Register Real Estate Advisors

Don’t expect to get rich in a hurry, no matter what they say on TV infomercials, and don’t let the dog eat your homework. Those are among the common goofs of novice investors.

By Bankrate.com
Once the real-estate market starts to rebound, investing in property will become a more appealing idea — either as a career or a great side job. Like any other endeavor, though, there’s a right way and a wrong way to go about it.
Bankrate spoke with established, full-time real-estate investors and with professionals, such as bankers, to identify the 10 types of traps into which real-estate investors most often fall.
1. Planning as you go
Andy Heller, an Atlanta investor and a co-author of “Buy Even Lower: The Regular People’s Guide to Real Estate Riches,” says lack of a plan is the biggest mistake he sees new investors make. They buy a house because they think they got a good deal and then try to figure out what to do with it. That’s working backward, Heller says.”First, you find the plan,” he says. “Then you find the house to fit the plan. Pick your investment model, and then go find property to match that. Don’t find the strategy after you find the home.” The problem is that most people look at real estate as a transaction instead of as an investment strategy, says Doug Crowe, a Chicago real-estate investor and speaker. “People fall in love with a property,” says Crowe, the managing director of Springboard Academy, the nation’s only real-estate academy for investors. “I say, ‘Who cares about the property?’ I fall in love with a motivated seller.”
2. Thinking you’ll get rich quick
That kind of wrongheaded thinking is fueled by “these self-appointed gurus who have infomercials and make it sound so easy to get rich in real estate,” says Eric Tyson, a co-author of “Real Estate Investing for Dummies.” Real estate isn’t easy. It’s a good long-term investment, but so is putting your money in a mutual fund, which is a lot easier. “These gurus don’t talk about all that hard work. You have to be smart, you have to be willing to work, and you have to understand your risk tolerance.”
3. Playing Lone Ranger
A key to success is building the right team of professionals. At the very least, you need good relationships with at least one real-estate agent, an appraiser, a home inspector, a closing attorney and a lender, both for your own deals and to assist with financing for prospective buyers. In the remodeling and maintenance segment of the business, the team includes a plumber, an electrician, a roofer, a painter, a heating and air-conditioning contractor, a flooring installer, a lawn maintenance service, a cleaning service and an all-around handyman. You can’t build a business as an investor if you’re spending all your time fixing leaky faucets and putting up ceiling fans.
4. Paying too much
Heller says the biggest reason investors don’t make money is simple: They pay too much for properties. “The profit is locked in immediately once the investor buys the property,” he says. “Due to mistakes in the analysis, the investor pays too much and then is surprised later when he doesn’t make any money.”
5. Skipping homework
You wouldn’t think you’re qualified to perform open-heart surgery without years of education and training. Yet many wanna-be real-estate investors don’t think twice about taking their financial lives in their hands without even cracking a book. Educate yourself before you put your family’s financial security on the line. Read articles, check out books from a library and look for a local chapter of the National Real Estate Investors Association. Speakers at monthly meetings cover everything from buying foreclosures to screening tenants. If you can’t find a local chapter, find out who owns a lot of rental properties in the area, call them up and offer to pay for an hour or two of their time to find out whether this is a good career for you.
6. Ducking due diligence
Investors often have to move quickly on their deals. That doesn’t mean they sign a contract and write a check without plenty of research, though. That’s where a lot of newbies trip up, says Houston real-estate agent Laolu Davies-Yemitan. They don’t do their due diligence about the deal, the costs or the market conditions, and they wind up draining their personal savings because the house needs extensive repairs or they can’t sell it. “Sometimes, new investors are buying property just based on the idea that the property is going to appreciate,” he says. “Usually, they don’t have any information to substantiate that.”
7. Misjudging cash flow
If your strategy is to buy, hold and rent out properties, you need sufficient cash flow to cover maintenance. “People think they can get a property manager,” Tyson says. But many have never interviewed a property manager and have little idea about how they work. Most managers, for example, are reluctant to take on one single-family home or a duplex, he says, preferring larger complexes. And fees of 7% to 10% of the monthly rent are common. “It’s a huge expense,” Tyson says. “I can put my money in a mutual fund and it costs a half-percent a year.” Davies-Yemitan agrees. It’s not uncommon for a property to sit on the Houston market for 90 to 120 days before it’s leased, he says. Meanwhile the owner has to pay the mortgage, the taxes, the insurance, the cost of advertising and any homeowner or condo association dues, he says. If the owner hasn’t budgeted for that, an asset can quickly become a liability.
8. Lowering the volume
If you’re working on one deal at a time, Crowe says, you’re doing transactions, not running a business. You need a steady pipeline of prospective deals; sufficient volume will weed out the marginal deals and let the good ones rise to the top.
9. Painting yourself into a corner
Many people buy a property and get stuck with it because they have only one exit strategy. They’re going to sell it or rent it out. What if it doesn’t sell? What if the rental market stalls?
Always have two, if not three, ways to get out of any deal. For example, if plan A is to rehab the house, put it on the market and resell it, then plan B could be to offer a lease-purchase to a buyer. Plan C might be to hold the house and rent it out. And as a plan D, there is the wholesale option, which would involve selling to another investor at a below-market price. Hopefully, you’ll still make a profit, but at the very least, you’ll cut the losses you’re taking every month in carrying costs.
10. Miscalculating estimates
Crowe tells his new rehabbers that after they’ve done their homework, they should double the amount of time and money they think it will take. If they can still make money then and they might be able to rent it out, it’s a good deal.

Do you know your agent’s responsibilities?

A $200,000 home costs more than a $185,000 home, right? Well, yes and no. Assuming the same type of financing for both homes, the $200,000 home does cost more initially. But many factors contribute to the overall long-term cost of a house. Here are some things to keep in mind when trying to determine the true cost of purchasing a particular home:

• Does it have a pool or hot tub that requires maintenance?
• How much yard maintenance is required and who will perform it?
• Are there trees that should be removed?
• What are the utility costs? Although your usage won’t be exactly the same as the current owners, you may be able to get their utility bills for the past year from them or directly from the utility company.
• How soon will the roof need to be replaced?
• Does the house need repainting?
• Does the electrical system need upgrading to handle the load for your appliances and electronics?
• Does the home have aluminum wiring, lead-based paint, or other safety or health hazards you will want to address?
• Does the house need new carpeting or flooring?
• What remodeling projects do you see as a must?
• Will appliances need replacing?
• What are the estimated property taxes for the property?

Also, be sure to get a professional inspection to identify other potentially costly problem areas.

2004 by the Texas Association of Realtors, All rights reserved.

1. Develop a Family Budget – Instead of budgeting what you’d like to spend, use receipts to create a budget for what you actually spent over the last six months. One advantage of this approach is that it factors in unexpected expenses, such as car repairs, illnesses, etc., as well as predictable costs such as rent.
2. Reduce your debt – Generally speaking, lenders look for a total debt load of no more than 36% of income. Since this figure includes your mortgage, which typically ranges between 25% and 28% of income, you need to get the rest of installment debt – car loans, student loans, and revolving balances on credit cards – down to between 8% and 10% of your total income.
3. Get a handle on expenses – You probably know how much you spend on rent and utilities, but little expenses add up. Try writing down everything you spend for one month. You’ll probably see some great ways to save.
4. Increase your income – It may be necessary to take on a second, part-time job to get your income at a high-enough level to qualify for the home you want.
5. Save for a down payment – Although it’s possible to get a mortgage with only 5% down – or even less in some cases – you can usually get a better rate and a lower overall cost if you put down more. Shoot for saving a 20% down payment.
6. Create a house fund – Don’t just plan on saving whatever’s left toward a down payment. Instead decide on a certain amount a month you want to save, then put it away as you pay your monthly bills.
7. Keep your job – While you don’t need to be in the same job forever to qualify, having a job for less than two years may mean you have to pay a higher interest rate.
8. Establish a good credit history – Get a credit card and make payments by the due date. Do the same for all your other bills. Pay off the entire balance promptly.

Reprinted from REALTOR Magazine Online by permission of the National Association of Realtors, Copyriht 2005, All rights reserved.

The lender must disclose a good faith estimate of all settlement costs. A check to cover your closing costs will probably have to be a cashier’s check. The title company or other entity conducting the closing will tell you the required amount for:

• Downpayment
• Loan origination fees
• Points, or loan discount fees, you pay to receive a lower interest rate
• Appraisal fee
• Credit report
• Private mortgage insurance premiums
• Insurance escrow for homeowners insurance, if being paid as part of the mortgage and insurance in escrow accounts as they are paid with the mortgage , then pay the insurance or taxes for you.
• Deed recording fees
• Title insurance policy premiums
• Survey
• Inspection fees – building inspection, termites, etc.
• Notary fees
• Prorations for your share of costs, such as utility bills and property taxes

A note about Prorations: Because such costs are usually paid on either a monthly or yearly basis, you might have to pay a bill for services used by the sellers before they moved out. Proration is a way for the sellers to pay you back or for you to pay them for bills they may have paid in advance. For example the gas company usually sends a bill each month for the gas used during the previous month. But assume you buy the home on the 6th of the month. You would owe the gas company for only the days from the 6th to the end of the month. The seller would owe for the first five days. The bill would be prorated for the number of days in the month, and then each person would be responsible for the days of his or her ownership.

Reprinted from REALTOR Magazine Online by permission of the National Association of Realtors, Copyriht 2005, All rights reserved.

Increase your chances of getting your dream house instead of losing it to another buyer, with these easy steps.

1.  Get prequalified for a mortgage.  You’ll be able to make a firm commitment to buy and make your offer more desirable to the seller.

2.  Stay in close touch with your real estate sales associate to find out first about new listings that come on the market.  And be ready to go see a house as soon as it goes on the market.

3.  Scout out new listings yourself.  Look at Internet sites, newspaper ads, and drive by the neighborhood frequently.  Maybe you’ll see a brand-new “for sale” sign before anyone else.

4.  Be ready to make a decision.  Spend lots of time in advance deciding what you must have so you won’t be unsure when you have the chance to make an offer.

5.  Bid competitively.  You may not want to start out offering the absolute highest price you can afford, but don’t try to go too low to get a deal.  In a tight market, you’ll lose out.

6.  Keep contingencies to a minimum.  Restrcitions such as needing to sell your home before you move or wanting to delay the closing until a certain date can make your offer unappealing.  In a tight market, you’ll probably be able to sell your house rapidly.  Or talk to your lender about getting a bridge loan to cover both mortgages for a short period.

7.  Don’t get caught in a buying frenzy.  Just because there’s competition doesn’t mean you should just buy anything.  And even though you want to make your offer attractive, don’t neglect inspections that help ensure that your house is sound.

Reprinted from REALTOR Magazine Online by permission of the National Association of REALTORS.  Copyright 2005.  All rights reserved.  http://www.REALTOR.org/realtormag.

Most home buyers want to get moved into their new home right away, but if it’s in need of repairs or paint  it’s much easier to do that before you move your furniture in.  If you are going to renovate, make sure you allow enough time to get through the project before you are in need of moving in.  Cleaning or replacing carpet should also be done prior to furniture delivery.  Be sure to arrange your utilities to be transferred into your name and out of the sellers name on the day of closing to avoid set up and connection charges.  Some services that often get overlooked are alarm companies and internet carriers.  Check with your MUD District or water company to find out when your trash pick up will be each week.  Don’t forget to notify the post office of your new address.  If you will have a cluster mailbox, be sure to ask them which box fits your key.

Do you know what to look for on your final walk-through when purchasing a home?  You should have an inspection done on the home during your option period and any agreed upon repairs should have been completed before the final walk-through which is usually the day of or the day before closing.  Below is an outline to help you as you make your final walk-through.

In GENERAL:

• Have all agreed-upon repairs been completed?
• Have the sellers removed any contents that are supposed to stay?
• Is the home relatively clean and ready for new occupants?

WALLS, CEILINGS, AND FLOORS

• Are there signs of new damage? (water damage, gouges, stains, etc.)

ELECTRICAL

• Do all light fixtures work?
• Do outlets have power?

PUMBING

• Test each faucet. (On/off? Water pressure? Hot/cold water?)
• Check under sinks for leads
• Do all toilets flush properly?
• Are any drains clogged?

WINDOWS/DOORS

• Do they all have screens (if applicable)?
• Do all exterior and interior doors open and close properly?
• If there’s an electric garage door, is it operational?

APPLIANCES

• Do all appliances included in the home operate correctly?
• Refrigerator
• Garbage disposal
• Exhaust Fans (kitchen and bath)
• Ceiling Fans

EXTERIOR

Has there been any damage to:

• Exterior walls or roof?
• Driveway?
• Landscaping?

1.  In general, a foreclosure property should be at least 20% lower than similar homes in the area.   

2.  Buying a foreclosure at auction is risky.  The home could have liens, be in poor condition, or have other legal headaches attached.  Buying bank-held or HUD foreclosure properties is safer. 

3.  Do your homework!  Rumors of bargain prices have attracted buyers to the foreclosure market, but it’s not always a good deal.  Sometimes multiple bids on a property drive up the price making it less of a bargain. 

4.  There are a lot of un-reputable websites that promote foreclosures.  A good website to use is RealtyTrac.com.  You can also search the entire Houston MLS Database at BuyandSellwithShannon.com/Buy

5.  Work with an experienced Realtor (like me!) that has access to foreclosure data through the Multiple Listing Service.  Impulsive or uneducated buyers can get taken advantage of and acquire a home with many problems.

6.  Make sure you have the home inspected during your option period.  If the bank will not allow an option period, get it inspected before putting in an offer.  Your inspector will be able to spot water, pest, and structural problems.  If the inspector recommends it, hire an HVAC professional to check out the heating and air conditioning system. 

7.  If there are repairs that need to be made you should get estimates for repair costs before getting locked into a contract on the home.

8.  Get a Pre-Approval before house hunting, as the bank will require that with your offer.

7Published in The Houston Chronicle, Sunday, November 22, 2009

It’s official, President Obama has signed a bill that extends the tax credit for first-time home buyers (FTHBs) into the first half of 2010.  In addition to extending the tax credit of up to $8,000 through June 30, 2010, the extension measure opens up opportunities for others who are not buying a home for the first time.

The program gives those who own a residence some additional reasons to move to a new home.  This incentive is a tax credit of up to $6,500 for qualified purchasers who have owned and occupied a Primary Residence for 5 consecutive years during the last 8 years.

Deadlines for all contracts need to be in effect no later than April 30, 2010 and close no later than June 20, 2010. 

Single tax filers who earn up to $125,000 are eligible for the total credit amount.  Those who earn up to $145,000 can receive a partial credit.  Joint filers who earn up to $225,000 are eligible for the total credit amount.  Those who earn up to $245,000 can receive a partial credit.  Maximum purchase price:  $800,000.

What is a tax credit?  A tax credit is a direct reduction in tax liability owed to the IRS.

What is the tax credit for  first-time home buyers?  An eligible buyer may request from the IRS a tax credit of up to $8,000 or 10% of the purchase price for a home.  If the amount of the home purchased is $75,000, the  maximum amount the credit can be is $7,500.

Who is eligible for  the tax credit?  Anyone who has not owned a primary residence in the previous 36 months, prior to closing and the transfer of title, is eligible.  This applies both to single taxpayers and married couples.  If either spouse has owned a primary residence in the last 36 months, neither would qualify.  In the case where an individual has owned property that has not been a primary residence, such as a second home or investment property, that individual would be eligible.  As mentioned, the tax credit has been expanded so existing homeowners who have owned and occupied a primary residence for a period of 5 consecutive years during the last 8 years are eligible for a tax credit of up to $6,500. 

How do I claim the credit?  For those taking advantages of the tax credit in 2009, you may choose to either apply for the credit with your 2009 tax return or you may apply for the credit sooner by filing an amended 2008 tax return with Form 5405.

Other Restrictions?

If any of these apply, a credit would not be due.

• You buy your home from a spouse, parent, grandparent, child, or grandchild.
• You do not use the home as your principal residence.
• You sell your home before the end of the year.
• You area nonresident alien.
• Your home financing comes from tax-exempt mortgage revenue bonds.
• You owned a principal residence at any time during the 3 years prior to the date of purchase of your new home.