Archives for December 2015

The Necessity Of The Home Inspector

Illustrating the power of the home inspection…

As a real estate agent, I am required to accompany all house inspections for my clients. I like to prepare my buyers for the worst before any inspection. Part of this process is educating them that in hiring a home inspector, he will be going through every problem, big and small, that is wrong with their potential acquisition. As such, the buyer should be ready to hear mostly bad news. However, I tell them that it is normal to feel a bit depressed right after a home inspection. However, I also inform them that there will be loads of small problems, each easily fixed. Most issues tend to be under a hundred dollars in cost. It is the major problems that the home inspector susses out where he really earns his fee. Among these types of issues would be structural problems, leaks, and dangerous aspects to the property – be they environmental or otherwise (for example, faulty electrical wiring, or wiring not up to code).

Creating solutions to found problems

If a major problem comes out in the home inspection, the buyer can then ask the seller to remediate the issue, or, lessen their sales price accordingly. Home inspections should not be used as a device to renegotiate the sale price of an already-agreed to contractual price. Rather, they are done simply for the protection of the buyer. You would never ask the seller to fix minor items…that would simply be tacky. It is only a major problem that should be addressed as a form of renegotiation on any given property.

An integral process…

I have written here before about the inspection process. It tends to be pretty uniform from one home inspection company to another. I have noted in one prior article how “most house inspectors like to start on the outside around the foundation, and then explore a building’s exterior walls up to the roof, on to the walkways, steps and any surrounding retaining walls. They will review with the investor what is or is not catastrophic in nature., in regards to defects with the house. And then they will offer advice on what can be done to repair them, along with cost estimates to correct these potential problems. If, for example, a gutter is found leaking, they will note the cause and effect of the leak: that water can get into the side wall of the house and rot the trim, or actually get into the structure internally. Inside the house, a home inspector will explain to buyers about the heating and electrical systems of the particular property, and how they operate. They will look for obvious problems in all the systems, and will give a generic overview of the entire system.”

A pertinent home inspection example

I recently had a buyer perform their house inspection using an inspector I knew was quite thorough in his work. His forte was finding trouble in locations one wouldn’t expect to look at – or gain access to for that matter. On this particular house, this inspector went through his normal home inspection checklist, then found the tiny opening to the attic space. It was a raised ranch house, and the attic opening was about two feet square, located in a bedroom closet. In this instance, there was a dresser loaded with clothes on top blocking access to the attic opening. Neither I nor my buyers even knew it existed.

Finding the hidden defects

This home inspector not only found it, he neatly moved all the clothes on top of the dresser (had they been placed there on purpose?), moved the dresser out of the way, and managed to open the attic hatch, get his ladder, and somehow squeeze himself in through the opening. Once inside the attic, he ascertained that the bathroom exhaust, next to the bedroom, was not vented to the outside at some point in time (though it was now). He found a large amount of mold in the area right above the bathroom, on the attic’s unfinished wood ceiling. He also took photos and wrote up the major problem in his written report. Naturally, we sent the report to the sellers, who claimed they never knew of the problem. We then asked for the sellers to remediate the mold using a licensed environmental company. And they did so, providing us with proof of the work being completed before the closing.

Part of your crew

This is just one simple example of the myriad issues that can come up in a house engineering inspection. For this reason, and because most buyers are not experts at house construction, it is an imperative that you hire a home inspector to perform a house inspection immediately after agreeing to terms on a new acquisition, and signing contracts on it. It is the singular best way to protect yourself from purchasing a “lemon” of a house. One that could suck you dry financially over time. You’ll find that the home inspection cost of a few hundred dollars acts as a great insurance policy when buying any investment property. The home inspector is yet another one of the invaluable members of your crew you need to add when assembling your team of real estate professionals for your investment property purchases.

Choosing your home inspector

I have also written here about the home inspector selection process. It’s not something to be taken lightly. I have noted that it is best to check that your choice of home inspector be licensed by your state…don’t simply assume they are. In addition, I recommended that “you may also want to check with the local Better Business Bureau to see if there are any complaints that have been lodged against the inspector you’re considering hiring. It’s also good to get several referrals from your real estate agent for local home inspectors they work with a lot. Realtors tend to create an approved list for different craftspeople as well as real estate related fields, including home inspection. Anyone on their approved list will have already been vetted many times over.”

Building rapport

I feel it very important to reiterate previous advice I’ve given on the selection process. In one prior article here I’ve recommended that, “as you build your crew, you’ll want to use your trusted home inspector over and over…Besides possibly obtaining volume discounts from him, you’ll also find another major benefit. You’ll develop something called rapport, and you’ll learn what to ask a home inspector. You’ll be able to trust his insights implicitly. And you’ll also be able to develop a “shorthand” way of communicating with him. The home inspector I stuck with for many years eventually did not need to send me those “boilerplate” inspection reports. He’d send me a shorter version – not the one used for standard home buyers. Communication flowed easily – and he kept me out of danger innumerable times in the process.” I would hope that any property investor, over time, will attempt to create this kind of rapport with their newly-found home inspector. Creating a steady relationship with your home inspector will greatly benefit you in the long run.

Photos courtesy of insurancequotes.com, propertymanagementinsider.com, ajvcgc.com, bestlongislandhomeinspectors.com, aceenvironmentalstl.com, sanjeeda-sheikh.com, beaconlighthomeinspections.com

Staying Atop The Fed Interest Rates Game

What’s up with the Fed rate hike…

This week’s news from the Federal Reserve about hiking the Fed interest rate a quarter of a point came as good news to the stock market. Many articles have come out recently, mostly lauding the Federal interest rate hike. But what about the effect on property investors? How will this first interest rate hike in nine years affect the average landlord? Well, consider it a mixed blessing, with a little bit good, and a little bit bad. On the whole, if you have properties that already have fixed rate mortgages, this decision should have no effect on your monthly cash flow. However, if you are using any adjustable rate mortgage, or home equity line for borrowing purposes, then you can expect to be taking a hit on the borrowed funds already taken out, as your monthly mortgage payment will indeed be going up.

A reflection of an improving economy

I had already reported here early this year how the improving economy would have an impact on the overall rental market. I had said that “with lower oil prices, and more disposable income made available, the economy can’t help but pick up speed in 2015. With this, consumer confidence will edge up, still slowly, but definitely upwards. As the unemployment rate continues its trend of ticking downwards, even with the greater stratification between the haves and have-nots in our country, job creation will also continue to increase slowly, but demonstratively. This will result in an improved housing market overall. Already, over the past year, many cities have shown house pricing gains in the 10 to 15 percent arena. Expect much of urban and suburban US communities to continue to see this type of increase in housing appreciation in 2015. However, rural areas will continue to lag behind in growth rate.”

How raising interest rates was reported

In an article from MSN.com (“Seven Ways The Federal Reserve Rate Hike Will Affect You in 2016, by Laura Woods, 12/16/15), the author noted that “after much speculation, the Federal Reserve announced Dec. 16, 2015, that it would raise interest rates for the first time since June 2006. The Fed rate hike means the target funds rate range that was 0 percent to 0.25 percent will increase to a range of 0.25 percent to 0.5 percent. Federal Reserve System Chair Janet Yellen said the decision to raise rates was due to strong economic recovery and the fact that the labor market has shown major improvements.”

The author went on to explain that some mortgage holders will feel the pinch, noting that “contrary to popular belief, not all mortgage rates are directly related to the decisions of the Federal Reserve Board. Adjustable rate mortgages and home equity lines of credit will be most impacted by the Fed rate hike, but most 30-year, fixed-rate mortgage rates are based on the 10-year Treasury bond, according to The New York Times. Prices are determined according to a number of factors, including long-term economic growth, inflation outlook and short-term interest rates. If you have an ARM that currently has annual readjustments or will soon, you might want to consider refinancing it to a fixed-rate mortgage now because doing so could save you a significant amount of money in the future. Conversely, if your adjustable-rate mortgage rate is locked in place for a few years, it’s probably best to wait and see what the future holds. HELOCs will likely rise with the Fed funds rate to an approximate average of 5.5 percent, reported The New York Times. Locking in a fixed rate tends to result in a rate increase, so take the size of your loan and the amount of time you plan to pay it off into consideration before making a move.”

Future expectations

In addition, expect a couple more, regular future increases of about a quarter point at a time to follow, through the next year or so. Obviously, this will make future investment property acquisitions more expensive to finance as we move forward. And your cash flow projections should certainly take this current increase into account.

In a separate article on the rate hike in Reuters (Fed Raises Interest Rates, Citing Ongoing Economic Recovery, by Howard Schneider and Jason Lange), the authors pointed out that “the Federal Reserve hiked interest rates for the first time in nearly a decade on Wednesday, signaling faith that the U.S. economy had largely overcome the wounds of the 2007-2009 financial crisis. The U.S. central bank’s policy-setting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 percent and 0.50 percent, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs.

The writers then went on to quote the Fed directly as to the reasons for the move, saying “the Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise over the medium term to its 2 percent objective,” the Fed said in its policy statement, which was adopted unanimously. The Fed made clear that the rate hike was a tentative beginning to a “gradual” tightening cycle, and that in deciding its next move it would put a premium on monitoring inflation, which remains mired below target.”

The upbeat news

On the positive side, any interest rate hike has an automatic dampening effect on the housing market. Though a quarter point will probably not force droves of potential buyers to the sidelines just yet. However, if you already have rental residential units as part of your investment property empire, then this Fed interest rates increase will be a boon overall. As some buyers decide to stay put and continue to rent for a longer period instead of getting into the home buying phase of their lives, there will naturally be an upward pressure felt on rents.

This can only help increase your cash flow in the coming year or two. After all, more rental demand equates to higher rents. So the Feds raising the rates is not going to be all bad news. The hike in rates in relationship to property investing will still be relatively small, and after all, it is a sign of our economy slowly becoming more robust. I wouldn’t expect any major credit crunch in the process either, and banks should retain the same lending requirements as before.

Photos courtesy of federalreservesystem.blogspot.com, thelastembassy.blogspot.com, hardmoneylendersutah.com, californiahardmoneylenders.blogspot.com, gazelleindex.com, stiles-law.com, tenantscreeningblog.com, anchorloans.com

How To Start Flipping Houses

Considerations for the novice property investor…

I have written in prior articles here some suggestions for the novice investor looking how to flip a house and just breaking into the house flipping business. Unfortunately, there will certainly be a great deal of trial and error you’ll have to experience on your path to house flipping wisdom. But pay heed to some of these recommendations, and you should definitely cut down on beginner mistakes. I have noted in my article “The Art of The House Flip” (see http://investinginproperties.org/fixing/the-art-of-the-house-flip/) how at the start, you “should begin by knowing every fixer-upper that is on the market in your local area that you plan to do your property investing. That means not simply combing through Zillow or Trulia for all available houses on the market in your area. It means you must actually tour each and every one that is a viable candidate for your house flip dollars. Make sure you work with one local real estate agent exclusively. They can greatly aid you in setting up automatic searches on their local Multiple Listing Services (MLS) that will generate possible investment flips daily for you to explore.” I also had some good suggestions in that article about the possibility of flipping houses with no money down.

More cogent advice

But wait, there’s more…As part of your house flipping 101 primer, you’ll need to develop some major amounts of discipline. I mean, after all, you will be running your own business! Consider some more advice on this exact subject I have proffered in the same article, when I mentioned that you should certainly “pick a day of the week to be able to tour all the houses that just came on the market that week, that are in dire need of repair. It is these fixer-uppers, where you can invest renovation dollars to earn you profits that you’ll need to zero in on. If possible, and your work schedule allows it, be able to visit immediately new additions to the market that represent tremendous profit potential. Either they are undervalued, or need work that is modest, but will yield high returns for your investment money. Naturally, you also need to do your homework on what similar properties to the house you’re considering flipping are selling for of late (within the last 6 to 12 months only). This is known as knowing the “comps,” or comparable properties. As before, use your real estate agent to help guide you in your research here.”

Pitfalls abound though…

I have also outlined in another article here some of the major pitfalls to be aware of when just getting your feet wet in house flipping. In a separate piece here (you can see the whole article at: http://investinginproperties.org/locating-property/beware-biggest-house-flipping-danger/) I have warned that “from the outset, you’ll need to create a pro forma budget for your real estate investing project. This is the easy part. Acquisition costs, tentative rehab costs, and carrying costs until you sell it need to tallied up. Be sure to be conservative in all areas, and don’t forget to add 10% as an overage factor when investing in real estate. Then, figure on a realistic market value for the property once it’s all fixed up to determine your net income projection.”

When the model for flipping houses doesn’t work…

I have also warned in here about some other major pitfalls that could befall you when investing in house flipping. I have ticked off many possible roadblocks to the novice property investor who’s trying to understand how to flip a house. However, I wanted to note here that one danger in particular should be evaluated prior to getting your feet wet. I’m speaking of the area you choose to do your house flipping business.
I have noted before that location is critical to the success of your house flipping projects. However, this assumed your area met other criteria to be successful. I should note that an aspect as serious as the crime rate should not be the main determinant of your selection of an area…Many geographical regions are in the process of gentrification, and prior poor crime statistics for an area do not necessarily indicate future problems. Rather, you should take in demographic data as a whole for any area you’re considering acquiring a flipping project. If a new access ramp to a nearby highway is about to be built, or if a new local mall is about to be constructed, then indeed, the area may be about to make some major improvements, and be a great indicator of a place to purchase a fixer-upper to rehab and then place on the market soon thereafter.

Be wary of this scenario…

However, there is a model for house flipping that simply does not make financial sense. This occurs when the geographic area you’re considering buying into has low absolute market valuations for houses while at the same time labor costs remain high relative to more affluent areas nearby. Let me give an example. Let’s say the area you want to invest in has an average home sale price in the hundred to hundred and fifty thousand dollar range. Meanwhile a very affluent town thirty miles away has an average sales price in the four hundred to five hundred thousand dollar range. If your budget will only allow you to purchase in the lower price range town, fine. However, if labor costs are roughly the same between the two areas, beware! A hundred thousand dollar renovation project doubles the cost of a hundred thousand dollar acquisition. But after the renovation, you probably will not be able to recoup such a high renovation cost – plus profit – when it comes time to place it on the market. But if you buy a four hundred thousand dollar home, the hundred thousand dollar renovation only represents a twenty percent increase in the valuation – not fifty percent! The flipping houses model needs to keep consistency between areas. Otherwise, you’ll be stuck “over-improving” a property – and most probably, will have to take a loss on it in order to sell it.

Length of time on the market

Also consider the average length of time on the market for homes in the area you’re considering buying into. This is critical. You can get this information from Zillow, Trulia, Realtor.com or your local Realtor…for any given zip code. If you find an area that has an increasing average length of time on the market, be very wary of investing there. In addition, if the area has an average length of time that’s got an average over one hundred eighty days, also be extremely concerned. Your model is based on moving your product quickly – your newly renovated house. If you get stuck in an area where there are too few buyers looking, you’ll then be stuck holding your property for a long time. The longer you hold it, the more your carrying costs will eat into any potential profit when you do sell.

Photos courtesy of askmen.com, cbsnews.com, metrosdrealty.com, foreclosuredatabank.com, barnettassociates.net, fixandflipnetwork.com, gumtree.com

Consider Title Insurance A Simple Necessity

Why title insurance should be an imperative

As a real estate broker, I recently helped a buyer acquire a piece of property to develop in my area. However, the seller of the parcel had acquired the land at a county auction of properties. Many of these properties had prior owners who had unfortunately not paid their tax bills for a long period of time. As such, when they purchased the property, the county made no warranties as to the “cleanness” of the title on the property. It was up to the buyer to do their own due diligence and obtain an owners title insurance policy on any given parcel involved in the auction. So the current seller of this particular parcel my buyer wanted to purchase had gone ahead and put the property on the market for sale, figuring they would deal with any potential title issues down the road, once they found a buyer. This was a risky maneuver on their part.

The saga continues…

And this is where me and my buyer come into the picture. Unfortunately, after negotiating the sales price with the seller, we were then notified the seller would have to clear up any title issues before a closing could take place. Unfortunately, we were forced to wait another couple of months, while we were under contract, for the seller to have a title company review the exact chain of title records, and determine that the last owner of the property still had an outstanding mortgage lien that needed to be cleaned up. Luckily, the seller, his attorney, their title company and my buyer’s attorney were able to come up with a workable solution to the problem to allow our sale to go through.

However, this could happen only with my buyer having to obtain a new title insurance policy as “extra” insurance that there would be no future claims on the parcel. (In our area of New York state, title insurance is not a requirement.) Title insurance cost can vary depending on the parcel and area involved. Your title insurance company will usually utilize a title insurance calculator for your area to come up with your one time only policy cost that will be paid by you at closing. In the case of my buyer in this story, it only cost several hundred dollars for her title policy.

A complex process

I have written in a prior article here about the complexities of the title insurance process (see http://investinginproperties.org/rental-investments/purpose-title-insurance-rental-property/). In that article I defined exactly what is title insurance. I also noted that the title company’s title search will include “all records the local municipality has on file for the investment property. This will include…water or tax bills, special assessments, tax liens and any other item that could conceivably affect the title. Traditionally, building department records are also checked to ascertain any outstanding building permits (opened, but never closed as completed), or similar code violations. Once title is completed, a title report is prepared by the title insurance company. It is sent to all the attorneys in the property transaction for their review.

If there are any current problems (for example, an unaddressed easement that was never disclosed), the attorneys need to hash out a solution prior to a closing. Similarly, if a building code violation comes up in the title report, or, as another example, the title picks up an existing, illegally built shed (that was built without a building permit), the seller will need to obtain a building permit (or tear down the shed), prior to the closing. Once the buyer’s attorney is satisfied that all outstanding violations have been removed, and that his client, the buyer, will be able to purchase the property with no encumbrances on it, the title is deemed to be “clear.” And a closing can finally be set.”

Title insurance is crucial

This process illustrates the real need for title insurance. It helps protect any purchaser of property from a prior owner somehow coming into the picture at some point in the future, and claiming the land is actually owned by them. You can see the compound effect of how disastrous things could get without a title company involved as insurer. The title company basically would be guaranteeing they would be on the hook for any potential “damage” in the future from such a claim. Imagine a current owner building on the parcel, then a claimant from the past coming forward saying the parcel is theirs. The potential for a major real estate mess would be financially onerous, if not disastrous, to say the least. In effect, the title insurer makes a promise to make things right. They can afford to do so by being very thorough in their research of the existing chain of title. Though mistakes occasionally occur on the part of a title company’s research, they are very, very rare. After all, title insurance companies are in business to make money. So research thoroughness on their part is essential.

Photos courtesy of welchgroup.net, business-law-pa.com, gfmag.com, taylorinsuranceblog.com