Rent with Option or Land Contract?

Posted on December 2, 2012 by Tim

The answer lies in your own personal needs. Both are suitable means of helping a buyer into your property, but each has advantages depending upon your goals.  Lets explore the structure of each, then your choice will be clear.

A rent with option provides the buyer with a standard rental lease and provides all the protections to both parties accordingly.  If the tenant misses a payment, the landlord can evict them and they will lose 100% of their non-refundable option money.  The tenant is merely purchasing the option to buy the property at a future date under specified terms and conditions.  The landlord also retains all of his or her rights under the lease AND they retain all of the responsibilities of a landlord; maintenance, taxes, insurance and collections all remain with the landlord.  Usually part of the this agreement includes applying a portion of the rent toward a downpayment.  From a banking perspective it is important to note that the rent MUST be fair market rent PLUS the additional option payment.  If not, the lender will not allow any portion of the rent to be applied to the down payment, which defeats the purpose of using this tool.

A Landcontract is actually a sale of the property.  The buyer and seller agree to the terms of the sale, which usually include a down payment and specific terms of repayment.  The only difference is that the Deed is not filed in the County Clerks office, it is held in escrow until the final payment is made on the property by the buyer.  For example if Steve were buying Sally’s property he might offer $5,000 down with the remaining $195,000 to paid back on a 30 year amortized note at 5% with a three year balloon.  In this scenario the BUYER is 100% responsible for maintenance, taxes and  insurance, and the deed is transferred upon the payment of the balloon due in three years.

A land contract provides the buyer with ownership and relieves the seller of responsibility for the property.  If the buyer defaults, the seller can evict them without going through the lengthy foreclosure process so the seller remains protected.

If you are buyer and are considering one of these options it is important for you to know that if the SELLER’s financial condition is shakey then it can impact this transaction adversly.  If the seller gets a judgement against them it attaches to the real estate that you are in contract to purchase since the deed is not filed.  To protect yourself in this scenario you would use a wrap around mortgage and file the deed.

To learn more call Tim Halladay at Victory Funding at 518-899-7700.  We’re in business to help you attain your real estate dreams!

 

 

Posted in Financing, Investing, Real Estate | Tagged land contract, real estate financing, rent with option, seller financing, wrap around mortgage | Leave a comment

5 Best Rehab Opportunities

Posted on September 23, 2012 by Tim

Making money is about solving problems!  The top 5 most profitable problems are easy to spot and can make you thousands! When i buy a rehab project to flip I look for very specific issues.  Most of the time they are the very issues that keep other investors from even bidding on the projects I make the most money on.

#5 Mold – that’s right, I said mold!  Only 2% of mold is toxic and most most can be remediated by removing the damaged sheet rock, eliminating the source of moisture, treating any affected wood and replacing the damaged items with new rock, tape and paint.  It’s simple and can make you thousands.

#4 Ugly wood siding and a deteriorated chimney.  Siding is relatively inexpensive for the transformation it brings.  Ugly houses can be made beautiful for a few thousands dollars which can put you in a position to profit!

#3 Dated walls and flooring.  Paint and carpet is the highest return on investment you can make in any renovation project you will ever do.  Don’t underestimate the power of this simple technique.  If your margins are a bit thin you can do a quick paint and carpet job for about five thousand dollars and turn it around for over twenty thousand.  Don’t go crazy on a rehab that you pay too much for!

#2 Conversion opportunities.  Can you change a two family back to a single family or two family to a three family or a single family to one with an in-law apartment?  One word of caution here; know your market!  If you are converting a two to a single make sure it’s not more valuable as a two first!  I’ve seen investors make this mistake going both directions!  The key on these is to know and understand the financing available to your retail end user.

#1 Favorite Rehab Defect is Foundation defects!  It’s hard to imagine a scenario that scares away novices and some intermediate investors faster than a foundation defect.  The good news is that they are relatively easy to repair and the cost is not exorbitant!  Most assign a 10k to 20K price tag to these defects and most can be repaired for under $2500!

If you are thinking about a renovation project call me first to help you build your team!

 

 

Posted in Free Tips, Investing, Real Estate | Tagged best flips, best opportunities to buy, house flipping, how to find the best flips. | Leave a comment

The Problem with Cash

Posted on September 22, 2012 by Tim

New federal laws require every lender to document every dollar that moves into your account to thwart money laundering and assist the feds to catch the bad guys. 

What in the world, you may ask, does that have to do with my mortgage?  When you apply for a mortgage many times you will be require to verify your assets.  If you are buying you will need to prove you have the money for  your down payment and closing costs.  The lender may require that you prove you have reserves for some loan programs.  For some refinance transaction you will also be required to prove you have assets for reserves.  Any time you have to bring a dollar to closing you will be required to prove you have the money.

Here’s the challenge.  Any time a lender looks at a bank statement they will review every single deposit you make.  If the deposits are direct deposits from your employer or any documented source then you are all set.  If, however, you have deposited anything other than that you must be prepared to prove where the money came from with cancelled checks and a verifiable explanation.

So what if it was cash?  You may have to use another account or wait until you can provide the required proof of assets to the lender without seeing that deposit.  In most cases that is thirty days, but it can be sixty days.

If you deposit cash from the sale of an item you must prove the following;

  1. Ownership – if it is a vehicle you must prove you owned it the title.  If it is jewelry or other items like that you must show a purchase receipt or other proof.
  2. Proof of the value – if it’s vehicle the lender can verify the value through Kelly Blue Book.  If it is jewelry or any other item you must provide an appraisal from a professional to verify that you received a reasonable value for the item.
  3. Sale – You must show a bill of sale
  4. Receipt of payment – If you were paid by check make a photocopy before you deposit it.  If cash, make sure you get a copy of the signed receipt.
  5. Proof of deposit – You must document the money entering your account.  This usually is what got you into this situation to begin with.

It can be even more difficult if you have multiple deposits.  I once had a borrower that hosted a bridal shower for a friend and took in hundreds of dollars from friends for the party expenses.  She was required to round up all the cancelled checks from her friends to show the lender where the money came from.

It’s all about planning!  If you know you are going to buy a home or refinance then do NOT make deposits to your account that are not easily documented OR hyper document every item you deposit.  Your life will be easier and your Originator will thank you!

 

Posted in Financing, Free Tips, New Borrower | Tagged Cash deposits, closing costs., down payments, loans, Mortgages, originate, purchase, refinance, reserves | Leave a comment

What Does My Broker Need Me to Bring?

Posted on September 22, 2012 by Tim

Every lender must research and document three things to determine your eligibility and interest rate. Income, credit and collateral.  Your identity must also be verified according to the Patriot Act.  Every docuement required falls into those three categories so lets break it down.

Income. How do you get paid? Every lender needs to prove that you have  a two year History of recieveing that type of income AND that the income is likely to continue for the next Three Years.  If your income doesn’t fall into any of the specific categories below then that is what you must prove.

If your get paid a salary or hourly wage you will need
1. Your Most Recent paystubs (4 weeks) and
2. Your W-2

If you are commissioned, self employed or collect dividend or other 1099 income you will need
1. 2 Years of IRS Form 1040 Tax Returns – NOT your state returns
2. Year to Date Profit and Loss Statement and/or
3. Last two years of 1099’s

If your income is all retirement or pension income, including disability income, you’ll need to bring
1.  Most recent year’s Award Letter(s) – this includes social security income
2.  Most recent two months of Bank Statements to show direct deposit into your account 3.  For disability income you may need to prove that it will continue for at least 3 years.

Credit.  Every lender will pull a credit report from the three credit bureaus, Experian, Transunion and Equifax.  The score will help determine what loan programs you are eligible for AND will help the lender determine your debt to income ratio since all your liabilities will be on the credit report.  What you will need to bring is

1.  A Letter of Explanation for any credit deliquency you have had in the past 12 months. A letter of explanation stating the outcome of every credit inquiry you have had in the past 90 days and any new debt you have aquired that is not on your credit report.

Collateral.  Once a lender is satisfied that you have a suitable credit history and the ability to repay the loan they will assess the collateral.  This is done with an appraisal.  You will pay the lender or an appraisal management company (AMC) that will order an independant appraisal of your home to determing the value and condition of the home you are purchasing or refinancing.  An analysis of the market conditions surrounding your property is also now included on the report as well.  Included in the collateral analysis is your asset verification.  The amount of assets required depends upon the specific loan program and is a major risk factor for the lender.

1.  When liquid assets are required you will need to show the most recent one or two months of bank statements.  RED FLAG  If you have ANY deposits in your account that cannot be readily identified as income, like a direct deposited paycheck, the lender will require documentation to prove where that money came from.  This recent requirement is part of a new Anti-Money-Laundering policy that every lender is required to adhere to.  It can make your simple refinance a nighmare, so plan ahead and don’t move cash around in your accounts that you cannot document. 

2.  Reserves – If other assets are required you will need to bring your most recent asset statements like your 401K statement or IRA statement or Stock account statement.

3. Any money you move from one account to the next must be documented in both accounts.  you will need account statements from both accounts.  Any statement you provide MUST include ALL pages of the statement.  If you provide a print out from the bank it MUST be stamped and signed by the bank in order to be valid. 

4.  Home owner’s insurance declaration page or the contract to purchase the property will be required to verify that you are the owner of the property.  You must pay for title insurance as well, which will further document the current ownership of the property as well as any liens that are on the property currently. 

Identity.  Usually all you need to bring is your driver’s license.

So, here’s the short list;

  1. Copy of your drivers licence
  2. Most recent paystubs (2)
  3. Last two years of w-2 (FHA)
  4. Last two years of IRS 1040’s (Self Employed, Commissioned or Dividend income)
  5. Year to date Profit and loss (Self Employed)
  6. Award letter(s) (Retirement, pension or disability Income)
  7. Most recent two months of bank statements
  8. Documentation of any deposits other than pay
  9. Home Owner’s Insurance declaration page (for refinance)
  10. Purchase contract – fully executed including all adendums
  11. Letters of explanation for all credit inquiries and any deliquencies
  12. Letter stating you have not acquired any debt that is not fully disclosed on your application.

As always, make sure you speak to your originator about any specific items you will need that are particular to your situation.  Call Victory Funding!  We make it easy!

 

 

 

 

Posted in Real Estate | Tagged documents to bring, real estate financing, what paper work do i need, What to bring | Leave a comment

What Documentation Will I Need?

Posted on May 12, 2012 by Tim

It’s never “good enough” for me to know WHAT I need to provide to someone, I need to know WHY I’m providing it.  Everyone’s situation is different, so the documentation may look different for every borrower.  Let’s break it down to three categories.  Income, Assets and Credit.  These are the areas that all underwriting guidelines are focused on proving.

Income – You must be able to prove you are working and how you are getting paid.  The underwriter must show you have at least a two year history of receiving the income and the likelihood it will continue for the next three years.

W-2 employee – Most recent 4 weeks of pay stubs + last 2 years of w-2’s – by far the easiest category.

Commission employee – Most recent 4 weeks of pay stubs + last 2 years of Federal Tax Returns with all schedules (IRS form 1040).  You must show whether or not you are claiming un-reimbursed expenses which must be deducted from your income.

Self Employed – Last 2 years of Federal Tax returns with all schedules

Retirement or Disability Income – Last 2 years of 1099’s, Most recent Award Letter, Last two months of Bank Statements if direct deposited, If disability you must show proof that the income is likely to continue for at least 3 years.

Rental Income – Last 2 years of Federal tax returns – Only need first two pages plus the schedule E.  Sometimes a lease will suffice if you purchasing a single family investment property or and FHA two, three or four family.

Dividend or IRA income – Last 2 years of Federal tax returns to show you have been receiving the income + the most recent account statement to show you have enough for the  income to continue for at least three years.

There are many more types of income, pages in fact, but the above are the most common.  Now lets look at assets.  The underwriter must be able to see the required amount of assets in the account for the past 60 days.  That means that EVERY DEPOSIT MUST be sourced and seasoned.  You cannot deposit cash and be able to use it for a purchase for at least 60 days.  Here is what the underwriter will require.

Last two months of bank statements – ALL PAGES – yes, even that annoying last page that tells you how to balance your checkbook must be included.  Do NOT just send the first page with the balances.

Most recent 1 month or quarter of other Asset account statements like 401K, Money Market Account, Stock Portfolio account, and so on.  You get the picture.

Gifts must be very meticulously documented.  Gift letter from the giver stating who they are, the relationship to borrower, that the funds will not need to be paid back, and all their contact information.  Then you need to provide proof the gift giver had the ability to give.  Usually a withdrawal slip from the bank showing the account balance at the time of withdrawal is sufficient.  A copy of the check and printout signed by your bank showing the transaction where you deposited the funds into your account.  If you think “paper trail” you will do it correctly.

Credit – Almost everything else falls into this bucket.  Besides the credit report you may be asked to provide 12 months of cancelled rent checks if you have thin credit.

Cosigned loans can be “removed” from your debt ratio if you provide 12 cancelled checks from the person other than you making the payment.

You will need a letter of explanation for any derogatory items on your report.  The letter must state what happened, why it was beyond your control and why it will never happen again.

The other items you will need to bring are for identity and processing purposes.

Copy of your driver’s license

Copy of your current insurance declaration page or name and phone number of your agent

Copy of your most recent mortgage statement for a refinance

Letter of explanation for every inquiry on your credit report

This will get you started!  We can ask for just about anything that could be a red flag so stay flexible and be prompt with the documentation so your loan can fly through the system with the greatest of ease!  Most of the time, Victory Funding can close your loan in 30 days or less with your cooperation!

 

 

Posted in Financing, Free Tips, New Borrower | Tagged advice, best interest rate, documentation, FHA, Low rates, Mortgages, real estate, What to bring | Leave a comment

Do I Really Need Title Insurance?

Posted on April 22, 2012 by Tim

Borrowers ask me this question all the time. The resounding answer is maybe. First let’s talk about what it is and what it does. Title insurance insures the beneficiary that no liens exist except those specifically mentioned and detailed in the policy. The title company searches public records for everything that has transpired regarding a specific piece of property for at least the past 40 years. Open mortgages, satisfied mortgages, liens, judgements against the owner, easements and transfers of the property are all in the report. Old mortgages are matched up against satisfactions that are filed in conjunction with them. In fact, that is one of the most common problems. When a mortgage is satisfied it is not uncommon for the lender to fail to file the satisfaction, leaving an open mortgage on the title.

Once all this is sorted out the title insurance company will issue a policy essentially guaranteeing the beneficiary that the title to the property is clean and defensible. Now back to the question. There are two types of policies. The mortgage policy and the fee policy. This refers to the entity benefiting from the policy. If you are the lender you will get a mortgage policy and if you are the owner you may get a fee policy. Virtually all lenders require a mortgage policy and you will be the one paying for it at the closing. The fee policy is completely optional, so how do you decide?

Here are some questions to answer that should help you make the choice.
1. Does the mortgage policy cover the purchase price of the home? The mortgage policy covers only the loan amount so your down payment will be exposed to risk if you do not purchase the fee policy.
2. Was the property ever involved in significant legal action like foreclosure, estate or bankruptcy? If so, there is added risk if the procedure wasn’t done correctly or there are disgruntled former owners or contractors involved. I recommend that you purchase the fee policy if any of the above are found in the search.
3. Did title transfer many times in a short amount of time? This can be an indication the property was flipped and, again, increases the potential for errors and risk. Buy the policy!
4. Finally, does the report show that Mr. and Mrs. Jones have owned it for forty two years and that’s the only thing in the report? You are probably safe with out the policy.

Think of title insurance as attorney insurance. That’s what you are really paying for in advance; the title companies guaranteed legal defense of any claim against the ownership of your property. With out the insurance you cold pay thousands of dollars to defend a claim instead of a couple hundred dollars when you purchase the property.

Posted in Free Tips, New Borrower, Real Estate | Tagged foreclosure, insurance, investing, Morgage, real estate., title insurance | Leave a comment

Seller Concessions? What Are They & How Do I Calculate Them?

Posted on March 26, 2012 by Tim

Seller concessions help people buy homes!  The name implies that the Seller actually pays the buyer or makes a concession in the purchase price to benefit the buyer.  In essence that is true, but in reality the Seller isn’t doing anything other than allowing the buyer to borrow more money to cover closing costs.  Lets look at an example to illustrate the point.

The seller of a home lists their house at $210,000 and gets an offer on the house.  The offer is negotiated so the seller is netting $200,000 and the seller accepts that price.  When the contract is tendered the selling price is $206,185 with a 3% seller concession.  The seller will net exactly $200,000, but since the contract price is $206,185 the lender for the buyer uses THAT number to determine the loan amount and includes the credit to the buyer of $6185 toward the required amount of money that the buyer must bring to the closing, effectively allowing the buyer to borrow those closing costs.

The home must appraise for the full purchase price.  Usually that is not a problem, but many lenders will not allow the purchase price to exceed the highest price the home was listed for.  When I list a home I usually suggest that the seller start a bit on the high side  in order to accommodate a potential buyer using a seller concession.  We then adjust the price quickly so we don’t miss any potential buyers at a lower price.

Here’s where most Real Estate Agents get messed up.  The math necessary to determine the correct gross sales price looks like this.

Final Sales Price = net to seller / (1 – seller concession)

Now lets apply the above numbers.  Final Sales Price = 200,000/ 1-3% (which is .97)

Final sales price = 206,185.57.

If it were a 6% seller concession then the formula would be Net to seller/(1-6%) = 212,765.96  or Net to seller/ .94 = 212765.96

If you are looking at a contract and want to determine what the seller is supposed to net  the formula looks like this;  Seller net = Gross purchase price x (1-seller concession) so if the seller concession is 6% the formula would be;

Seller Net = Gross purchase price x (1- .06) or Seller Net = GPP x .94

Many Realtors want to multiply the seller net by the seller concession then add it to the seller net. When you do that you will rob your seller of the price they agreed to.  What that usually means is that it will come out of your commission check.  Using the example from above the final purchase price would be 212,000 but when the bank does the math correctly and takes the final purchase price and multiplies it by 6% they get a seller concession of $12720 and the seller nets $720 less than they thought they were getting!

This calculation is done incorrectly on MOST contracts!  Learn how to do it correctly and keep that seller concession in YOUR pocket!  If you are a seller then you need to know how to do this math so when the other realtor messes it up the miscalculation doesn’t come out of YOUR pocket.

Become an expert at what you do!  Your clients will be loyal forever!

 

 

 

Posted in Financing, Free Tips, Real Estate | Tagged how to calculate seller concessions, mortgage broker expertise, real estate, real estate math, seller concession | Leave a comment

Still Building in January!

Posted on January 25, 2012 by Tim

Wow!  It doesn’t happen often, but this year builders are still in the game.  We are breaking ground tomorrow, January 25th on a new construction modular on a spot lot we bought a while ago.  Most years we are done until Spring, but this year the dozer is hitting the ground at the end of January!

Making money in this market is all about buying the Real Estate right and finding the buyer BEFORE you pull the trigger.  Imperfect building lots can be purchased at a bargain but be sure you understand the ramifications of every aspect of your lot.  Soils, wetlands, frontage, bedrock, utilities among many other variables will determine your ability to make money on land.

If you are thinking about making money on land or building, do your self a favor and hire experts for your first purchase.  The knowledge they have will make the difference between becoming an expert and becoming and ex-builder!  Happy building!!

Posted in Investing, Real Estate | Tagged Real Estate development | Leave a comment

Broker or Banker?

Posted on January 23, 2012 by Tim

Brokers offer more choices for the consumer as well as a much higher level of expertise.  Our entire economic system is built on competition and consumer choice so let’s look at what each has to offer and I believe the choice will be clear.

Think about it; the average bank may offer three or four different loan programs to every customer that comes through the door.  You, the consumer, may qualify for all of them, but the loan officer will likely offer you one.  That’s right, ONE product that you may be well qualified for, but that doesn’t mean it’s the best program for you! A Broker, conversely, has several lenders to choose from that each compete for the business of that Broker.  Lenders who sign on with brokers compete for that business by offering the most competitive interest rates, the fastest underwriting times, the best technology, the best customer service to the end consumer and the most creative, beneficial loan programs in the industry.  The result is that the consumer has access to dozens of loan programs.

Another fact that plays into the competitive edge that Brokers have is massive overhead.  A brick and mortar bank chain has enormous overhead while a wholesale mortgage bank can contain it’s overhead and pass the savings on to the consumer through the broker.  The overhead expenses that a local, or national bank has force the lender to charge more for the same products.  So, how do you choose between a Banker and a Broker?

Choosing is where the expertise of the Broker comes in.  Consider these facts carefully.  First, Loan Officers who work for federally chartered banks and federal credit unions are NOT required to be licensed.  They do NOT have to take the required 22 hours of federally mandated training.  They do NOT have to pass federal OR state testing.  They do NOT have to complete 11 hours of continuing education each year.  Remember the Loan Officer is YOUR contact point.  They help you choose the right program for your specific set of circumstances.  They are there to solve your problems.  Most Bank Loan Originators do NOT know the underwriting guidelines that will be used to complete the loan you are applying for.

Brokers are required to complete all the above requirements.  Oh, and one more thing… most Loan Originators that work for Mortgage Brokers ONLY get paid when your loan closes.  They are not order-takers or box checkers.  That system of compensation forces them to be more competitive, better trained and more motivated to get your loan closed.  Staying up to date on market changes and guideline updates benefits the consumer and is a paramount keystone to remaining competitive in this market for Brokers.  Salaried  employees just don’t need, or have, that edge.

More choice, more training and expertise and more competition means a better experience for you, the consumer.  Explore the differences and be sure you are working with an expert on the largest transaction of your life!

 

 

 

Posted in Financing, Free Tips | Tagged best interest rates, broker, mortgage broker, real estate agent, wholesale interest rates | Leave a comment

It’s Just Math

Posted on January 22, 2012 by Tim

How do I choose an interest Rate?  First, it important to know that every rate offered for a specific product has a cost attached to it.  That cost is usually expressed as a number above or below 100.  For example, on a 30 year fixed loan a lender may offer a rate to a broker ranging from 3.5% to 4.75%.  The “cost” of the rate at 3.5% may be expressed as 98.5 meaning that the consumer would have to pay 1.5% of the loan amount as a fee to the lender – not the broker, usually referred to as points.

If the consumer didn’t want to pay points they may choose a rate of 3.875%, for example, that has an associated price of 100.00.  That is considered “PAR” meaning that the consumer won’t pay any points and the lender won’t give you a credit.

You may need a lender credit if you were buying a home and could benefit from lower closing costs, or the lender may pay the broker using that credit.  In that case you would choose a slightly higher interest rate that includes the bank paying you a credit.  An example of this may be an interest rate of 4.125 with an associated CREDIT of 2% expressed as a price of 102.00.

The question still remains how do I choose?  As I said, it’s just math.  Every interest rate will produce an associated principle and interest payment.  Obviously the lower the rate the lower the payment, but the higher the cost.

Lets use the above figures and a fictitious principle and interest payment to illustrate the point.  The P&I payment on 100K loan is $450 at 3.875% interest.  If you choose 4.125% the payment jumps to $470 but the lender gives you a credit of $2000.00  It will take the lender 100 months to recover that credit – that is a great deal for you the consumer.

Now let’s say you choose 3.625% and the corresponding payment is $430 but the cost to you is $2000.  Now it will take YOU 100 months to recover that fee which means it is a terrible deal for you.

How long should is too long?  I usually recommend you recover any money you spend is 48 to 60 months unless you plan on being in the home a shorter time than that.  Lender pricing changes constantly but usually benefits the borrower to take a slightly higher rate in exchange for large lender credits, also known as yield spread premium.

Don’t let your emotions drive your interest rate decisions! Learn the system and do the math!!

 

Posted in Financing, Free Tips, New Borrower, Real Estate | Tagged how to choose your interest rate., interest rate, lender credit, yield spread premium | Leave a comment