal, interest, real estate taxes and home insurance, commonly referred to as PITI, and is what is estimated in the pre-qualification process. During the mortgage pre-approval process, mortgage lenders calculate mortgage qualifications based on the current mortgage interest rate, estimated real estate taxes and estimated homeowners insurance. However, mortgage pre-approval for a specific mortgage amount is only an estimate.
There are situations where the pre-approved mortgage amount and price range is beyond affordability for a buyer. This can occur if the mortgage interest rate increases during the home searching process, or during the mortgage application process and the interest rate was not locked in. Likewise, if the home to be purchased has higher real estate taxes than what was estimated in the pre-approval process, the monthly mortgage payment will be higher and may be beyond affordability.
It is highly recommended that a buyer knows what the monthly mortgage payment will be based on their contract offer and match that payment to their mortgage pre-approval.
It is not purchase price which determines affordability, it is the monthly mortgage payment!
Published: July 13, 2009
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by Kenneth R. Harney
With both President-elect Obama and the new Congress in Washington last week, work on the forthcoming $775 billion economic stimulus plan moved into high gear.
But don't necessarily look to the stimulus plan alone for costly new incentives for home building or real estate sales. There are actually two packages out there -- the new stimulus plus the $350 billion in unspent funds from last Fall's congressional bailout legislation.
The 2009 economic stimulus may well contain some direct assistance to spur the housing market. Senate budget committee chairman Kent Conrad of North Dakota said last week that "it's hard for me to see a stimulus plan (passing Congress) that doesn't have a significant housing component."
But Obama himself suggested that the primary focuses of the economic stimulus would probably be elsewhere -- payroll tax cuts for workers, infrastructure projects and alternative energy development and some form of tax relief for businesses.
Asked about housing relief specifically in an interview on CNBC, Obama said, "I think the most important thing when it comes to declining home values, is number one, preventing further foreclosures that erode home values across the board."
Meanwhile, there were indications on Capitol Hill that foreclosure relief may well be funneled from the unused $350 billion left over from the original $700 billion authorized in the so-called "TARP" bailout fund. The initial $350 billion was used by the Treasury primarily to prop up banks, but congressional Democrats are demand that it now be used to help keep home owners out of foreclosure.
Aides to Obama said one likely housing-related target in the stimulus plan is an extensive "energy retrofit" program for houses and office buildings, including federal facilities. Obama has endorsed "weatherizing" -- improving the energy efficiency - of one million homes a year. That could take the form of additional tax credits or financial incentives, and would create employment -- another key goal.
Last week a bipartisan group of senators gave further impetus to the real estate retrofit idea, calling for a boost in the current $2,000 federal tax credit for energy efficient homes to $5,000.
Wrangling over what gets includes in the stimulus is likely to continue until the Inauguration January 20th, and a final stimulus plan isn't likely to be passed until sometime in February.
In the meantime, housing and real estate lobbies looking for tax credits and mortgage subsidies increasingly understand that there are two money pots in play - not just one. From whichever pot it comes, home building and real estate are likely to end up with a sizable chunk of the action.
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