Real estate investing is the sine qua non for wealth accumulation. Here are some basic tips on how it gets done in the real world.
Location – Location, location, location. You have heard that is the key to real estate investing. It sounds good but it is so wrong. You can have a great location but if you are paying top dollar for it, it will be much harder for you to profit from the investment. Today’s ghetto may be tomorrow’s gentrified cool spot.
To make money in real estate, do not follow the trend: Set the trend. Or at least, determine where the trend is going and get there before everyone else does.
Pick a location that you believe is going to be good for the next ten years, even though the latest statistics show that the average homeowner moves every 8.17 years. Sometimes people get stuck and wind up staying in a situation, err a mean… at a location, longer than they first expected.
Deal structure – How a deal is structured can be more important than the location. Deals should be structured according to several variables including: What are the comps (prices of comparable houses in the area)? Why does the seller want to sell (get to the true motivation, which is not always what the realtor is telling you)? How much money is it going to cost to bring the property into really good (but not great) condition? Will the combination of the purchase price and the improvements necessary exceed the area comps? Will the seller offer additional incentives to effect a sale e.g. helping with closing costs (a/k/a seller’s assistance a/k/a seller’s assist)? Will the seller hold a second mortgage on the property that he/she is selling?
Inspections – Before you hire the home inspector, usually a $400-$500 fee, do your own inspection while you are touring the property with the realtor. DO NOT show the realtor how “in love” you are with any part of the property. Your main objective is to find as many faults with the property as you possible can: BEFORE you submit an offer.
Offers – Once you have determined what the cost of the repairs are of all of the faults/defects that you saw on your inspection AND you know what comps are for the area AND you know the cost of the improvements that you want to make to the property (to fit your personal preferences) and you have an idea on the annualized cost to maintain the property in good working condition, then you can prepare an offer for the purchase. Make sure that the offer is below the asking price. In hot markets, the purchase price is about 97% of the asking/list price. If the house has been on the market for more than thirty days, drop the offer to much more than 97%. The longer a house has been on the market the more you should lower your offer should be. The market is telling you that the list price is unrealistic and is overpriced.
LISTEN. DO NOT FALL IN LOVE WITH ANY PROPERTY: IT CANNOT LOVE YOU BACK! Do not listen to realtors telling you there may be “multiple offers” on the table. That has nothing to do with the objective value of the house. Remember to follow the money: Your realtor works for the person who is going to pay them!! Usually that means the seller, so do not let your realtor push/suggest/persuade/embarrass you into making a higher offer than one that is supported by facts! Stick to your facts, not your emotions which will cause the realtor’s commission to get higher. Be sure to include in your offer a 6% seller’s assistance if you are doing a FHA (Federal Housing Authority) loan. It means you only have to put up at least a 3 ½ % down payment and some (or most in some cases) of your closing costs are paid by the seller. If you are doing a conventional mortgage, then the maximum seller assist is 3%.
AOS – Make sure your agreement of sale (AOS) includes a mortgage contingency (if you are planning on getting a mortgage) that identifies the amount of the down payment, type of financing, and the financing commitment date. Make sure the any of the defects/faults found by you and/or the home inspector are either corrected before your settlement date or that you will receive credit from the seller AT SETTLEMENT for the cost of the work to be performed after settlement.
BE SURE TO CROSS OUT… the section of the AOS that says you will give a copy of the home inspection to the seller. That report belongs to you since you are the one paying for it. If the seller wants a copy, then make him/her pay for it, or at least some part of it.
Home Inspections – Make sure the home inspector that you select is reputable and is willing to give you a copy of the written report. The home inspector’s report will usually have pictures of defects found and the estimated cost of the repair. The systems inspected will include: plumbing, heating, electrical, roofing, foundation, water issues, landscaping issues, and more. It is very preferable to be at the property when the inspector is there, so that you can see exactly what he is seeing, and you can ask questions while everything is fresh in his, and your, mind.
Mortgage companies – Use a mortgage broker rather than a mortgage company that is tied to one single financial source, unless you already have an existing relationship with that financing source e.g. a credit union or a bank. Credit unions usually give lower mortgage rates than banks.
Mortgage payments – If you put twenty percent or more down payment on the home, then you do not have to pay Private Mortgage Insurance (PMI), an insurance policy that pays the lender in case you stop paying the mortgage. Once you have 20% or greater equity in your property you can choose to request the end of PMI. The PMI payment amount will usually be between .46% to 1.5% of the amount of
the mortgage being obtained. Again, once your equity is at least 20% of the amount of the original property appraisal, you can drop the PMI and thereby reduce your monthly mortgage payment.
Settlement – Finally the day arrives, and you are about to go sign a bunch of papers so that you can collect the keys to your new kingdom and get on with your “happily ever after.” But… not so fast. The deal is not done until it is done. It will not be done until you go over to the property and inspect it one last time to make sure that ALL of the things that were supposed to be done are done AND that the property that you agreed to buy is the one that is standing right in front of you with NO material changes. If there are ANY ISSUES, DO NOT sign the deal i.e. closing documents until the seller addresses all of your concerns to your satisfaction. Understand that everyone at the settlement table wants you to sign the deal, because some of them cannot get paid until you do… like the realtor(s) and the seller. So you have all the power in your hands and if you are not happy about the deal… walk away! Sellers and their agents are more than willing to try hard to accommodate you because EVERYONE wants your check. If all goes well, sign the multiple documents and hand over the certified check + the check the mortgage company wired over and go enjoy your new property. Good job!
Lastly, as is with most investing… you make your money on the buy, you cash in when you sell! Happy hunting!
