Let’s examine what you need to be concerned with if you want to invest in real estate? First, you must understand your market. There are two different types of markets. One type of market is a seller’s market, and the other type of market is the buyer’s market.
In a buyer’s market, the buyer must be aware that being in a buyer’s market doesn’t make the buyer’s job any easier. It just gives the buyer more flexibility. Remember in a buyer’s market, there may be several buyers for one property or only one buyer for a property. If there are no other buyers for a property by virtue of the length of time the property has been on the market then a low offer may come in to the seller. Sorry sellers. However, sellers that do not mean that you have to give your properties away, but it may mean that you may have to settle for less than you anticipated selling your home.
Another thing that makes a buyer’s market advantageous to the buyer and not to the seller is that there are a lot of homes to choice from that may meet the buyer’s criteria.
In a seller’s market, on the other hand, the seller has the upper hand. The seller can price their home significantly above market value and negotiate the purchase price to exact what the seller wants the purchase price to be. Sorry buyers. If the buyer really wants a home in a seller’s market, the buyer must succumb to the seller’s terms in order to get the home. As a matter of fact, in a seller’s market the inventory of homes for sale that may meet the buyer’s criteria are fewer.
Once you ascertain the type of market you are in then you are ready to buy. Now you must determine what type of properties work best for you. By that I mean do you want to purchase single family homes or multi units. With single family homes, it is very important to determine what will happen if the property is vacant. You must determine if you can pay the mortgage if there is a mortgage on top of other expenses if there is not a tenant or the tenant is not paying. In those calculation must be the upkeep of the building to include utilities and maintenance not only the mortgage, taxes, and insurance. If that is affordable then move forward. If not, then look at those options with a multi unit and determine which scenario works better for your financial situation if there are vacancy. Do not fool yourself there will be vacancy during something of your ownership, so it is best to look at that now than later.
Now, that you have determined which property type you like then move forward. Always remember it is easier to rent three plus bedrooms then two or one.
Up until now I have spoke only about the possibility of buy and hold. What is buy and hold? Well, buy and hold is when you buy the property and hold it to rent it for a pre-determine number of years. It is important to note that in order for this to be successful buy your investment property in an area that is desirable to both renters and homeowners. By doing this, it makes it easier to sell for a profit when you determine you want to sell.
There is yet another way to be a real estate investor and it is called fix and flip. Fix and flip is fixing up the property to flip or sell it to someone else. Under the fix and flip, if your buyer is acquiring financing to purchase the property then you will have to have owned the property for at least six months to be able to sell. Be aware that some lenders may require that you owned it longer. You may be wondering how the financial institution of the buyer knows how long the seller has owned the property well the lender requires a clear chain of title. The chain of title will show if there is any liens and/or judgment, but it also shows the chain of ownership. The chain of title yet again let’s the lender know if the property is marketable and free to transfer ownership. You may be wondering where the chain of title comes from? The chain of title comes from an abstract of the title. An abstract of the title is a condensed history of ownership of the property which is gathered by the abstracter through public record.
Once the Title Company and lender determine that the property is free and clear to sell. The lender needs to know that the buyer is free and clear of liens and judgments as well. The reason is that the liens and judgment that the buyer may have may attach to the property, so a search is done on the buyer by their name and social security number. If the buyer has a common name then a name affidavit can clear up most information that may come up. The name affidavit has the buyer’s name, social security number, marital status, last five years of addresses, etc. This information is used to rule out judgment that may appear as the buyer’s judgment or not.
Let’s discuss different ways to sell the property under a fix and flip scenario. The seller may consider a lease option. Under a lease option, the seller must do a judgment search on the potential buyer/tenant before attaching them to the property because the judgment and or liens on the potential buyer/tenant may attach to the property. I am sure the seller does not want to pay someone else bills, so pay to have the search done.
Once the search is complete and it is determined that the potential buyer/tenant does not have any judgment and/or liens draw up the lease/option contract. Consult an attorney when doing this to ensure all options of ownership and releasing option are examined.
Under most lease agreement, the buyer pays a non-refundable deposit. This deposit is negotiated between the parties and credited to the buyer at time of purchase. Under some agreement, the deposit is credited to the buyer only if the buyer does not default on the lease agreement and exercise their option before the expiration of the lease agreement.
The seller will also credit the buyer a certain portion of the monthly lease payment that the buyer/tenant makes in a timely manner to the buyer at time of closing. However, the buyer/tenant shall not receive any credit for monthly payment made after the due date specified in the contract.
Incidentally, it is important to note that the buyer/tenant can only exercise their right to purchase in writing. It is also important to note that the option to purchase is not transferable.
It is important to work with the potential tenant/buyer to help them clear their credit issue by referring them to a professional that will help the tenant/buyer determine what need to be corrected on their credit and keep up with the tenant/buyer progress on doing what is required to correct the tenant/buyer’s credit. The reason this is important for the life of the lease you can not sell the property without proper notice to the tenant/buyer.
Now, that we have discussed your investment option let’s get back to some basics. Let’s say you are buying a fixer upper. With a fixer upper, there are not many insurance options or so you may think. Because you can one company and they tell you that they can not insure your new purchase under after repair, and you move on with the purchase, but do not have your interest in the property insured. Well, there are companies that offer the insurance you need. You just need to know what companies offer it and what that type of insurance is called. It is called builder’s risk or a vacancy policy. The companies that offer these policies are Allstate, American Family, and Farmers Insurance. Allstate’s policy covers the property for a year, but it does not cover you once you have a tenant in the property. Once a tenant is in the property you must have a landlord policy.
American Family’s policy covers the property for three months, and then at the end of the three month you either buy another three month policy because it is not ready for occupancy or get a landlord policy.
Once your insurance is in place or even before purchase find out about permits for the jobs needed for the fixer upper. You need to do this so that jobs will not be stop by the city inspector and you lose money as a results. This is very important in a fix and flip scenario because you stand to have to pay expense that you did not calculate for. This is also called holding cost, so do research that can not be spoke to enough research, research, research.
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