FOREWORD The core function of the Loaning4Less training program is to provide our students the base knowledge required for gaining entry into the distressed real estate market. We support that function by providing an effective method of capital funding to acquire property that has been confirmed as a viable investment. Your training will be extensive and detailed. However, your effort will dictate the results. The overall program design has been created to assist you through the process of identification, profit analysis, rehabilitation cost assessment, market analysis, and the ultimate resale of the property to determine if the property represents a viable opportunity. Under the direction of a Loaning4Less Training Center Representative you will learn the basics and expectations of our program. Next, with your Personal Coach you will be guided through your advanced training and case study review. The goal of the Personal Coach is to educate and advise on methods of acquisition, market analysis and the initial review of the property submission viability. Your Personal Coach does not determine the final purchase. They will assist in the packaging of the property benefits and analysis for presentation for funding. The success of your endeavors is at the forefront of you Personal Coach‘ work-plan and your continued communication is the key to the ultimate success of a property purchase. The Textbook is the basis of the training program. It is designed for convenient and flexible study. In addition to your textbook, a diversified set of case studies has been prepared for inclusion in your training along with aptitude assessment questions. These components are of great importance and require your full understanding and completion in order to be advanced to the stage of property submission. This training system is designed to educate you on how to evaluate a property and minimize investment risk. You must read this material in order to gain a full understanding of Real Estate Investing.
Imagine how motivated your past educators would have been had their income been dependent on your future success
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The Textbook is divided into chapters. Your Personal Coach will work with you to design your training agenda. Each section will be reviewed and must be fully completed before moving on to the next. You will be required to sign and return chapter acknowledgements. Property laws governing real estate transactions are similar state by state; however there may be varying requirements at the county level. The Textbook focuses on teaching you the ―language of real estate‖ through universal and generic concepts, terms and procedures. It takes time, effort, and patience to successfully become proficient in real estate investing. We recommend you do as much personal research as possible and consult with area professionals. Your Personal Coach represents an active professional investing entity. It is important to work closely with your Personal Coach so that all of the necessary skills required for property identification and feasibility can be developed quickly. The sole purpose of your Personal Coach is to assist you through training and help you develop your skill set to not only submit potential acquisitions but to be able to apply your education for your own endeavors.
PC = Personal Coach
L4L = Loaning4Less
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Overview of Training Process L4L Intro call TRAINEE
Chapters 1 - 3A with Training Center
Advanced Training with PC
Assessment
Case Study Practice Submission
Property Submission Electronically via RE-Source Software
PC Request Information PROPERTY REVIEW If not accepted by PC. Review reasons.
If not accepted review with PC. Move to next property.
Underwriting Funding Review
If APPROVED
OFFER Accepted
Declined SEE OVERVIEW SUBMISSION PROCESS
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L4L Compliance Process
Submission Process Submission Process
TRAINEE Customer Service
PC
Training Center
If rejected review with PAS
Property Information Evaluation
Market Analysis
Underwriting Review
After Repair Value Appraisal Renovation Cost Review
Initial Offer
Offer Presentation
Risk vs. Reward
Re-Sale Comp Expense Breakdown
Added Value Seller Acceptance Counter Offer Ernest $
Counter Offer Evaluate Response
Order Inspection
Confirm Rehab Cost Underwriting Appraisal & ARV Appraisal
Close Project Coordination Fee Change utilities Lock-Box on Property Send key to Nu-Way
Contractor's Bid Review Agreement Established Deposit Made Bond Posted
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Renovation Begins
The acquisition of knowledge is the mission of the student, The transmission of knowledge is the mission of the coach, And the application of knowledge is the mission of both.
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PROGRAM OUTLINE This program has been specifically designed to adequately build a foundation for the ultimate result of purchasing real estate as an investment. To that end the requirements presented in this course have been developed by Loaning4Less, for Loaning4Less to potentially purchase a property you have identified. In addition, adapting the finer points to fit your own investing requirements is the key to your future as an independent investor. Loaning4Less has specific unwavering requirements for purchase and will not deviate from that set guideline. This stringent approach is not only for your benefit, but also for the protection of profit and the necessary risk-management required for successful investing.
____________________________ Participant Signature
_______________ Date
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TABLE OF CONTENTS CHAPTER 1 - HOW TO APPROACH TRAINING Tips for Success Overview of Training Process Individual Training As a Trainee Loaning4Less Terminology to remember 14
10 11 12 13
“Only the curious will learn, and only the resolute will overcome the obstacles to learning.” ---Eugene S. Wilson, Amherst
CHAPTER 2 - SETTING YOUR GOALS & EXPECTATIONS The Training Schedule Goals Goal Setting 101 Motivation Performance Standards Psychological Obstacles The Benefits of Writing a Real Estate Investment Business Plan Networking
15 16 17 19 22 23 24 25
CHAPTER 3 – CONSIDERING REAL ESTATE AS AN INVESTMENT Understanding Real Estate as an Investment Distressed Property and Avoiding Pitfalls Burned by Real Estate ―Some Just Walk Away‖ Residential Investment over the Real Estate Cycle
31 33 34 36
CHAPTER 3A- THE PROCESS OF DEFAULT AND DEMAND The Process of Default and Demand Notification of Default to Property Owner Legal Notice Publications and County Postings Courthouse Postings and Auction Lists
40 41 43 44
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CHAPTER 4 – THE LOANING4LESS METHODOLOGY OF DEAL IDENTIFICATION AND ANALYSIS Getting Started Deal Identification Researching Your Property Viability Details Behind the Submission Demographic Data Neighborhood Evaluation Real Estate Market Survey County Research Treasurer‘s Office Research Zoning and Environmental Research Recorder‘s Office Research Court Research Pulling it all Together How to Sell a Fixer-Upper Overall Tips and Warnings Quick Data Sheet
45 46 47 50 51 52 53 54 55 55 56 57 58 59 61 62
CHAPTER 5 – THE REAL ESTATE TRANSACTION: AN OVERVIEW Section 1 The Real Estate Transaction an Overview Financing and The Closing Deed and Recordation How to Interpret Inspection Reports
63 64 65 66
Section 2 Areas of Acquisition to Explore Pre-Foreclosure Negotiating with Distressed Owners Buying Pre-Construction Limited Upfront Carrying Costs Selling Early Summary Article How to do a Short Sale
67 70 71 73 74 75 76 77
Section 3 Working with a Real Estate Agent The Players What to Give a Realtor Purchase Contract Purchase and Sale Agreement
78 79 81 81 84
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“If you don‟t know where you‟re going, you‟re likely to end up somewhere else.” Dr. David Campbell
CHAPTER 6 – PACKAGING A PROPERTY Key Steps The Components of a Property Assessment Structural Evaluation Taking Photos Buyer‘s Estimated Expense Worksheet Submission Process Flow Chart
86 89 90 91 92 94
CHAPTER 7 – WORKING WITH A CONTRACTOR Working with a Contractor How to Successfully Hire a Contractor Letter of Understanding Performance Bond Protect Yourself from Fraud Rehab Request Form Customer Draw Request
95 96 105 106 107 109 114
CHAPTER 8 – WE OWN IT, NOW WHAT DO WE DO Now It Gets Exciting Offer Acceptance Through Resale
116 118
CHAPTER 9 – PRACTICAL APPLICATION Case Study #1 Case Study #2 Case Study #3 Other Important Things To Consider
119 121 122 123
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CHAPTER 1 HOW TO APPROACH TRAINING The Textbook will introduce you to the basic terminology, concepts, and research techniques needed to become a real estate investor. Your Personal Coach will guide and provide you with the essential details pertinent to finding the best profit opportunities in your local markets. Once you successfully complete your case-study review and assessment, along with a practice property submission, your Personal Coach will assist you in packaging your first request for property funding. You will receive on-going support relative to the review of completed Property Profiles for the full five-month term of your program period. It is imperative that you are active and in contact with our office throughout your subscription term.
―The lazy man always walks the same path twice.‖ — Chinese Proverb
The Loaning4Less Training Program operates much like a ―house key.‖ Each tooth in that key is essential to unlocking the door. If only nine out of ten of the teeth on that key are copied, the door will not open. At times you will be asked to review terms found in the abbreviated dictionary provided in the reference section. You will be asked to repeat similar work in a more sophisticated manner as you complete your Practice Property project. At each step you will review and apply previously mastered skills. The learn-review-apply method of learning has been shown to be the best educational method for mastering complex and new information. Keep in mind that you will receive one-on-one training tailored to investing in your area. You must also expand your teachings by reading your local Real Estate section, attend FREE Seminars, and look into joining a local Real Estate Investment Club. The ultimate responsibility of success is with you.
Tips for Success The program is designed to fulfill an educational requirement that is the necessary foundation for proceeding with real estate investing. Expanding your knowledge outside the scope of this text is imperative. Delivering quality completed work and surrounding yourself with professionals that will compliment your endeavors is absolutely necessary. Do not undertake any real estate purchase without thorough investigation and understanding of your exposure to risk.
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Overview of Training Process L4L Intro call
TRAINEE
Chapters 1 - 3A with Training Center
Advanced Training with PC
Assessment
Case Study Practice Submission
Property Submission Electronically via RE-Source Software
PAS
Request Information PROPERTY REVIEW If not accepted by PC. Review reasons.
If not accepted review with PC. Move to next property.
Underwriting Funding Review
If APPROVED
OFFER Accepted
Declined SEE OVERVIEW SUBMISSION PROCESS
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L4L Compliance Process
INDIVIDUAL TRAINING In an effort to maximize efficiency and provide you the best results a Training Center Representative will share with you the specified policies and procedures to enhance your education and time management. Once you progress to working directly with a Personal Coach and you fully complete your advanced training and practice property submission/assessment you will be eligible to submit property for funding consideration. Your Personal Coach will review your work, and help you identify a property suitable for investment, for up to six months after your enrollment date, provided you have completed all necessary training. In order for this to be an effective learning tool, you must provide completed information and pertinent details. Your Personal Coach will not complete submissions for you and will redirect you to compile the necessary information for funding presentation. What you present in terms of work and detail is the first impression you make on those who will evaluate your submissions. That impression is key as you will essentially be asking them to support your investment idea and design. What would you look for before entrusting 100‘s of thousands of dollars? To best assist you in understanding the importance of managing your expectations and creating a solid foundation for continued support by your Personal Coach, the following expectations of your role as a trainee have been created. This does not mean that these points are the end all be all of your association. They are a guideline developed to provide for an efficient use of time and energy. Your Personal Coach will review in detail any modifications as well as their own practices to ensure you gain the most benefit from the time you spend together.
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AS A TRAINEE •
You should set a weekly or bi-weekly consistent time for training. If you are unable to keep your appointment, call in for rescheduling as early as possible.
•
You should only keep an appointment if you have completed the tasks at hand.
•
You should respect your PC‘s schedule and e-mail questions prior to your appointment time so that they may be addressed during your training session.
•
Your Personal Coach is in position to work with you. You must be consistent in order to maintain on-going Personal Coach contact.
•
You should submit only completed submissions, any incomplete submissions will not be reviewed.
•
If special consideration is needed for your submission, allow ample time for thorough review to be conducted.
•
Set realistic goals.
•
You should make a daily investment of time to expand your knowledge of real estate investment. For example: read the real estate section of your paper, evaluate the demographics of your area, and explore business trends in your community.
•
You should explore networking opportunities for the provision of property leads.
•
Embrace your entrepreneurial spirit and work towards developing your efforts into a business.
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REMEMBER Working efficiently will yield the greatest results. Understanding what is expected of you will minimize frustration in the future. Only submitting completed work will promote progress. Investing personal time to expand real estate investment knowledge is a necessity.
LOANING4LESS TERMINOLOGY TO REMEMBER ARV - After repair value. Assessment – The set of questions contained in the case-study guide to assist in the evaluation of your understanding of the materials presented. Client Services – A dedicated arm of the training department specifically designed to maintain ongoing communications and contact with those who have strayed from progressing from training. Funding review – The most critical process of all our endeavors. The process by which determination is made on what to buy, how to fix, and how to see property presented. Personal Coach – A Personal Coach does not make funding decisions. Your Personal Coach is a mentor for your education and will work diligently to help you experience success. A Personal Coach will not complete your work for you. Practice Property Project – The hands-on application of compiling a property for consideration. This property is essentially a practice run and should not be expected to be processed for funding. Property submission/Request for Funding - The Loaning4Less format that documents the details of a property submitted for consideration. That documentation is thoroughly reviewed for completeness, accuracy, and potential profitability. Property Profile - The complete property evaluation, market and marketability analysis, legal documentation and title work submitted by Students, All of this information is necessary to evaluate a property and make an informed investment decision.
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CHAPTER 2 SETTING YOUR GOALS AND EXPECTATIONS It is well established that formal, written goals with detailed objectives and performance standards enhance and accelerate progress. Loaning4Lessis in the business of purchasing property across the United States with its affiliates that offers reasonable profit potential as determined by the identification of various risks and resale marketability. The initial identification of these properties is filtered to us through our trained associates and then examined in great detail for purchase viability. Although we embrace and promote your enthusiasm and motivation, purchases are made on the basis of feasibility, profitability as it relates to risk, time and ultimate financial reward. Your profit payout is a result of us doing our job. Setting your expectations and goals in line with the above will promote your financial success as it relates to property profit. In this chapter, you will arrange your training schedule with your Personal Coach, learn how to set effective goals, how to establish and evaluate objectives, and how to overcome obstacles to your goals, as well as monitoring your motivation.
THE TRAINING SCHEDULE The Loaning4Less Training Program is designed to educate you on the process of real estate investment identification in your market. Your Personal Coach will discuss your ability to devote the time necessary to fully complete your training based on the responses provided on your training profile and availability. Based on that information, together you will determine the schedule of your sessions and begin discussing the pace in which you are most comfortable. Please keep in mind your six month subscription period as well as any outside endeavors and establish a workable, realistic plan. Your scheduled appointment time is important. In the event you need to cancel or reschedule please give 24 hour notice. We will do our best to accommodate your requested times however flexibility on your part will be required. Remember we are working towards the same goal.
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GOALS The definition of a goal is quite simply something that somebody wants to achieve. For example; ―my goal for this year is to acquire two feasible investment properties.‖ Before defining your goals you must first understand the mechanics of setting goals. Applying the adage of working SMART versus working HARD, consider the acronym associated with goal setting. S M A R T
Specific Measurable Achievable Realistic Time defined
The first step in outlining your goals to define what you want to achieve. By establishing a personal mission statement you can focus the direction of your efforts and ultimately stay on track to achieve your goals. For example, if a sports team‘s mission is; ―To be the US champion.‖ Then all goals and objectives must include actions and activities that contribute to fulfillment of the mission. Every Loaning4Less Participant defines their mission differently; and each mission changes the way that individual participates in the Program. Each of these motivating missions is equally legitimate, but will affect the goal setting process. *Use Business plan tools to expedite the process.
Please invest time in creating your mission statement. Refer to your profile to review why you enrolled in the program.
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GOAL SETTING 101 Goals are important. Formal, written goals help you identify your expected results, improve your effectiveness by giving you a clear framework for feedback, and heighten your success by setting achievable targets. Goals are most effective when they are: exact and tangible, measurable, time specific, take into account your constraints, and are under your direct control or influence. People learn best through immediate, accurate feedback. Think back to a time when you watched a toddler learning to walk. Gravity provides immediate, accurate feedback. Toddlers learn walking very effectively. Goals give you a framework for immediate, accurate feedback. They also allow you to accelerate your learning curve, so that you become successful faster. At the same time, keep in mind goals can change. Experiencing obstacles is yet another form of immediate feedback. Although most obstacles can be overcome, embracing reality and adjusting your goals accordingly will minimize frustration and keep you grounded. A vague or non-tangible goal would be • I want to be rich. That type of goal is non-specific in its action and is not a measurable goal. A more specific goal would be • I will double my income. That goal is exact and measurable. Goals must be measurable. A goal is not an effective mechanism unless it can be monitored. ―I want to improve my organizational skills,‖ is not measurable. The goal of ―I will develop an organization system, to enhance my efficiency,‖ or ―I will develop a calendar system so that I never miss important dates,‖ is measurable. Likewise, goals are not effective as a feedback mechanism unless they are time specific. ―Someday‖ is just not accurate enough for good feedback. In the example given where the goal is to double your income, it is necessary to expand the goal from ―I will double my income,‖ to ―I will double my income this year.‖
Goals that ignore real-life cost and resource constraints are unrealistic, and amount to nothing more than wishful thinking. ―I will participate in the Loaning4Less Training Program full-time,‖ is not realistic for someone who already has a full-time job. However, ―I will participate in the Loaning4Less Training Program for one hour every weeknight and do my on-site evaluations on Saturday morning and alternate Sunday afternoons,‖ is realistic and achievable. Finally, a goal must be under your direct control or influence. You are not in charge of other people‘s actions, and you should not base your goals on other people‘s decisions. It is very
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realistic to plan a goal of ―One solid Property Profile my first month‖. It is not realistic to set a goal for finding a property that will re-sell thirty days later. For example, a car salesman cannot tell in advance which customer will buy which vehicle. It is totally unrealistic for that salesman to set a goal of selling a high-end SUV to the next customer. However, that salesman can easily and effectively research his own performance and figure out how many customers, on average, he has to wait on to sell a high-end SUV. His goal then becomes, ―Wait on enough customers to sell a high-end SUV.‖ Similarly, our Students should concentrate on doing what is required for success. For instance, the Student cannot control where the profit opportunity lies in their local area. It is unrealistic to set a goal of, ―one property purchase a week.‖ Until you actually do the research, it is impossible to tell what opportunities are available in your area that will yield the most return. Like our salesman example, you need to concentrate your efforts on doing research work first and set the results of property success as secondary goals. To help you achieve a solid foundation for setting your goals follow the outline below and create your goals accordingly. •
State each goal as a positive statement. For example: ‗Execute market analysis well‘ is a much better goal than ‗Don‘t make a stupid mistake‘
•
Be precise. Set a precise goal. Include dates, times, and amounts so that you can measure achievement. If you do this, you will know exactly when the goal has been achieved and can derive personal satisfaction from achieving it.
•
Set Priorities. When you have multiple goals, give each a priority. This will assist you in managing your efforts without feeling overwhelmed, and allow you to focus your attention on your primary goals.
•
Write goals down. This makes them real and can be reviewed easily.
•
Set operational goals at a realistic level. Keep the underlying low-level goals small and achievable. If all of your goals are too large it will appear as though you are not making any progress. Set yourself up to be rewarded by achievement.
•
Set performance goals. These are not outcome goals. These goals you have control over. You will experience high levels of frustration if you set goals that cannot be achieved due to reasons beyond your control (bad environments, weather, or just plain old bad luck).
•
Set realistic goals. It is imperative that you set goals you can achieve. Focus on your ambition and desire and not that which you think or have heard is possible. Setting your goals too high will impede your success
•
Do not set goals too low. It is equally important not to set unrealistic goals as it is not to set goals too low. This tends to occur if you are afraid of failure or just plain old lazy! Set goals outside your immediate grasp, but not so far away that you can never achieve them.
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MOTIVATION Maintaining personal motivation in the midst of a new endeavor can be difficult. Everything you are experiencing for the most part is new. You cannot expect to have overnight success in anything. You will encounter frustration, disappointment, and obstacles. Keep your feet on the ground, your head focused on the task at hand, and your desired outcome along with these motivational techniques. The possibility of success becomes much greater. •
Focus on the positive, but do not bypass or ignore the negative.
•
Keep high-self esteem, believing in yourself, your competence to absorb new ideas; and personal worth and self-respect will go a long way towards staying motivated.
•
Use positive self talk and images. I am creative; I can succeed in the future…
•
Focus on your goals.
•
Acquire habits and skills of success. Take responsibility for your actions, asking for help when you need it. Commit to follow through.
•
Act in the present.
•
Maintain personal balance.
•
Focus on success, not the problems.
•
Listen and spend time with those who support your efforts.
•
Strive to achieve.
•
Reward yourself.
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Ask yourself these questions to help determine your level of motivation: Do you set high standards for yourself?
Do you believe in yourself?
Are you enthusiastic?
Do you view problems as challenges or opportunities?
Do you have a positive self-image?
Do you do just enough to get by?
Do you find fault easily in yourself and or others?
Do you work towards a balanced life?
Do you write your goals down?
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OBJECTIVES Mission Statements are general intents. Goals are specific and measurable accomplishments to be achieved. Objectives are the tactics that you use to achieve goals. The objectives and tactics you use must be complementary to the goal, just as goals must be complementary to the mission. For example: Mission:
To be U.S. Champions.
Goals:
To beat every team in our division.
Objectives:
Improve general team fitness and reduce injuries. Play good defense. Increase field goals. Improve passing game. Improve running game.
The objectives are the steps you need to take to reach your goal. The objectives determine how fast or slow your goals are achieved, and, what methods you use to achieve those goals. One of the most important aspects of training is that your Personal Coach helps you prioritize your objectives and what methods are most likely to move you towards success in your local area.
Note: View the objectives as the mechanics of your operational goals.
We require our students to develop a working plan that incorporates their mission statement, goals, and objectives. This is the first step toward achieving success in any business. Remember, each local market opportunity is unique as is each participant; working hand in hand with your Personal Coach to outline the steps of success is only the beginning of what lies ahead. You are responsible for your actions, and follow through. Although we can work with you to define your goals, we cannot force you to work towards achieving them. Initiative is the key and you must put forth a serious effort. Be honest with yourself, and hold yourself accountable to your actions and success in the business at hand will be just in front of you.
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PERFORMANCE STANDARDS Objectives should be adjusted based on the information you obtain from monitoring your performance. The best way to accelerate your success is to use the most effective tactics and strategies and do more of what works! It is very difficult to tell which are the most effective tactics and strategies while you‘re in the middle of the rush of business. The most effective way to discover what works best is to establish performance standards, and judge each strategy and the results it yields.
OVERCOMING OBSTACLES TO GOAL ACHIEVEMENT What if I get discouraged? If you feel discouraged, it probably is the result of not meeting personal expectations. Question yourself as to what you expected from yourself and were you realistic. If it wasn‘t, you have no reason to feel discouraged. Recreate the goal and keep moving forward. If, however, you truly believe you were realistic in your expectation and you are not progressing assess why. Revisit your mission, goals, and objectives. What is impeding your progress? Are the obstacles identifiable? What can be done to overcome them? Assess your actions and reactions and modify your plan accordingly. How do I stay focused and on track? Most importantly, accept responsibility for staying on track. This is up to you and not anyone else. You control what you want to accomplish and when. Do not let little distractions keep you from what you should be doing. If you fall behind, refocus your efforts and take the steps necessary to continue. How do I avoid procrastinating? DO IT NOW! Instead of waiting any longer, take the time necessary to define your goals. If your goals cannot be established you will spin your wheels and achieve nothing.
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PSYCHOLOGICAL OBSTACLES Your Loaning4Less Personal Coach will help you overcome or work around most obstacles. You are responsible for overcoming psychological obstacles. The three most common psychological obstacles are outlined below. The best ways to overcome psychological obstacles are to be true to yourself, your plan, and your ability.
1. Negativity - if you don‘t believe that the goal can be reached, the goal has no purpose. We encourage you to create small, reasonable goals then re-assess and ―grow‖ your goals as you become more experienced. No one expects a rookie to pitch a no-hitter his first time out. We don‘t expect you to negotiate through the hazards of buying a foreclosure based solely on the information provided in The Textbook. 2. Procrastination - only you can get out of your house and into the market where the opportunities exist. Avoid procrastination by having sufficient motivation to achieve your goal, establishing clear priorities for identified tasks, breaking each task into small (non-intimidating) components, setting mini-deadlines for each component, and rewarding yourself when tasks are completed. 3. Unproductive Activities - it is very easy to get wrapped up in low-priority unproductive activities that do not yield results, or are counter-productive to your goal. Avoid this time-consuming trap by: establishing clear focused goal statements; working with your Personal Coach to determine which activities are most productive for reaching your goals; and reviewing your progress toward your goals daily.
REMEMBER A good Mission Statement clearly states your cause, defines your concentration, describes your direction, and indicates the general plan for success. A mission statement is more general than a goal. Setting goals is a necessary and extremely important first step in achieving your desired success. Goals identify and improve your effectiveness, heighten your awareness, and guide you to results. Goals are most effective when they are: exact and tangible, measurable, time specific, take into account your cost or resource constraints, and are under your direct control or influence. Effective goals are ―owned‖ (created) by the person responsible for reaching the goal. One-size-fits-all goals that are handed out by someone else seldom work. Objectives are the tactics, strategies, and tasks that you use to achieve goals. Objectives are task specific. All components of the plan should be adjusted based on the feedback you obtain from monitoring your performance. The best way to accelerate your success is to use the most effective tactics and strategies and do more of what works!
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THE BENEFITS OF WRITING A REAL ESTATE INVESTMENT BUSINESS PLAN
Bring together your ideas and research into a structured format. Decide whether or when your business will be commercially viable. Clarify your business purpose to yourself and communicate it to any partners or staff. Predict future scenarios and pitfalls and address them before they threaten the success of your business. Set out the strategy for your business, and particularly your marketing strategy. Set targets and objectives, including sales and financial targets, so you can monitor your business‘ performance on an ongoing basis.
A business plan includes: An Executive Summary for your Real Estate Investment business setting out:
Objectives Mission Keys to Success
What start up costs you can expect for your Real Estate Investment business? Market Analysis for your Real Estate Investment business including:
What are the key issues affecting the market. Competition and Buying Patterns – Who will you be competing against?
Strategy and Implementation Summary for your Real Estate Investment business. How you can promote your Real Estate Investment business including:
Your marketing Strategy Your Promotion Strategy Your Distribution Strategy
Management Summary for your Real Estate Investment business.
Are you suited to running your Real Estate Investment business?
To enhance your training, we recommend the following additions.
Business Plan Software
Real Estate Dictionary
National Home Improvement Estimator
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Get the Right Networking Mind-Set and Skill Set By Ivan R. Misner Make more and better connections when you get your mind and skills in gear for networking.
When you're thinking about becoming a more skilled net worker, you usually think about what you can do to network more effectively. This includes teaching others what kinds of referrals you're looking for, asking for referrals from your clients, and using incentives for those referring you. These are all components of your skill set. And while it's important to know the right things to do while networking, it's equally important to start thinking the right way to make your networking efforts as successful and dynamic as they can be. This involves altering your mind-set. Let's take an up-close look at some elements you'll want to include in your mind-set to ensure networking success: 1. The law of reciprocity or "givers gain" approach. The law of reciprocity sets in motion in-kind responses of individuals based on the actions of others. I like to call this the "givers gain" approach. You shouldn't approach networking thinking "I did this for you, now what are you going to do for me?" Rather, you should remember the old adage "Give and you shall receive." The law of reciprocity takes the focus off of what you stand to gain from the networking relationship, and in doing so, creates bonds based on trust and friendship. Put it to the test. You'll be amazed by the outcome. 2. Diversity in networking. Look for groups that don't target people just like you. In this way, you'll broaden the net you seek to cast for referrals. There are many great networking organizations out there. If you stay only in groups that focus on your profession, you lose the breadth you need to develop a wide-reaching network. 3. Farming mentality. For networking to yield extraordinary success, your mentality must be that of a farmer. He prepares the soil for months before ever planting the seeds. He tends the seedlings with care, feeding and watering them regularly, putting up a scarecrow to keep pesky birds away. It's a long, drawn-out process to go from seeding a field to harvesting the crops. There's no quick return. Approaching networking with a mentality that focuses on the process of cultivating referrals will create the results you desire. Too many times I see professionals who are trying to grow their networks ask all the contacts they make at a mixer to visit their referral group, or keep them in mind for referrals as they give each new contact two or three of their business cards. This is way too soon. Think about that farmer diligently tending the seeds he has sown, and spend more time strengthening your friendships with those whom you wish to have as part of your networking circle.
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Now that you have the basics for thinking about networking down pat, let's examine a few of the things you can do to develop a strong word-of-mouth-based business: 1. Activate the VCP process. VCP stands for visibility, credibility and profitability. What you need to do in order to be visible, credible and profitable takes a certain skill set. Things like participating in monthly mixers hosted by your local chamber of commerce, writing a regular column in your local newspaper or sponsoring the Little League team are things that make you visible. As you become more and more visible in your business community, you'll develop credibility. People will recognize that you're here for the long haul, and you'll begin to receive quality referrals. So look for opportunities to make yourself more visible. Think out of the box--be creative! 2. Sharp shoot, don't shotgun. When talking about their businesses, many entrepreneurs try to get everything they do into a 30second pitch--and potential referral sources miss most of it. They tune out after the first few items on the list. Instead, you should focus on your top two or three areas of expertise. Keep in mind that you're not marketing to your referral sources. In effect, you're training a sales force. Your networking team is there to keep an eye out for potential clients. If you communicate exactly what type of client you're looking for, better, more qualified referrals will result. This skill set is especially productive when you're meeting weekly with a strong contact network. The difference between trying to say it all and focusing on one aspect of your business each week is huge. 3. Hold one-on-ones. Conducting a one-on-one is almost like doing an interview, except that you both get to ask questions. The idea is to share something in each category you discuss with your referral source. I once had the chance to see how this literally transformed a networking relationship between two businessmen who'd been in the same networking group for quite some time but hadn't really made a deeper connection. The two begrudgingly took my recommendation to do a GAINS exchange--to talk about their goals, achievements, interests, networks and successes--and found that they had quite a few things in common. They both coached their young daughters' soccer teams, they both collected sports teams' hats, and their college degrees were in the same field. These two seemingly disinterested people became very close and developed the type of networking relationship that most only dream about. See how networking is as much a mind-set as it is a skill set? Clearly, there are many things to do that will make your networking attempts successful, but there are also a good many things to be that are equally important to this art.
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Smart Ways to Use Your Business Card By Ivan Misner Successful networking is "all in the cards" with these four strategies.
Your business card is one of the most valuable networking tools you have in your quest for increased referrals. Can you envision a reality where 20 to 30 people in your word-of-mouth marketing circle carry your cards and have them ready to hand to prospects they're actually qualifying for you? I certainly can, and am excited every time I hear someone say, "Let me give you my friend's business card. Oh, and by the way, may I have him (or her) give you a call?" The business card is the most powerful single business tool--dollar for dollar--you can invest in. It's compact, energy-efficient, low-cost, low-tech, and keeps working for you hours, weeks and even years after it leaves your hands! Some of the things your business card does are:
Tell people your name and the name of your business
Provide prospects with a way to contact you
Give others a taste of your work, style, and personality
It can be so unusual or attractive or strange or charming or funny that it sticks in the memory like a great radio or television ad
It can be reused, as it passes from person to person, giving the same message to each person who comes in contact with it
The two main functions of your card are to gain business from the person you give it to and to get your name out to other people with whom the first person comes in contact with via referrals. With that in mind, let's take a look at the most effective ways to use your business cards.
Make Your Cards Accessible in Every Situation In short, don't leave home without them! It's a great idea to keep a small box of your cards in your glove box, just in case you find yourself in a situation where you need more than you've carried in your pocket or purse. In addition to my jacket pocket, I tuck them away in my briefcase, wallet, and computer bag. Just to make sure I never run out. Keep an eye on your supply. The time to reorder is before you're in danger of running out. In addition to being sure you have your cards on hand, be sure that your networking partners always have your cards. Check with them regularly to see if they need more, and be ready to provide them with whatever quantity they say they need in order to promote you.
Seek Situations to Exchange Business Cards There are many opportunities in which you can pass on your card to prospective clients and
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customers as well as referral sources you wish to develop. Some are obvious; others are not. Whenever you have a one-on-one meeting with someone new or someone you haven't seen for a while, give her your business card. At mixers and social events, be sure you have plenty of cards when you go in. These are good places to extend the reach of your network. Conventions and trade shows are another great venue for exchanging business cards. The vendors at the trade shows are anxious for you to take their card. Don't make that a one-way street; be sure you give them your card as well. When you visit a non-competing business that might attract the same people you would like to have as customers, ask if you may leave a supply of cards to be handed out or made available. In most cases, a business that's complementary to your own is always looking for a networking partner. An example would be a sports nutritionist leaving a stack of cards at a martial arts studio. Be creative and consider even bringing your own cardholder to leave out. International meetings and events can provide an opportunity to give out your business cards. Consider having your card printed double-sided, with English on one side and the language of the host country of the event on the other side.
Contacts at a Distance Whenever you communicate with someone in writing, send a card if it's appropriate to the occasion. Enclose several cards in every packet of sales material you mail out. Along with your thank-you note to the businessperson whose referral brought you a major contract, include a business card to replace the one she gave away, plus several more. After any telephone call in which business was discussed, follow up with a letter outlining the main points of your discussion and include one or more of your cards. E-mail is a great way to follow up, but a letter will actually allow you to include your business cards.
Special Tricks of the Trade When giving out your card, hand-write something on one copy, such as your cell-phone number, a secondary e-mail address, etc. This will give that particular card a greater chance of being held onto. Be sure you give a couple of "clean" cards to that person as well, and ask your new friend to pass one on to a potential customer. After you get someone's card and have ended your time with her, make notes on the back of the card to jog your memory about something special that'll help you remember her. Don't do that in front of her, or you run the risk of making the impression that you are "forgetful." If you need to record information immediately during your discussion, such as telephone numbers or other data not on the card, use one of your own cards. You don't want her to think you view her card as scrap paper upon which to take notes. At a restaurant, leave your card with the tip and write a personal thank-you note on the back or pay the highway toll for the Mercedes behind you, and leave your card for the driver! The main thing when handing out your card is to keep in mind what an effective tool it can be. Take maximum advantage of its full potential. And never, ever, be caught out without it. And if you need a referral to a great graphic designer and printer, contact me--I have just the card for you!
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Defining your business:
What is the name of your business? Does this say something about what you do? ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________
Who can benefit from your service and how? ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________
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Create a circle of influence and promote yourself:
Realtors: ______________________________________________________________________________ ______________________________________________________________________________
Mortgage Brokers: ______________________________________________________________________________ ______________________________________________________________________________ Contractors: ______________________________________________________________________________ ______________________________________________________________________________
Wholesalers: ______________________________________________________________________________ ______________________________________________________________________________
Lawyers: ______________________________________________________________________________ ______________________________________________________________________________
Title Company: ______________________________________________________________________________ ______________________________________________________________________________ Other: ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________
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CHAPTER 3 CONSIDERING REAL ESTATE AS AN INVESTMENT Real estate as an investment does not have a single definition. Each and every purchase made is done so by fulfilling specified criteria defined by each buyer. That criteria is further defined by the market in which the property exists. What is feasible in Los Angeles may not apply in Boise, Idaho. Assessing the market from all angles is the first step in learning how to define opportunity to fit the specified criteria. Your Personal Coach will work diligently with you in outlining your market so that there is a clear understanding of what has the potential of yielding success.
UNDERSTANDING REAL ESTATE AS AN INVESTMENT Hundreds if not thousands of books have been written on how to gain wealth in real estate. The one underlying philosophy consistent in almost each and every writing is the simple fact that … Buying and selling real estate as an investment requires you to remove emotion from your decision making process. Emotional attachment to a property is the biggest mistake any real estate investor can make. Stop! Don‘t even allow yourself to go there. Investment is about profitability. It is a numbers game. If the numbers don‘t work… WALK AWAY! It doesn‘t matter that Mary from church told you it was a good deal and the owner really needs the money…It doesn‘t matter that the Realtor who referred you the property thinks it could make you money if…? *Remember a Realtor will get a commission on the buy, what do you get if it doesn’t sell at a profit? It may seem hard to understand right now, but there is a strong theory in real estate that says: ―Money is made when you buy.‖ To some that makes no sense as you collect the profit when you sell, however, if you buy right you can sell right and that is the name of the game. You have a very serious task at hand. You are in control of what Loaning4Less sees in your market and how well you identify opportunity. You are in position to utilize funds that will not put you at risk, and share in the profits in the end. It is in your best interest to remove emotion, manage your expectations, and provide viable opportunities that are not outside the scope of Loaning4Less‘s business. Loaning4Lessis for a profit professional real estate investor focused primarily in the distressed residential property market. As you work towards identifying a property for submission, keep that at the forefront of your plan and do not waste your efforts on alternative purchases. Your Personal Coach will not review any property outside the scope of a single-family residential property and will refer any other submissions for consideration to a review team.
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Loaning4Less property approvals depend on numerous factors. Completion of a Property Submission/Request for Funding does not guarantee that your property recommendation will be approved for purchase. There is no magic profit percentage that guarantees a purchase. Much of the market data and property valuations you provide are subjective in nature and open for interpretation. If and when a property is not approved for purchase, it is important that you work with your Personal Coach to correct the deficiencies, or initiate a new search for another suitable property. Many of our students try to find shortcuts that lead to unreasonable expectations, such as submitting properties for approval before they have even completed the necessary training. Without learning our methodology in its entirety, the potential of a property purchase will be greatly diminished. The world of underwriting property purchases has changed dramatically. Those changes impact how we review, conduct, and conclude transactions. In the face of universal lending practices adjusting to current conditions we need to remain flexible and understand that requirements may change transaction to transaction. Loaning4Less is a forward thinking entity that understands that changes in real estate are inevitable. To that end we understand that our business must adjust to stay at the forefront of investing. What was the ―meal ticket‖ in the industry last month may very well be replaced next month? Keep all avenues of opportunity at the forefront of your endeavors and remain pliable to market and economic changes. ***The presentation of deals derived “out of the box”, are key to your success. Do not pigeon hole your own opportunity by believing MLS or REO properties are the only source of potential.
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WHAT IS MEANT BY THE TERM DISTRESSED PROPERTY The cause of a property being distressed can come in many different forms. The idea of buying distressed property stems from being able to purchase a property with some form of deficiency at a discount to the overall area market value. Generally, real estate is discounted because the owner suffers financial or legal setbacks and defaults on their financial obligations. In addition to financially distressed property, there is cosmetically distressed property. The latter is where the rehabilitation market comes into play. Generally the property will be a combination of both. There are several other causes for a distressed sale of property and if necessary your Personal Coach will go into greater detail.
AVOIDING PITFALLS Knowing what makes a good investment is just the beginning. Avoiding costly mistakes is what keeps your profits intact. Since there are thousands of variables, addressing them individually are not even attemptable, however, identifying where the most common mistakes are made will give you an edge when assessing a deal. These are not in any specific order and should be discussed in more detail with your PAS. AVOID: 1. Letting emotions drive the deal 2. Being the first to discuss price 3. Not treating the process as a business 4. Not paying attention to real estate trends (price increase, decrease, new build etc...) 5. Thinking to short-term 6. Not having a written plan 7. Not expanding your real estate knowledge 8. Not networking 9. Buying a house that won‘t sell (remember the first thing to go down is price, and that affects your profit) 10. Not understanding your contracts and including special contingencies 11. Believing the hype 12. Giving up on a property after one offer 13. Overspending on rehab 14. Not conducting proper inspections 15. Relying on resale from an appraisal 16. Not using licensed contractors for repair 17. Not getting written bids 18. Paying for repairs before they are complete 19. Not establishing guidelines for repair work and date certain completion 20. Not working with a good realtor with investment experience 21. Focusing on the one-hit wonders 22. Not following a deal that makes sense long enough 23. Not following the numbers 24. Not identifying what the motivation of the seller is 25. Not paying attention to detail. Paying attention to details and protecting against mistakes is just as important as identifying your deals. A great deal can turn quite sour if the profit diminishes due to oversight or carelessness‌
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Burned by Real Estate, Some Just Walk Away But Abandoning Investment Property to Foreclosure Carries A Very High Cost; Slashed Credit Scores, Vulnerable Assets By KEMBA J. DUNHAM and RACHEL EMMA SILVERMAN October 18, 2007; Page D1
During the height of Las Vegas's real-estate boom two years ago, property investor Rob Rozzen bought 16 homes, hoping that skyrocketing prices would pump up his retirement nest egg. Now, Mr. Rozzen says he is considering filing for bankruptcy protection. As the housing market slowed, the 40-year-old was unable to sell the homes, and his full-time job as a real-estate agent was no longer able to support mortgage payments totaling $45,000 a month. So one by one, over the past 14 months, Mr. Rozzen has stopped making payments on his investment properties, for which he paid between $226,000 and $390,000, and lenders have foreclosed. As a result, Mr. Rozzen's credit score plunged from 730 to the high 400s, he says. The Prada clothes, luxurious vacations, and full-time housekeeper and pool cleaner he once enjoyed are things of the past. Still, he says, walking away from his investment properties was his only option. "You get to a point where your hands are tied," he says. A growing number of investors like Mr. Rozzen are making the drastic decision to walk away from their properties and ultimately send their homes into foreclosure, lenders and real-estate agents say. Many investors who were hoping to quickly flip their investments are now left with homes that can no longer be sold for more than the mortgage debt. In many cases, these investors can't even find tenants willing to pay enough rent to cover hefty mortgages. Certain data point to the trend. According to an August study by the Mortgage Bankers Association, defaults on mortgages where the owner doesn't live in the house are a major driver of the defaults in Florida, Nevada, California and Arizona -- four of the states with the fastest rising rates of seriously delinquent loans. Defaulted mortgages are defined as those 90 days or more past due or in foreclosure, according to the study. But walking away from a mortgage is almost always a bad idea. You can lose your ability to take out future loans, and you might find the lender coming after your personal assets, such as your principal residence, depending on your state's laws and the terms of your loan. "A lot of these people can't think clearly because the level of financial distress is so great," says David Dweck, president of the Boca Real Estate Investment Club in Boca Raton, Fla., who is also a Realtor. "They're hoping [that by taking this step], it's going to work itself out." Tom Crossett is one investor on the verge of walking away from his properties. At the height of Florida's condominium boom two years ago, the 53-year-old air-conditioner contractor from Delray Beach, Fla., bought four units with the plan to flip them quickly. He paid between $143,000 and $173,000 for the units. Mr. Crossett now says the developer of the complex that sold him the converted-from-apartment units reneged on many of the promises, including extensive renovations, making them a tough sell. To help make monthly mortgage payments totaling $4,000, he's been stuck renting the units to tenants who make sporadic payments. He says that next month, he plans to cut his losses and stop paying the mortgages. "The only way I can see for me is to just get out, stop the bleeding and let them go," Mr. Crossett sighs. Before walking away from a mortgage, legal experts say, investors should approach a lender about a possible loan "workout," in which the mortgage payments are reduced but the investor gets to keep the property. Some investors say they have tried this, but without success. Still, banks don't typically want to act as property managers, nor do they want to have high foreclosure numbers on their books. 34
"There is a real incentive for both lenders and borrowers alike to do a workout and avoid foreclosure. Lenders are not good at being homeowners," says Fred Witt, national director, realestate tax services, at Deloitte Tax LLP, in Phoenix. One of the first effects of walking away from a mortgage is an assault on one's credit. The foreclosure could remain on your credit report for years and will sharply reduce your credit score, experts say. "This makes it more difficult or extremely costly, and in some cases impossible, to do more financing in the future," says Jack Guttentag, a professor of finance emeritus at the Wharton School of the University of Pennsylvania who operates a mortgageadvice Web site. In some cases, lenders can go after an investor's other assets to satisfy a loan if the borrower defaults. But that often depends on the loan agreement, which sets out what recourse the lender has in the case of a default. In a nonrecourse loan, lenders can take only the property itself to satisfy the debt. Most loans, however, are recourse loans, which means that the borrower's other assets may be at risk. Individual investors may even be on the hook if they borrowed through a limited liability company or a partnership. Principals of LLCs, or general partners of partnerships, can be personally liable if they act as guarantors; lenders often require personal guarantees as part of the loan agreement. "Banks want the individuals on the hook," says New York lawyer Gideon Rothschild. Partnerships and LLCs are good to "protect you against slips and falls on your property," adds Jay Adkisson, a Newport Beach, Calif., lawyer, but they offer little protection if a lender requires you to sign a personal guarantee. What's more, whether other assets, such as insurance policies and personal residences, are shielded from creditors varies widely by state. In Florida and Texas, for instance, your home, life-insurance policy, annuity or retirement plan are generally shielded from creditors. California, by contrast, offers much less protection for debtors. (More details about your state's laws are available at www.assetprotectionbook.com/state_resources.htm.) Of course, investors can take steps to shield their assets from creditors. But setting up fancy structures, such as offshore trusts designed to keep property off limits from creditors, typically only works if done before creditors appear on the horizon, says Beachwood, Ohio, lawyer John E. Sullivan III. Similarly, assets in a 401(k) are generally protected from creditors if the plan was already in existence. "If you plan when the coast is clear, you should be OK," says Mr. Sullivan. "If you choose to wait, it could be too late." Mr. Adkisson, the Newport Beach, Calif., lawyer, says he has received about 30 calls a week in recent months from real-estate investors seeking to shield their assets, just as lenders are beginning to chase after them. "There's just an absolute flood of people seeking asset protection, and it's all after the fact. It's like buying auto insurance after the car wreck." There are a few things you can do to protect your money even as creditors are moving in. One idea: Move to Florida and buy a big house. As long as you can stay out of bankruptcy and qualify for Florida residency, a creditor can't force the sale of your home under Florida law, says Mr. Rothschild, the New York lawyer, who adds that the tactic won't work under new bankruptcy rules if you're forced to file for bankruptcy protection. Investors who face foreclosure may be left with a big federal tax hit, says Mr. Witt, of Deloitte. That's because, in a recourse loan, the amount of the loan forgiven by the lender, in excess of the property's fair market value, is typically taxed as ordinary income to the taxpayer, he says. The tax code does offer some relief, but only if the loan is forgiven during bankruptcy proceedings or if the borrower was insolvent immediately before the loan was discharged.
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However, it's tough to prove insolvency, since the Internal Revenue Service considers many assets, such as 401(k) retirement plans, in determining whether a borrower is insolvent. "These assets are typically exempt from creditors, but not for tax purposes," says Mr. Witt. One option to avoid, if possible: filing for bankruptcy protection. Laws passed in 2005 make it much tougher in some cases to protect certain assets, such as your primary residence, from creditors during bankruptcy. Write to Kemba J. Dunham at kemba.dunham@wsj.com and Rachel EmmaSilverman at rachel.silverman@wsj.com ________________________________________________________________________
Residential Investment over the Real Estate Cycle Much attention recently has been given to the possibility of a slowdown in the U.S. residential real estate market. While real residential investment has continued to grow and existing house prices have held up through the first quarter of 2006, analysts have pointed to other signs of slowing. Two commonly cited indicators are an apparent slowing of sales of new and existing homes and a buildup of inventories of new homes in many markets. In this Economic Letter, I characterize past episodes of residential investment downturns and evaluate how specific housing market variables, such as sales volumes and inventories, perform as predictors of downturns. Measuring real estate market activity The main indicator of the quantity of new housing supplied to the economy is the residential fixed investment series from the national income and product accounts. Residential investment is made up of new construction put in place, expenditures on maintenance and home improvement, equipment purchased for use in residential structures (e.g., washers and dryers purchased by landlords and rented out to tenants), and brokerage commissions. Over the past 25 years residential investment has accounted for approximately 30% of gross private investment and approximately 5% of total domestic output. As a share of total investment, residential investment has been in decline since the 1960s, mainly due to the surge in investment in business equipment and software starting around that same time. As a share of total output, however, residential investment is currently at its highest share since the mid-1980s: In 2006:Q1, real residential investment grew by 3.1%, contributing about two-tenths of a percentage point to real GDP growth. Residential investment is a highly volatile component of GDP. Yet as shown in Figure 1, the volatility has decreased markedly in recent years. Indeed, this series is one of the most frequently cited pieces of evidence when describing the overall decline in macroeconomic volatility (see
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Dynan, Elmendorf, and Sichel (2006) and Peek and Wilcox (2006)). Before the mid-1980s, residential investment was characterized by periods of extreme boom and then bust. The response of residential investment to the strong economy and robust house price appreciation since 1996 has been much more gradual, by comparison. If we characterize an investment slowdown as two consecutive quarters of declining real spending, there have been eight downturns since 1976. The shaded recession bars in Figure 1 indicate that when the overall economy tips into recession, invariably residential investment turns down as well; however, the timing of these downturns does not always track the recession dates perfectly, and some downturns even occur during overall economic expansions. This leads to a natural classification of residential investment downturns. Recession-related downturns last an average of seven quarters and are characterized by large declines in investment; on average, real residential investment falls by about 50% from the previous peak (see Figure 2). These averages are strongly influenced by the downturns occurring before the 1980s, when the depth and duration of recessions were also severe. On the other hand, non-recession-related downturns are relatively shorter, lasting an average of two to three quarters, and relatively milder, resulting in an average dip in investment of roughly 10%. Forecasting residential investment downturns Residential investment should be thought of as the quantity of new housing supplied to the economy, and, in the long run, it should satisfy the overall demand for new housing. Thus, residential investment depends on supply factors, such as construction materials costs, as well as demand factors, such as demographics, interest rates (or the cost of capital), prices, and the stock of household wealth. These demand-side factors are particularly important in helping to explain why residential downturns tend to accompany economic downturns. In this spirit, a standard macro model of residential investment will typically posit that investment depends on variables like aggregate consumption, interest rates, and prices (see Brayton and Tinsley (1996)). Notably absent from this specification are the variables most cited in the press as evidence of a slowing housing market: sales volumes and growing inventories. At any point in time, however, the new supply brought to market may not exactly equal the amount of new housing demanded. In particular, negative shocks to demand can result in there being too much supply on the market. If these changes in demand are not expected to be transitory, then developers will slow the pace of new construction and a downturn will occur. To forecast these turning points, we need to know what variables developers use to learn about changes in demand. It is possible that variables that do not enter into the model sketched out
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above, such as sales volumes and inventory levels, are related to the information that developers use to make, or alter, their plans. In this type of framework, variables that speak to selling conditions for finished projects seem to be fairly useful in predicting downturns; for example, sales volumes dip one quarter before the average downturn in investment. For recession-related downturns, sales drop very quickly (by about 10%) once the downturn has started. For non-recession-related downturns, however, there is no clear signal, on average, from sales volumes data either before or during the downturn. The so-called "month's supply of housing" ratio, or the number of new housing units for sale in a given month divided by the number of new units sold, is also fairly useful for predicting investment downturns. For recession-related downturns, the ratio (shown in Figure 3) starts to rise on average six quarters before the actual downturn, and continues to rise for six quarters into the downturn. For the average non-recessionrelated downturn, the inventory ratio turns up just one quarter before the downturn and then eases back down after two quarters (which is also the average duration of a nonrecession-related downturn). This exercise indicates that prices seem to be considerably less useful predictors of downturns than quantity-type measures. This might seem surprising because, unlike sales volumes and inventories, prices have a forward-looking aspect and thus would seem to be good predictors of the future state of the housing market. Figure 4 shows the average behavior of real new house prices leading up to and then following a peak in residential investment. The focus here is on new house prices because, presumably, they, rather than existing house prices, are most relevant for real estate developers' decision-making. Additionally, new house prices are likely to be more sensitive to market weakness than existing house prices. Developers are always "motivated sellers." If demand is soft, they generally do not have the option of withdrawing the house from the market and simply living in it. For recession-related downturns, the real price of new houses declines about four quarters after the peak, on average. Real new house prices register no detectable declines surrounding the average non-recession-related downturn. This basic stylized fact is even more apparent when using prices of existing homes. Only in the severest downturns do we witness real price declines, and never do these price declines come in advance of a downturn in investment. One caveat to this analysis is that it is based on the comparison of the average behavior of a housing market series leading up to two different
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types of downturns in residential investment. Obviously, averaging in the figures masks a fair degree of variation across the different downturns. However, more formal statistical modeling supports the notion that variables such as sales volumes and inventory ratios yield earlier and more reliable signals when the downturn is recession-related. This is natural; recession-related downturns have tended to be more severe than the non-recession-related episodes. It is also interesting to note that the recent behavior of the month's supply ratio bears more resemblance to the typical behavior before a recession-related downturn than to a non-recessionrelated downturn. Yet economists, such as those sampled in surveys of professional forecasters, are generally predicting only a moderation in overall economic growth in coming quarters. Given these conflicting observations, it is natural to wonder how much stand-alone information for predicting residential investment is contained in the housing market data. The answer, based on the last 30 years of data is mixed. If we estimate a model of the event that a residential downturn occurs using lagged values of the housing market variables mentioned above, we can generally improve the model prediction error by adding in forecasts of output growth. This suggests that it is best to consider economy-wide factors in addition to specific housing market variables when evaluating the real estate market. Conclusion Housing market statistics, such as sales volumes and months of supply on the market, can provide some useful information about turning points for residential investment. Much of this early warning, however, comes in advance of severe, recession-related downturns. Before nonrecession-related downturns, which are typically relatively shorter and milder, these variables are less reliable. The analysis suggests that incoming information from the housing market should be evaluated in the context of the overall economy's performance. To the extent that forecasts for solid output and employment growth are realized, this would not preclude slower growth in residential investment, but it should provide support for the real estate market and residential investment. John Krainer Economist
References [URLs accessed June 2006.] Brayton, F., and P. Tinsley, eds. 1996. "A Guide to FRB/US: A Macroeconomic Model of the United States." Federal Reserve Board Finance and Economics Discussion Series. Dynan, K., D. Elmendorf, and D. Sichel. 2006. "Can Financial Innovation Help to Explain the Reduced Volatility of Economic Activity?" Journal of Monetary Economics 53(1), pp. 123-150. Peek, J., and J. Wilcox. 2006. "Housing, Credit Constraints, and Macro Stability: The Secondary Mortgage Market and Reduced Cyclicality of Residential Investment." American Economic Review 96(2) (May), pp. 135-140.
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CHAPTER 3A THE PROCESS OF DEFAULT AND DEMAND There is a standard process that most financially distressed properties encounter. This is assuming that the owner is in default of mortgage payments and not seeking liquidation for other legal reasons, i.e. divorce, estate liquidation, tax seizure. At every level of the process a property goes through when default of payment has occurred opportunity for a good deal exists. Your Personal Coach will discuss these with you in greater detail as they pertain to your market area. A mortgage is a written legal document that creates a lien upon real property as security for the payment of a specific loan. For example, John Doe applies, and qualifies for a loan from ABC Mortgage. Mr. Doe pledges the property he is buying as collateral or security for the loan. Note that the buyer grants the mortgage, and is referred to in legal documents as the grantor or mortgagor; and the lender is the recipient of the mortgage, and is referred to in legal documents as the grantee or mortgage. When individuals or businesses fail to pay their purchase loan payments and/or property taxes, those property owners are said to be in default. The amount of the default is called the arrears. Local governments and lenders have the authority to seize or foreclose on defaulting property owners and sell either the property, or (in some jurisdictions) sell a lien against the property. Property owners may reinstate their loan or cure the default by paying all of the back loan payments or taxes due; the foreclosure action, then, stops. In many jurisdictions, there is also a redemption period after the foreclosure and liquidation, in which the original property owner has some period of time to redeem the property by paying all of the amounts due, including all of the costs of foreclosure and liquidation. Redemption periods affect the purchaser‘s rights to sell, rent and manage the property.
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NOTIFICATION OF DEFAULT TO PROPERTY OWNER Typically foreclosure starts with a letter sent to the mortgagor (the borrower) demanding cure, or prompt payment of money owed. The Foreclosure Notice letter usually contains a Notice of Acceleration. Acceleration makes the entire loan due immediately, not just the delinquent payments or arrears. If full payment is not made by a particular day named in the letter, formal foreclosure proceedings begin. •
Pre-Foreclosure - The owner of record will have gone through a period of demand once payments on an open mortgage have stopped. Opportunity does exist at this stage. Pay close attention to third party information and anticipate a longer turnaround time as you are probably working at the institutional level.
FORECLOSURE PROCEEDINGS After the lender has given the owner proper notification, an attorney prepares a Summons, Complaint, and lis pendens (which is legal Latin for ―notice of pending lawsuit‖). The Summons is usually a pre-printed form summoning the borrower to court at a specified date and time to answer the lawsuit against them. The Summons sets forth the names of the parties (usually, borrower and lender); the name and address of the court with jurisdiction; and the deadline for responding to the Summons. If the borrower fails to respond by the deadline named in the Summons, that person loses the right to address the court and defend against the foreclosure proceeding (any legal action undertaken by a court of law, from adoption to foreclosure, is called a proceeding).
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The Complaint is just what it sounds like; the foreclosing party (usually the lender) alleges (makes assertions of facts and opinions that have not been verified) a complaint to the court. By law, a Complaint must include: A.
The names of the parties to the proceeding.
B.
The status and relationship of the parties to the proceeding (as in: XYZ Mortgage Company, lender, vs. John & Jane Doe, husband and wife, the secured borrowers).
C.
The reason the proceeding is being brought before this court (usually because the real property is located within the court‘s jurisdiction).
D.
A list of all the parties at interest; in other words, everyone who has an ownership interest in the property and everyone who has accepted the property as collateral for a loan (for instance the second mortgage holder).
E.
A description of (and a copy of) the security agreement, loan agreement and/or mortgage that gives the plaintiff (the foreclosing party) the right to foreclose on the defendant (the borrower).
F.
A request, or plea, that the court order full payment or transfer of title in lieu of payment.
Legal documents requesting action from a court are called pleadings (which contain a plea to the court) or motions (when one party suggests an action to the court). A response to a Complaint is called an Answer, and any other documents filed by either party responding to a motion or a pleading filed by the other party is called a Response. Decisions made by a judge in his or her official capacity are called Judgments (a decision regarding a specific case) or Orders (a judgment that orders one or more parties to perform an action - such as pay money or deliver a deed). Loaning4Less is not in the practice of buying property at foreclosure auction. This is primarily due to the simple fact that buying what you have not thoroughly investigated is foolish. However, there are several approaches one can investigate in an effort to pro-cure the property before sale. Review these options and your State/County requirements with your PAS.
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LEGAL NOTICE PUBLICATIONS AND COUNTY POSTINGS Numerous opportunities are published in legal notices in specialized publications (rather than large-circulation daily newspapers, which are considerably more expensive). It is simple to find these notification publications, call the local public library. We strongly recommend that you subscribe to all of the notification publications for your area. While the ads are hardly alluring (please see the sample, below) they are very informative. EXAMPLE: L-407888 SUPREME COURT - COUNTY OF MIDLAND, BANK OF ANYTOWN, Plaintiff(s), vs. John J. and Mary A. Doe, et al., Defendant(s). Pursuant to judgment of foreclosure and sale entered herein and dated December 28, 2002. I, the undersigned Referee will sell at public auction at the front steps of the ANYTOWN Town Hall, 100 Main Street, Any town, State, on the 15th day of March, 2002 at 10:00 AM, premises beginning at a point on the westerly side of Small Street, 233.5 feet southerly from the southerly end of a curve connecting the western side of Linden Drive South (West Linden Street) and the southerly side of Oak Avenue, being a plot 100 feet by 200 feet, said premises known as 114 Linden Drive South, Town of Any town. Approximate amount of lien $113,456.87 plus interest and costs. Premises will be sold subject to provisions of filed judgment, index no. CV 12376-02. Dated February 11, 2002, JAQUELINE WAYNE, Referee.
There are, also, numerous listing services that can provide more conveniently formatted information either in print or on the Internet for a fee. Always examine a sample of the listing and carefully check how often it is updated, how complete the list is, and whether or not there are any guarantees. It may be worthwhile to sign up for a limited trial subscription and verify all of the listings for a month to check on their completeness. It is always a good idea to use caution when your financial future is at stake. Most jurisdictions, also, post or advertise property sales at designated locations in the county offices or local courthouse. Numerous opportunities are posted: tax defaulted properties, foreclosure properties, and tax lien certificates are usually included. Sometimes, a jurisdiction will post notices of sale online, and some will advertise in specialized legal notice publications. When you first encounter a knowledgeable clerk, find out where and when sales are posted and how often the listings are updated. We strongly recommend that you review all posted listings as soon as they are available for your area.
COURTHOUSE POSTINGS You can contact probate and bankruptcy courts, and ask to be put on their mailing list for real property sales. In some areas, you can go to the courts and examine their dockets. Be sure to call first, because some courts limit the dates and times you can get access to the dockets. Bankruptcies are filed in federal district courts; so if you cannot find the number under bankruptcy court, try federal or district court. Probates are usually handled by the superior court of your local area.
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GOVERNMENT AUCTION LISTS Government property sales are handled through the General Services Administration (GSA). You can write to them and ask for their catalog, ―U.S. Real Property Sales List.‖ The GSA does not maintain a mailing list, so you will need to send in the order blank from each issue in order to get the next issue. You can order lists of properties by state. You can select agricultural, commercial, industrial, and/or residential property lists. The GSA accepts verbal and written bids as noted in the catalog. For issues of the catalog, write to: Properties Consumer Information Center Pueblo, CO 81009 (617) 565-5700 The U.S. Department of Housing and Urban Development (HUD) offers incentives to lenders, and also, insures mortgages through the Federal Housing Authority (FHA) to encourage home ownership for modest-income families. HUD/FHA requires that you go through their designated real estate brokers in order to inspect and bid on their foreclosures. Call the nearest HUD office, and they will provide you with a list of designated brokers to contact in your area. Many HUD/FHA homes are only sold to owner-occupants and will not sell a property unless you sign an agreement to live in the house and not rent it out or sell it for a specified period (usually three years). Though, some properties are specifically sold as income properties, it is worth checking with the designated broker in your area. Sealed bids are accepted by mail, and a 10 percent down payment must be included with the bid. HUD pays the broker‘s fees if the offer is accepted. The Veterans Administration (VA) sells foreclosed properties to anyone; purchasers are not required to be veterans or owner-occupants. In some states, you can purchase directly from the VA without using a real estate broker. Bidding is made through written offer, and the VA usually requires a 10 percent down payment accompanying the bid. The VA‘s list of foreclosures is available on the first business day of each month. You must call each month to request a new list.
CONSIGNMENT AUCTION LISTS The Small Business Administration, Federal Deposit Insurance Corporation, Federal Savings and Loan Insurance Corporation, and other private and government agencies, all consign properties to auction. Numerous auction houses are listed in your local yellow pages, and we recommend calling each one to see if they handle real property auctions and to get on their mailing list. Please see, ―Government Auction Sites,‖ in Websites of Worth, Auction Agency Websites.
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CHAPTER 4 THE LOANING4LESS METHODOLOGY OF DEAL IDENTIFICATION AND ANALYSIS
GETTING STARTED Now that you have an understanding of what Loaning4Less expects of you and what it will take for you to establish a business mindset. It is time to get down to the nuts and bolts of identifying opportunity, conducting due diligence, and analyzing the profit potential of a deal. Although the previous paragraph may have your mind swimming and or heading off in a thousand different directions, keep a focus on the process and manage your efforts step-bystep. Do not make the mistake of skipping a step or passing over what might appear to be of little impact. You will miss something and it will ultimately cost you profit or possibly the entire deal.
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DEAL IDENTIFICATION Real estate transactions originate in a variety of ways. Keep your eyes open and your ear to the ground and viable opportunities will present themselves. Remember, every personal contact, physical address, and business associate could lead you to a potential deal. Talk to everyone you know about your real estate endeavor to create an in-bound lead program. You may even want to think about drafting a letter to be sent as a lead in to future discussions, speak to your Personal Coach about the content and remember less is more. Identifying opportunity may seem as easy as reading the paper, searching the internet or driving around an up and coming neighborhood; however, you are not the only investor in the game and need to be creative so that you are the first to the door-step. Since there are numerous methods of acquisition and each market‘s opportunity differs we will outline a brief listing of sources to consider. Once you have researched your market area your Personal Coach will plan with you the best source to start with. Never underestimate the power of word of mouth, keep your lines of communication open and do not rely on the path of least resistance (multiple listing services) to be your only source of deal flow. Referring back to the beginning, and recalling that distressed property incorporates a multitude of origins, the listing below is a small sampling of potential paths of acquisition. 1) 2) 3) 4) 5) 6) 7) 8)
For Sale by Owner / Out of state owner Corporate Owned Bankruptcy / Divorce Probate Pre-Foreclosure Short Sale Builder Buy-Out Bank Owned (Pre-MLS and MLS)
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RESEARCHING YOUR PROPERTY VIALIBILITY Due Diligence: For those who like to refer to the general legal term of due diligence, it is defined as: ‖The care that a reasonable, prudent person would exercise in the examination and evaluation of risks affecting a transaction.‖ ―Real Estate investors must be very careful and knowledgeable in order to protect their financial investment and get the best deal possible. Savvy buyers, no matter what they are buying have a set of shopping rules when making a purchase… the best price possible…haggle…inspect carefully (buyer beware)… best quality you can afford…so why not do the same for a REALLY big purchase like real estate you buy as an investment?‖*… (Taken from article written by Paula Stone “Due Diligence for Real Estate Investors.” www.EZinearticles.com)
Due Diligence is the act of displaying appropriate carefulness. Without making this seem too simplistic it is imperative that you embrace the following mantra in an effort to stay focused and exercise appropriate carefulness. Who, What, Why, Where, When and How does this deal come together or fall apart? Due diligence is what will separate you from the masses. Loaning4Less will make every effort to support your endeavors, however, if you are not on top of your game and dotting your I‘s and crossing your T‘s in the area of research and due diligence you have not only failed yourself you will not close a deal. Taking the approach of what will make this deal turn sour is a lot better than presuming what you see or hear is the truth. It will also position you in your dealings as a seasoned investor and remove the naïve expectation that all deals work and make money. Starting your process by asking the following questions will alleviate a lot of wasted time and minimize your frustration.
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WhoWho is selling? Who is buying? Who gains? Who losses? Who is motivated? Who is touting the deal? Who is profiting? Who will do the repair? Who will market the resale?
WhatWhat is the property condition? What is the inspection report telling me? What is area market analysis saying? What is the as-is value? What is the potential repaired value? What is my confidence in the area? What is the average market time? What has been the property history? What do the neighbors have to say? What does the property need? What are my rehab bids covering? What is my repair time going to be? What are the sold properties supporting in price?
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What is the inventory of active properties? What market exposure has the property had? What is my risk exposure?
WhyWhy is this a good deal? Why has it been on the market for X amount of days? Why should I buy? Why am I being pushed for a decision? Why will it be worth more in the future than it is today? Why do I think the risk exposure is reasonable?
WhereWhere is the property located? (Not an address! In relation to traffic, RR, hazards and nuisances) Where is my information coming from? Where does the profit come from? Where is my biggest profit drain? Where can I minimize exposure? Where has the property been marketed? Where can market value be added?
WhenWhen did this property become available? When will it be ready for resale? When will I let the deal go and move on?
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HowHow did I come by this property? How will it gain value? How is my risk/reward relationship? How will I manage the rehab timeline? How will resale be handled? How will rehab dollars be best spent? How did I evaluate the comparable properties? How will it fit in the market resale demand? How many properties are for sale in the area? How many properties have sold in the last 6-9 months? How will my property compare to the sold properties? How will my property fit in the seasonal trend of the market?
DETAILS BEHIND THE SUBMISSION Researching Your Market Area You must become familiar with the real estate markets within your area in order to take advantage of the various discount property investment opportunities. Area market data is available from a variety of sources, and once compiled, can be applied to any property within that area. Demographic Data, Real Estate Market Survey, and Area Data all help to determine value and marketability of properties. Once all of the area research is complete, it is only necessary to copy and append that information to your Property Profiles.
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DEMOGRAPHIC DATA Demographics are an important consideration at this point. You need to find the most profitable counties in your area (a county with 9,000 square miles and a population of 1,130 people is not a good bet). You are looking for densely populated areas where there is a large, active, and growing real estate market. Once you have selected the most promising counties in your area, you must collect the demographics for those counties. Demographics tell you a lot about the community, and what price you can reasonably expect for the property. A Demographic Data Analysis should include the following information: •
Population in the community, including growth trends
•
The median and average income
•
Percentage of the community currently owner-occupied versus renting
•
The age of the properties in the community
•
The percentage of the population that works in various types of industries
Demographics have a direct impact on the marketability of a home. For instance, you determine from the Demographic Data Analysis that the average income in a community is $17,000, only 25% of the residents currently own a home, and that home is typically worth about $50,000. It makes sense to concentrate your efforts on properties that a majority of the residents can afford. It does not make good business sense to purchase a $100,000 home in this neighborhood. Although the home may very well be worth $100,000, finding a buyer will take months. Once you understand the demographics of a community, you must understand the economics, as well. What is the driving force of the community? What businesses employ what segments of the population? If the largest employer in the area just laid off half of its work force, the marketability of a home will not be the same as it would be if that same employer just announced that it is going to double its work force. Excellent demographic data is available from the National Association of Counties online at www.NACO.org. Once you understand the current demographic data, you will be able to concentrate your efforts on the properties that are in the greatest demand. Regardless of what the market conditions are, Loaning4Less can position our properties for maximum success.
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NEIGHBORHOOD EVALUATION You need to determine how desirable the neighborhood is. Remember, you need to evaluate the profit potential of the property, not the absolute desirability of the house. The most marketable properties are smaller, less expensive ―starter homes.‖ Starter homes have huge resale potential. This is not true of high-end mansions. Check to see: A.
Are nearby homes similar in style and construction?
B.
Are the other homes well cared for?
C.
Does the street have a lot of traffic?
D.
Are there many homes for sale?
E.
Do most of the homes in the neighborhood appear to be lived in?
F.
What other types of properties are nearby?
G.
What amenities does this neighborhood have to offer?
H.
Are there any nuisances (a freeway, train track, etc.) nearby?
WRITE UP THE NEIGHBORHOOD You need to find out if there are any major problems in the neighborhood such as noisy industries, freeways, fire stations (within a mile is good, within a block is bad), fresh landfills, etc. You will, also, need to evaluate the public attractions, such as convenient shopping, good schools, easy access to public libraries and other public services, public parks, charming restored historical districts, etc. None of the problems necessarily make the property a bad investment, but the answers to these questions can help us price the property accurately to insure quick resale and a decent profit. The neighborhood evaluation needs to be thorough and should include a discussion of any nearby special amenities or nuisances. An undesirable neighborhood feature does not necessarily mean the property isn‘t a good investment, but undesirable features will affect resale time, resale pricing, and profit margin.
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REAL ESTATE MARKET SURVEY Real Estate Market Data tells you a lot about the real estate markets in your area. For each neighborhood within your area, you need to know: 1.
Current real estate cycle: ask real estate experts (real estate agents, local bank loan officers and mortgage brokers, title company researchers, etc.) to estimate whether the local real estate market is a buyer‘s market or seller‘s market (see Groundwork for a full discussion of buyer‘s and seller‘s markets).
2.
Percentage of the homes in the community that are currently owner-occupied vs. rented.
3.
The average age and square foot price for residences.
4.
The average days on market at fair market value for different categories of properties (small starter home under $75,000, large up-scale homes over $200,000, etc.). This real estate market data will help you to accurately judge resale value for various deeply discounted properties within your area. It is important to break the data down by neighborhood or zip code because: (1) frequently, that is how the data is compiled, and (2) the smaller the area, the more accurate the information - yes, Virginia, there is such a thing as the wrong side of the tracks.
AREA DATA Area information will also help you judge property opportunities. The Internet, the local library and a handy book, the Places Rated Guide, are all excellent sources of Area Data. You need to discover: 1. The availability of local shopping. Note: enclosed shopping malls are considered to be past their prime, and declining at about 15 years of age, and they are ―dead‖ at 20 to 25 years old. Therefore, you need to know not only where the shopping malls are, but how old they are, as well. 2. The availability of recreational amenities, such as parks, recreation districts, amusement parks, and sport areas (for sport fishing or hunting). 3. The quality of the local schools, not on an absolute scale, but compared to other nearby communities. Every major area seems to have one or two school districts that are more popular than their neighbors. This doesn‘t rule out neighboring communities, by any means, but it is good information to have when making price decisions.
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COUNTY RESEARCH The records available at the county assessor, treasurer, zoning, environment, recorder, and court all contribute to a complete assessment of a property‘s viability as an investment. At each step in the process, there are factors that immediately disqualify a property as an investment; we call the problems, Red Flags. After meticulously researching a property, discovering no Red Flags, and documenting all pertinent information, it is possible to analyze the property as an investment.
ASSESSOR’S OFFICE RESEARCH After locating some interesting properties, visit the County Assessor‘s Office on-line to examine their records. You want to find out: 1) A property‘s assessed value 2) Basic property description (size and types of improvements, number of bedrooms, baths, size and type of vehicle storage, accurate street address, and name of last owner of record) 3) The assessment ratio (the ratio of assessed value to fair market value) 4) How old the assessor‘s information is 5) Any special assessments or tax liens that may not be included in the recorder‘s office records 6) A property sketch, if available 7) A plat map, if available Property records, in this office, are organized by property address. The tax assessor determines a fair market value for a property to determine the amount of property taxes owed for that property. Different jurisdictions conduct assessments at various times. Some counties re-assess annually, or every two years, and there are some counties that haven‘t re-assessed for twenty years. It is important to determine when an assessment was last done on a parcel. This will help you determine the current variance between assessed value and the market value. Parcels are also reassessed when a change is made. For example, if a property was assessed as a vacant lot, and a house is built on that lot, the parcel is reassessed when the house is completed. Be cautioned that this does not always hold true with properties that have declined in value. In other words, if a home was assessed, and then the home burned down, the assessor‘s records will not necessarily reflect that the home is no longer there. The only way to really know the condition of a property is to look at it.
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Red Flag: A property that has an assessed value and fair market value that is „out of sync.‟ For instance, if a property has suffered damage or neglect and the assessed value is depressed. Owners do not usually abandon their property lightly, so the property may have been abandoned for good reason.
TREASURER’S OFFICE RESEARCH The Treasurer‘s Office, also known as the Tax Office or the Revenue Office, maintains tax collection records. These records will indicate whether the current owner(s) are current on their taxes, and will help to determine if there are any outstanding tax liens and encumbrances on the property. These records are usually organized by owner‘s names.
Red Flag: If the assessments are so high that it is impossible to make sufficient profit, move on to another property.
ZONING AND ENVIRONMENTAL RESEARCH The Zoning, Planning, or Land Board Office offers plat maps, parcel maps, zoning, and zoning variance information. You want to find out: A.
A property‘s legal description and actual location
B.
Basic property information such as size of lot
C.
The property‘s access (Is it landlocked, is it on a public road?)
D.
The property‘s elevation or contour, (Is it level, or is it a cliff?)
E.
Any special restrictions or environmental issues that may not be included in the recorder‘s office records
F.
A plat map, if available
Plat maps pinpoint a particular parcel‘s location, and show the outlines of the legal parcels, together with the parcel number for each lot. The map book number, plat map number, and parcel number are usually included in legal descriptions of the property and deeds or conveyances of the property.
Red Flag: Carefully check the accuracy of the legal description in deeds, conveyances, and other records, and make sure it matches the plat map legal recorded description exactly. Any
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discrepancy could indicate that the wrong property is being foreclosed on - a fairly common error. A parcel map shows a more detailed description of the parcel than the plat map. The parcel map shows zoning, various building limitations, egress and digress setbacks, and other easements. This information is important for any property, but is critical for lots and vacant land. A plat map will also show you if a parcel is landlocked; in other words, that there is no access to the property. With landlocked parcels, it is necessary to review the original deed of trust or mortgage to see if there is a legal right easement affording access. In covenant-controlled communities, it is necessary to research any restrictions applied by the community architectural committee. With lots and vacant land, it is important to determine build ability (the useable size of the lot, after subtracting unusable slopes, setbacks, easements and applying restrictions), in order to determine the desirability of the property. After researching zoning and build ability, environmental issues must be researched. For example, if the property was once used as a gas station, there could be a potential ground contamination environmental issue. Environmental issues are not always recorded, so you will need to research environmental liens, encumbrances and obligations with the proper authorities at the health department, or, in some jurisdictions, department for the environment, land conservation department, etc. Knowing the previous uses for the property or any other history on the property will, also, give you insight on environmental problems or hazardous conditions that may affect the value of the property.
Red Flag: Zoning and environmental problems are expensive to remedy, if they can be remedied at all (there is no guarantee of a favorable legal decision); thus these problems drastically reduce the marketability of property. If a property has zoning or environmental problems, move on to another property.
RECORDER’S OFFICE RESEARCH The County Clerk and Recorder, also variously known as the Registrar of Deeds, the County Registrar, or the Land Records Office, is usually the best source of information regarding chain of title. You want to find out: A.
Every lien, covenant, condition, restriction, and encumbrance recorded against the property
B.
The seniority in law of all liens and encumbrances
C.
All recorded current parties at interest
D.
The property‘s chain of title
Every party at interest must be researched and their claim(s), current name, address and telephone numbers must be obtained. This is critical in foreclosures, because proper notification must be verified, the seniority of various liens must be researched, and marketability of title must be established. It is important to know which claimant is foreclosing on the property and whether 56
any liens, encumbrances and obligations survive the foreclosure. For instance, if the holder of a second mortgage forecloses on a property, all of the liens senior to that mortgage (usually a first mortgage and tax liens) remain in full force and effect and must be paid off prior to re-sale of the property. Obviously, these obligations reduce the profit margin and must be considered when calculating spread, margin, and return on investment. Some counties are up-to-date, and have everything computerized; others have microfiche; and others have huge books that you have to dig through. We suggest that you call and set an appointment with an employee to teach you how the information is stored and how you can retrieve it. There are county websites that keep recorded documents online. However, the information usually does not go back far enough for an accurate search. Warning: it is very tempting to research almost exclusively online. But, electronic information sources, are often a poor source of the written records system and frequently inaccurate. Always verify online research with a physical records check. Please see ―State, County & City Research Websites,‖ in Websites of Worth, on page 101.
Red Flag: Liens, covenants, conditions, restrictions, and encumbrances that make the property unprofitable or difficult to sell; additionally, properties that are the subject of unfinished lawsuits are a lousy bet (title could be tied up in court for years). When a property has a lien, covenant, condition, restriction, encumbrance problems, or is the subject of a lawsuit, discuss with your Personal Coach to decide if you should move on to another property. Verify the seniority of every encumbrance, and verify which liens “fall off” at liquidation, and which remain in force. Verify that the legal property description is an exact match on all the records
COURT RESEARCH Once you have completed the property research, it is time to complete the owner research at the local County Court. In many cases, indebted owners have personal liens filed against them that automatically attaches to any property they own (for instance, IRS tax liens are personal to the owner, but attach to all property owned by the taxpayer). These liens affect the value and marketability of property, but may not be recorded at the Recorder‘s office. These records are organized by name, so postpone this research until you have all of the names of the current parties at interest. You want to find out: A.
All the variations on the current owner(s)‘ names
B.
Every lien and encumbrance recorded against all parties at interest
C.
The seniority in law of all liens and encumbrances
D.
All recorded current parties at interest
E.
Evidence of proper Service of Process or Notice
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Sometimes, the record shows liens as unsatisfied when, in fact, they have been satisfied. For instance, a property‘s records show a conveyance of a warranty deed in 1999, accompanied by a new mortgage, but the old mortgage still shows as unsatisfied (in other words, still in force). A new lender issuing a new loan without paying off the old mortgage would be very odd, indeed. This is probably a recording error, and not a problem with the property. Contacting the original mortgage holders, and arranging to record a new quitclaim deed, can usually remedy recording errors. If it is a high-profit property, it‘s probably worth it. If there isn‘t much of a spread, you might want to think twice about devoting a lot of time to it. Make sure you receive direction before expending effort on correcting records.
Red Flag: Notification failure! More foreclosures are derailed due to notification failures than for any other reason. If all of the parties at interest have not received proper notice, the foreclosure is illegal; don‟t get bogged down in a legal nightmare, move on to another property and the timevalue of money is negatively affected.
Red Flag: Verify the owners‟ names on every document where they appear. The names must be exactly the same, including the spelling and the middle initial. If there is any discrepancy at all, the property sale can be contested. If the owner contests the sale, we stand a chance of losing the property.
Red Flag: Check for any other property that the owner may own in the county. If the owner owns several pieces of property, there is a very real possibility that the property to be sold is not the same as the property advertised in the legal notice.
AMENTITIES Determine what amenities, if any, are included with the property. Ask the individuals conducting the sale about amenities. Check with the homeowners‘ association, if there is one. Amenities include club membership (typical for golf course, resort and vacation properties), attractive local schools, parks, etc.
PULLING IT ALL TOGETHER Common sense, due diligence and commitment are at the heart of every property acquisition. Loaning4Less Students must: (1) find properties (2) physically inspect the property and provide photographs (3) value the property ―as is‖ and once renovated through solid sold comparative properties and area market analysis (4) research the marketability of the property (5) Focus on the return on investment and risk reward relationship; and finally, pull it all together and package the property for presentation.
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HOW TO BUY AND SELL A FIXER-UPPER It just needs a little TLC, right? If you‘re willing to put some elbow grease into it, buying and selling a fixer-upper can be a profitable endeavor. But there‘s a level of risk involved, not to mention a substantial commitment of time and effort on your part, and long periods of time when you will be living in chaos and sawdust. If you‘re still up for the challenge, it can be a rewarding experience. Steps: 1.
Decide on the geographic area in which you want a property. Whether you intend to live in a home or not will impact where you‘ll want to buy. Remember that your ideal place to live may not be the best place to invest in property.
2.
Be prepared for an extensive search. Many fixer-uppers, particularly those in especially bad shape, don‘t command much attention, so you may have to hunt around. Drive through desirable neighborhoods to spot ―For Sale‖ signs.
3.
Keep in mind that ―location, location, location‖ is still the mantra of real estate purchases, whether for a fixer-upper or a single family home. Steer away from properties in areas that are going downhill, because you‘ll have trouble recouping your investment no matter how beautiful the structure. Find out if the asking price of that fixer-upper is comparable with the prices of other homes on the block. Make sure the fixer-upper is in an area of appreciating house values. That way, your house will be worth even more when your repairs are completed, rather than less because of worsening market conditions in the neighborhood. Try to meet some of the neighbors who might give you some information on what‘s been going on in their block.
4.
Look in the classifieds, and at community bulletin boards or other public spots for the magic words ―fixer-upper,‖ ―needs TLC,‖ ―handyman special,‖ or ―diamond in the rough.‖
5.
Review local listings of foreclosed properties in your city. When banks or municipalities have had to take ownership of a property, they‘re generally very motivated to hand it off to a private buyer like you (See How to Buy a Foreclosed Home). Contact real estate agents to see if they are listing a fixer-upper.
6.
Keep an eye out for properties that need only cosmetic improvements. Houses that could use new paint, carpeting or flooring are the least expensive and offer the fastest potential turnaround. Larger problems such as bad roofs or faulty foundations are often prohibitively expensive and undermine eventual profit, depending on what you got the house for and how much you think you can sell it for.
7.
Watch for vacant homes that have not been kept up by the owner. These forgotten houses can often have the most motivated seller you could hope to find.
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8.
If you find an appealing property with seemingly reasonable repair needs, confirm. Have the home professionally inspected. Specify that the final sale is contingent on a satisfactory complete inspection.
9.
Accompany the inspector when he or she goes through the house for a blow-byblow account. Then review the report in detail to see what‘s wrong. You may also need to get additional inspections including soil, pest, roof, and seismic. Be sure the inspector generates a narrative report rather than a checklist.
10.
Get a formal appraisal ($200 to $400) of the home‘s value and have your agent work up comparables. If possible, have the appraiser estimate how much the home should sell for after it is restored to good condition.
11.
Set your target purchase price. Pros suggest bidding at least 20 percent below its potential fixed-up value.
12.
Get several bids from contractors of how much it will cost to fix what needs to be fixed (see How to Hire a Contractor, Plumber, Painter or Electrician). Be sure to check zoning requirements and include permit fees. The house‘s value should increase at least $2 for every dollar you spend on improvements. Calculate the potential value of the house after renovations and be sure that it isn‘t higher than comparable houses on the block. Be realistic about repair costs.
13.
Make the final sale contingent on obtaining a satisfactory bid for improvements. That way, if the bids you receive are simply too expensive, you can back out of the deal. Keep in mind that contingencies of any kind could make it hard to negotiate a lower price or even make a deal in a seller‘s market when competition among buyers can be intense.
14.
See How to Shop for a Mortgage, and pursue a mortgage that includes funds for home renovation, such as the Federal Housing Authority 203(k) program.
15.
Make whatever repairs and renovations are necessary and then sell the property. (See How to Sell a House.)
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OVERALL TIPS Be patient. Unlike the folks on Home and Garden Television‘s ―Weekend Warriors‖ who make it sound as though renovations happen within a few weekends. Fixer-uppers can take a long time to find and much longer to spruce up, particularly if you‘re holding down a day job. Timing is often more important than the state of the house. If you sell during a hot market, price appreciation can help offset the cost of your improvements. Don‘t be taken aback by properties that have been on the market for a long time. It‘s not unusual for some fixer-uppers to be up for sale for a year or more, depending on market conditions. As a general rule of thumb, improvements that are invisible to the average homebuyer or merely bring the home in line with expected minimum standards don‘t add to the resale value. If you make the wrong improvements, such as enlarging a closet or converting two bedrooms into a master suite when you only had two bedrooms to begin with, you won‘t see much, if any, return on your investment. Another potential pitfall is over-improving the home compared to other homes in the neighborhood.
OVERALL WARNINGS Conditions that your home inspector finds that can warrant backing out of a deal include; pest infestation, radon, significant water damage to the structure, or other major fixes. Be aware that naturally occurring threats, such as mud slides or floods, if you‘re located in a flood plain, may be equally dangerous. Properties should be investigated by a structural engineer as well. It‘s a conflict of interest if your home inspector also offers to do the work he or she has stated needs to be done.
WHAT TO LOOK FOR Decent location Profit potential Reasonable repair requirements Inspection reports
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Quick Data Sheet Asking Price: ___________________ Address: __________________________________ Zip: __________ MLS#_________ Style: ____________ # Bedrooms: ____________ # Baths_______________ #Garage: _________ Attached or Detached. Approx Sq. ft. House_________Lot Sq. ft.______ Roof_____________ Private Spa: _______Private Pool: ___________ Appliances: Washer/ Dryer____________ Oven_____________ Dishwasher____________ Refrigerator ___________ Utilities______________ Construction_____________ Flooring________ Landscaping______________ Air Conditioning Sys______________ Heat Fuel_____________ Heat Sys________ Association fees___________________ Association name_______________________ Annual Taxes_____________________ Days on the market______________________ Sale price________________________ Original Price__________________________ Traffic Pattern: ____________________ Nuisance: _________________ Location Description: ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ What is the current condition of home? Please describe work that needs to be completed. ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Additional Information: __________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________
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CHAPTER 5 SECTION 1 THE REAL ESTATE TRANSACTION: AN OVERVIEW Upon the identification of a viable property, an offer is drafted and presented to the sellers. It is assumed at this point that negotiations will begin. Loaning4Less will direct all offers for the purchase of property for which we are affiliated. Remember, we will never start with our highest and best. Do not feel as though you are insulting a seller by offering less than what they are asking, this is why it is called an asking price. The real estate transaction is confirmed by the contract. The contract defines the rights and liabilities of the seller and purchaser. The contract must be in writing, signed by the parties involved and must contain all material terms. The specific procedures for the signing and negotiating of a contract of sale, as well as the formalities to be followed at the closing where the actual transfer of the deed occurs, vary between states as well as between counties and cities within states. A Loaning4Lessofficer will always negotiate the contract. In order to determine the specific parameters of the contract, he or she reviews the following documents: the deed, survey, title insurance policy, promissory notes or mortgages on the property, certificates of occupancy, tax bills, fuel and utility bills, leases, permits for elevator, pools, etc. The purchaser should arrange for an inspection of the premises by an engineer, architect, contractor or home inspection company prior to the signing of the contract. In the alternative, the contract should set forth the consequences if defects are found with the premises. Loaning4Less will not make any purchase without an inspection. The contract generally provides for the apportionment of outstanding expenses at closing. Closing apportionments are adjustments to income, expenses or charges, usually to the date of closing. The expenses are generally apportioned so that the seller pays its expenses prior to closing and the purchaser pays the expenses subsequent to the conveyance of the deed. The contract is often contingent on the purchaser obtaining financing within a certain time period. If the sale involves a co-op or condominium, the contract will be somewhat different as a result of different considerations involved.
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FINANCING Purchasers of real property typically obtain financing from various sources. Mortgages are commonly used to finance the acquisition of real property, since the lender receives a lien that may be enforced on the default of the purchaser. The buyer retains title to the property unless the mortgage lien is foreclosed. The lender, who may be the seller or a third party, can enforce the mortgage by foreclosing the lien. The borrower can redeem the property by reinstatement or payment of the loan prior to foreclosure. Certain states are considered ―title theory states‖ and treat title to mortgaged premises as being in the mortgagee. Other states are considered ―lien theory states‖ and consider that the legal title to the mortgaged premises remains in the mortgagor and the mortgagee merely has a lien on the property. A mortgage loan can be structured in a variety of ways and can have fixed or adjustable rates.
THE CLOSING The closing is the ceremony at which the property transaction is consummated. Closing practices are dictated by custom, which varies from region to region. Generally, all necessary parties are present, their identity is verified, the documents are finalized, financial calculations and adjustments are reviewed and documents, money and information are exchanged. The closing usually takes place at the office of the seller‘s representative or Title Company, occasionally at the office of the lenders‘ counsel. Almost all of Loaning4Less‘s closings will be conducted via mail-away procedures and ample time should be given to review documents. There are various costs which are payable at closing, which vary according to jurisdiction. Costs typically paid by a purchaser include fees to record the deed and the mortgage, utility bills, escrow fees, attorney‘s fee for the bank attorney, taxes, special assessments, financing charges, inspection fees, origination fees, rent payable if possession is taken before closing and adjustments.
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DEED The actual transfer of title to real property generally occurs by a deed. It usually occurs at a closing where it is executed, acknowledged and delivered. There are various types of deeds. The principal types are quitclaim deed, warranty deed with full covenants, and bargain and sale deed. A quitclaim deed contains no covenants by the grantor. A warranty deed with full covenants contains covenants by the grantor of right to convey, against encumbrances, of further assurances, and of quiet enjoyment and warranty. A general warranty deed warrants title against defects arising before as well as during the time the grantor has title. A special warranty deed contains the same covenants, but only warrants against defects arising during the time the grantor has title. A bargain and sale deed contains the basic covenants against grantor‘s acts. A deed must be in writing, it must identify the parties and the land involved and it must be acknowledged and delivered.
RECORDATION In order to protect a purchaser or lender from the subsequent rights of third parties over the real estate, it is essential to record the relevant documents by filing in a public recording office. Generally the recordation of contracts, deeds, and mortgages occurs at the county level. Significant differences with regard to recording procedures and requirements exist from county to county.
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HOW TO INTERPRET INSPECTION REPORTS Now that you‘ve had a home inspection, make sure you understand the significance of its findings before you buy. Steps: 1.
Review the inspection report. Get details about any disclosed findings.
2.
Pay special attention to items in the report that indicate potential health hazards, such as a cracked heat exchanger in the furnace, lead paint or asbestos.
3.
Look for other red flags indicating expensive repairs in the near future, such as a faulty roof or cracks in the foundation.
4.
Provide the seller with a copy of the inspection report. Notify seller in writing of the findings and needed repairs.
5.
Get estimates for repairs. In writing to request that the seller adjusts the selling price or makes necessary repairs before close of escrow.
6.
Decide whether the selling price plus any repair costs exceeds your budget.
Tips: If you have allowed for a contingency on the findings on any inspections and you do not wish to complete the transaction due to items discovered in the inspection, you have a legal way out of the contract to purchase the home. Inspection reports will usually run 10 to 20 pages. Keep in mind when reading the report that no house is ever perfect. Many financial institutions will also require a termite inspection; this will cost between $50 and $100. Contact an inspector specializing in detecting lead paint hazards for any home built before 1978. If you are unfamiliar with construction and building codes, it is wise to have a contractor review the report.
Warnings: Be leery of inspectors whose reports have an alarmist tone.
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SECTION 2 AREAS OF ACQUISITION TO EXPLORE ESTATE LIQUIDATIONS Out of state family or trusts may not want the headache of managing the property or dealing with repairs. Contact local Estate attorneys to let them know you are out there and would be interested in working a referral program with them.
DIVORCE PROCEEDINGS Most couples in a divorce are more interested in severing ties and cashing out than sharing an interest in a jointly owned property. In addition, if a spouse has been granted ownership of a property they may have a great interest in selling in an effort to move on. Being able to present a private transaction that offers savings on commission might be very lucrative. Identify area support groups and see if there is a newsletter or an opportunity for you to present your services to members. Also, consider contacting local attorneys with a referral program.
FREE PRESS In almost every market there are free or low cost periodicals that you should identify and consider advertising in to promote your business of buying real estate.
BANK REPOSSESSIONS Working with local loss mitigation departments may give you a leg up on the competition. Identify a community bank and look to establish a relationship. Walking into Wells Fargo will do you no good unless you have a good sense of who you need to deal with locally.
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HUD AND VA HUD and VA foreclosures are disposed of through open public bid. When a HUD or VA property goes through foreclosure, and does not sell at auction, an investor can submit a ―sealed bid‖ offer to HUD or the VA. This must occur 11 days after it reverts to the foreclosing party for investor purchases. However, HUD and VA properties tend to be small starter homes (the programs are designed to encourage home ownership for people who might not otherwise qualify). These houses tend to have lower prices, smaller spreads, a much smaller ROI than either tax defaulted or foreclosed properties. While we encourage you to take advantage of every opportunity in your area, HUD and VA properties are a fairly low priority. Prior to investing a lot of research in HUD or VA properties, check on the spread and the ROI. The other critical issues are the resale and demographics of the neighborhood. If a solid volume business can be established, Loaning4Less may accept smaller spreads.
FOR SALE BY OWNER Take the time to read the classified section of your paper. These people are getting bombarded by Realtors who want to list their home. Contact the home owner and set a showing. Yes, they may be at market value but who knows what they will negotiate to if the house needs work, they‘re motivated and they are saving on commission.
WHOLESALE OPERATIONS Evaluate the area for entities that are buying property routinely-do a search in public records for a particular group you have identified. Buying the property before work is done is the key and everyone can make a profit.
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CONTRACTORS Do not under estimate this source of lead. Contractors talk to a lot of people and may well know an individual who is in the repair phase over their head and a buyout would be of interest.
LOCAL INVESTMENT GROUPS Not only should you join this group, but you should explore property for sale. Another man‘s nightmare may just be your dream.
CORPORATE OWNED PROPERTY In many cases large corporations have relocated individuals to a specific area for work. At some point they will look to sell that property. It may prove to be beneficial to search larger corporations for a relocation division and discuss what it is you do with regard to buying property. Also, if you have heard that a local company is downsizing and relocating individuals to another city contact the company to identify if they are offering an employee program for selling their home and again outline the service you can provide.
AND LAST BUT NOT LEAST THE MULTIPLE LISTING SERVICE There are of course a variety of other methods of acquisition such as pre-foreclosure, short-sale, auction, Trustee sales, tax sales etc. These are additional methods of purchase and should the opportunity arise your Personal Coach will discuss them in greater detail. Overviews of these processes can be reviewed in the appendix section of this book.
The above is just a sampling of where a deal can be found; use your imagination, creativity and business sense to make it happen. The more consistent and visible you are the greater the outcome of leads.
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PRE-FORCLOSURE Pre-foreclosure acquisitions are a little more complicated for a beginning Loaning4Less Student because it requires negotiation with the owner and possibly one or more creditors. It can open up the number of properties available to you in your market, as pre-foreclosures are numerous and lucrative. Before jumping into to this line of acquisition, a tremendous amount of research is required. A full title search conducted by a title company is required. No negotiations should occur without explicit instructions from Loaning4Less.
FINDING DISTRESSED OWNERS The easiest way to find pre-foreclosure properties is to advertise as a property investor to the general public and local attorneys, and let them contact you. You can find attorneys listed by specialty (bankruptcy, divorce and probate) in the yellow pages, and, of course, lenders are all listed. With patience and good typing skills, you can type labels for every one of them and send a flyer and a pre-printed tab-top Rolodex card (the Rolodex cards are especially effective for improving response) to everyone on the list. Submit all marketing materials to Loaning4Less first for approval. Another option for contacting attorneys and lenders you want to do business with is to purchase a current list from a mailing list service, which you can find on the Internet or in the local yellow pages under Direct Mail, Direct Marketing, Letter Shop Service, Mailing Lists, or List Services. Local, highly specialized lists are fairly inexpensive (as little as $100) and can be very useful. It is helpful to send out postcards, or some other reminder periodically (we suggest approximately quarterly), and use an updated list for each mailing. Mailing lists are only good for a few months. Finally, you can advertise in local papers as ―Investor buys houses, for CASH, quick closings!‖ You want to allow the extra days, so that you can properly research the property. We suggest using local ―thrift‖ papers, such as the Thrifty Nickel, the Penny Saver, etc. These small papers offer a much more targeted audience for much less money than your average large circulation major daily papers.
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Other low-cost, high-impact local advertisements are: A.
Bus bench ads located in high-traffic locations
B.
Flyers posted in public places
C. ―Tear off‖ ads (a flyer with a ―fringe‖ of phone numbers across the bottom that interested people can tear off and take away with them) D.
Business cards scattered wherever you can possibly give them away
A much more direct method is to scan the court house listings of pending foreclosures and contact the homeowner in default. Remember, foreclosure is usually the last straw in a long series of emotional and financial disasters, so contacting the owner is easier said than done.
There are very strict rules governing advertising to defaulting owners; research the legalities before you begin!
NEGOTIATING WITH DISTRESSED OWNERS You are dealing with people who are suffering (usually) the worst emotional and financial distress of their lives; tact is required. You must be sympathetic without getting dragged into hour-long ―emotion fests.‖ You must be reassuring and business-like when the stressed owners behave emotionally. The owners, and their creditors, face a ―lose-lose‖ situation and it is up to you to turn it into a win-win situation. The owners are losing their home and their credit rating; the lender faces loss, delays, expenses, and creates a public relations headache to collect on a bad loan that, in retrospect, they wish they had never made. If there is enough equity in the property, then, you can solve these problems and make a profit.
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Red Flag: Some homeowners may make inaccurate assertions, due to financial ignorance, or due to the stress they are under. Verify every assertion made by the homeowner(s).
When you first contact distressed homeowners, you must make it clear that foreclosure proceeds very quickly, if they are not willing to help you help them, your time is better spent on another property. During the presentation, let them know that: A.
If the property goes into foreclosure, their credit rating will be ruined for ten years (the maximum length of time that a credit reporting agency can keep a negative entry in their credit file).
B.
Quick action is essential; accumulating late charges, expenses, property taxes, and other charges, will continue to increase, thus reducing the amount of equity they can realize from selling the home.
C.
Let them know that you can help them walk away from their debt, and their credit problems, with possibly extra cash in their pockets.
D.
Ask how many payments they are behind to emphasize the urgency of their need, and request a copy of their most recent demand notice or pay-off statement. In addition, acquire information on the trustee handling the case.
E.
Point out that Loaning4Less offers quick closings upon verification of property viability.
If the homeowner(s) keep mentioning that they intend to re-finance, or to get the money somehow, encourage them; say, ―Fine, if you can do it. If you can‘t, please call me back.‖ Remember, no legitimate lender will refinance a house in foreclosure, and any financing that may be available will cost a fortune. If these owners can‘t keep up with their payments now, how can they possibly keep up with even higher payments? You may very well hear back from these homeowners in short order, so do not offend them by being negative about their unrealistic dreams, or they will turn to someone else.
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BUYING PRE-CONSTRUCTION When a developer plans a new development of any nature, the firm has many hurdles to overcome, not the least of which is financial. Whether the developer is a major group or a local contractor, financial backers gauge interest in a project based on pre-sale reservations. Both commercial lenders and private investors ascertain the buying public‘s actual level of interest prior to funding a project. With adequate interest, funding has a strong potential for moving forward. This can translate into potential savings for buyers who are willing to reserve a unit or make a purchase at this earliest stage.
POTENTIAL APPRECIATION Although there is never a guaranty, in many cases the ―first day‖ price will be lower than the price for subsequent purchasers. In some cases, developers even offer additional incentives when the opening bell rings. Of course, as the project progresses from imagination to reality, interest by end-users increases. Needless to say, with a more definite picture, pricing tends to increase. Again, although this has been the trend thus far, there is no guaranty that this will continue into the future.
ONGOING APPRECIATION Many projects are developed in phases, especially the condo towers. For example, the developer will build the first tower, followed by a second, and sometimes a third or even fourth. Of course, the first tower prices tend toward entry level and each new tower shows an increase, in some cases significant.
SUPPLY AND DEMAND The economic rule of supply and demand certainly has been coming into play with South Florida real estate, especially waterfront and water access properties. At this point in time, the demand is very high. Due to restrictions by the various municipalities and counties involved, there are certain limitations in terms of the number of available properties. According to some analysts, over the next eight years, the baby boomer flood will start to peak. Demand may be even greater than it is now, and the overall supply will probably be more limited.
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LIMITED UPFRONT CARRYING COSTS Reservation Agreements: First, a reservation is nothing more than a Right of First Refusal. You, as a buyer, are under no obligation whatsoever. For this position, you will place a reservation fee of anywhere from $10,000 to 10% of the proposed purchase price. At the point where the developer is ready to sell the units, you elect to move forward with a purchase contract or to bow out. If you decide the purchase is not for you, the reservation fee is refunded in full. In other words, during the reservation phase, you have nothing to lose. FYI: Though developers prefer to go directly to binding purchase agreement i.e. contract, Reservation Agreements are used when they choose to begin sales prior to having all permits in place, and prior to condominium documents approval by the Florida State Government. If you decide to go ahead with the purchase agreement, payment of the balance of the first 10% will be required. You will then be granted a 15-day (calendar) rescission period (for CONDOS only) during which buyers may obtain an attorney to review the contract and condominium documents, or at the very least do so themselves. Once the rescission period is over, buyers are committed and any defaults will result in a loss of the deposit. When the building site preparation begins, a second 10% deposit is generally required. From this point forward, the purchase remains on hold until the development is complete and the property can move forward to closing in which case either a cash payoff or mortgage will be required.
CLOSING COSTS Whether purchasing a new construction single family home, town home, or condo, please be advised that to the price of your unit, developers add a fee at closing, ranging between .5% to 2.5% of purchase price. Single family and town home developers claim those fees to cover ―administrative‖ expenditures. Condo developers actually use a significant portion of the fee to cover property recording fees, title search, exam, and insurance, and title company fees.
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In addition to the ―builder‘s fee‖ buyer should expect to deposit 2 or 3 times the monthly maintenance fee into the Home owner/condo association reserves. In summary, in addition to financing (mortgage fees) it is sensible to expect approximately 2% closing fees. This information is not intended to dissuade purchase of pre-construction residences, rather to inform and prepare buyers, so they are not first made aware of these fees at closing.
SELLING EARLY There are two options in terms of selling prior to closing (flipping). The first is assignment of contract. Nowadays, the majority of developers prohibit assignment of contracts. It is a possibility, rare as it may be, in some complexes. The second option becomes possible, when builders will ―resell‖ units once the entire development is sold out. If choices one or two are not offered, there is the option of a simultaneous closing. With pre-completion re-sales, the units are made available to the public as the current market pricing – as determined by the developer and/or original buyer. Buyers can list their properties with the developer who will then make them available for purchase. The exact percentage of price and costs involved vary. Buyers may also obtain the services of a real estate company to promote their unit, though as a rule, MLS listing before closing on property is prohibited by developer and may be a breach of contract.
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HERE IS ANOTHER SUMMARY
1.
Reservation Period. (Typically 6 months) When a property is made available for pre-construction purchase the developer provides floor plans and artist renderings with a brief description of the overall project. This initial offering is presented to clients and contacts of real estate agents. At the reservation stage interested individuals complete the necessary paper work accompanied by a refundable deposit, usually a nominal $5,500 to $10,000. The deposit is held in escrow with a title company and is fully refundable should you decide to cancel your reservation. The Reservation Period is typically 6 months, or until sold out.
2.
Right of Rescission Period. (State mandated 15 days) Once the developer is ready to proceed with the project (usually 6 months after the reservation period began) he will deliver state-approved Condominium Documents. You will have 15 days to review the documents and either choose to commit (Hard Contract) to the unit(s) you reserved or you may request all your reservation fees be refunded. The Right of Rescission Period is 15 days.
3.
Hard Contract. When you choose to commit to the unit(s) you reserved then you will complete the documents provided during the Right of Rescission Period. At this point you provide the balance of earnest money (usually 20% of the purchase price). This balance is minus your initial reservation deposit. You may opt to pay 10% balance plus file a 10% Letter of Credit with the bank of your choice. After you submit the hard contract it will take approximately eighteen to twenty four months of construction before closing.
4.
Closing. (Typically 18 to 24 months after Hard Contract) When the development is complete a Certificate of Occupancy (CO) is issued. From here it is much like the purchase of a new home. You are granted access to inspect your unit and create a punch-list. Prior to closing you walk through your condo to make sure everything is to your satisfaction. Then you go to closing. By then you have made arrangements for the balance either by securing a mortgage or by providing cash.
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HOW TO DO A SHORT SALE A short sale in real estate occurs when the outstanding obligations (loans) against a property are greater than what the property can be sold for. 1.
Verify the value of your property. If you are selling the property through a real estate broker, your broker will provide you with an estimate of market value. If you are selling the property yourself, do your own market analysis of the area and your property.
2.
Add up all the costs of selling the property. If you are using the services of a real estate broker, the broker will provide an estimate of closing costs. If you are selling the property on your own (for sale by owner), call a local title company or real estate attorney and ask, as a seller, what the closing costs will be.
3.
Determine the amount owed against the property. This will be the total of all loans against the property.
4.
Do the calculations. Subtract the total amount owing against the property from the estimated proceeds of the sale. On a short sale this will be a negative number.
5.
Contact the lender or lenders. Talk to someone in the customer service department and tell them the situation. They may direct you to a specific department. Talk to a supervisor or manager if possible; this person will have more authority
6.
Ask the lender what its procedures are for a short sale. Some lenders are willing to work with you by reducing the amount owed or making other arrangements. Others will look to the agents involved (if any) or anyone else who‘s making money off the transaction to see if they are willing to make concessions to make the transaction happen. Still other lenders will tell you that your debt is your responsibility, one way or the other.
7.
Sell the property.
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SECTION 3 WORKING WITH A REAL ESTATE AGENT Real estate is often purchased and sold with the assistance of a real estate broker. Brokers may be employed to sell property, in which case their duty is to act honestly toward the principal (seller) and obtain the highest price possible. They may also be employed by a purchaser to locate property, in which case their duty is to secure the property at the lowest possible price. It is a general rule that the broker becomes entitled to a commission when they complete the services they are hired to perform. In the event that the brokers are employed to obtain purchasers, they are entitled to their commission when they introduce a person to the seller who is ready, willing and able to purchase on the terms requested. Accordingly, it is advisable for the person who hires brokers to enter into an agreement with them whereby it is agreed the broker will not be entitled to a commission until the transaction and closing are fully completed. There are various types of brokerage agreements which are as follows;
NON-EXCLUSIVE AGREEMENT This is also known as an open listing. Under this type of agreement several brokers may be hired by the owner. A broker is only entitled to commission when a buyer is procured.
EXCLUSIVE AGENCY AGREEMENT Under this type of agreement the seller can only hire one broker. The owner, however, can sell or lease the property without a broker, in which case the owner is not liable to the broker his or her commissions.
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EXCLUSIVE RIGHT TO SELL Under this type of agreement, the broker has the exclusive right to sell, and receives a commission if the sale is consummated by him or herself or the owner.
MULTIPLE LISTINGS This is an arrangement among a group of brokers whereby a participating broker can sell property that is exclusively listed with any of the other participating brokers. The ―listing broker‖ obtains the listings and the ―selling broker‖ sells the property. These two brokers split the commission and the listing service receives a small fee.
THE PLAYERS Understanding the nuts and bolts of the transaction is imperative. In addition, understanding that a Realtor is being hired to perform a job is the mindset you must achieve. Realtors are paid on commission; in order to earn a commission work needs to be done, how hard a Realtor is willing to work or not work generally doesn‘t change the commission base they charge. Asking questions and interviewing Realtors is important don‘t be bullied by their professional status, they need listings and purchases to survive in the business and you represent a strong entity that will buy and sell real estate. When seeking a Realtor you should consider the following when conducting your interview. Remember, Loaning4Less will not guarantee that your buy side agent will list the property for resale. Every effort will be made to enhance your relationships and work with your requested realtor but Loaning4Less will make the final decision on listing entity.
Please note that a Realtor title is a designation received when they participate in the local Board of Realtors. An Agent is simply a licensed real estate transaction provider. We strongly encourage you to work with Realtors who are bound by a code of ethics and professional standards.
Agent in these questions refers to the real estate professional and not their professional standing.
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1. Ask the agent what type of investment property experience they have. The buying and selling of investment property requires different analysis and consideration than purchasing or selling primary residential real estate. It may also require a different approach to negotiation and documentation. 2. Look for an agent that has established relationships with area banks, mortgagors and wholesalers. When a bank or mortgage company forecloses on a property, they typically will work with a local Real Estate Agent to list the property for re-sale. Working with a professional that can provide a source of property leads rather than solely searching the multiple listing services will potentially yield greater results. 3. Find out what type of marketing a Realtor does when selling a property. Do they have a website? What kind of advertising do they do? Don‘t just expect an open house or a yard sign to create a mass draw of property buyers. Typically an open house will yield little results and bring in nosey neighbors wanting to view the home. 4. When using an agent to identify a potential buy, set realistic expectations about their availability. Most Realtors will not have time, nor want, to drop everything to show one house. Set up a time on a weekly basis to go look at properties that appear to offer potential on an initial review. Great deals are far and few between, you will need to act quickly when a potential property comes up. This is not a property that has been on the market for 4 months and suddenly you are being sold on its great price and resale viability. 5. When you first start searching for properties in an area, a Realtor can provide general information. This information is referred to as a Market survey. The market survey will give you important statistics about the average time a home is on the market, the average price per square foot a home sold for, how many homes are currently on the market, etc. This is a great starting point for your analysis. Remember statistics are samplings and represent averages; you are looking for distressed real estate and therefore need to use the area market survey as a guideline. Your Personal Coach will discuss in greater detail what to look for in your area to help identify opportunity. Remember, using the highest set of number samplings to promote a purchase is a huge waste of time. Seeing profit on paper does not guarantee money in the bank. 6. When discussing strategy for resale, a serious set of comparative sales should be provided by your agent. This set of ―comps‖ should show the good, the bad and the ugly. Remember, we are hoping to establish an on-going relationship and need to analyze the truth about an area not just what an agent wants us to see. Make sure a ―comp‖ is comparing apples to apples. If you are looking at a two-story Victorian built in 1935 it is not comparable to a Ranch home built in 1999 even if it is on the same block.
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WHAT TO GIVE A REALTOR In an effort to establish a strong professional relationship, there are things that you should provide your prospective agent. Realtors hear all the time ―I‘m an investor,‖ without quantifying that statement your realtor will probably not take you or your efforts seriously. Discuss with your agent what it is you are looking to accomplish and the policies and practices of Loaning4Less. Invest the time to truly identify if you can work together. Loaning4Less is a professional investing entity and will work to promote your relationship; however, Loaning4Less will not create separate practices to accommodate an agent. Please review with your Personal Coach the standard operating procedures for offers and resale before setting any expectations with your prospective agent.
THE PURCHASE CONTRACT When we put an offer on a property there are basic terms in a contract that all Loaning4Less offers have. Learn the terms so you can understand how we put offers out to manage risk and allow for profit. Names of the buyer(s) and seller(s) The first line of most printed residential purchase contracts asks for the name of the buyer(s). If you think you might be adding a co-owner, such as a parent, to help you qualify for a mortgage, add the magic words "and/or assignee." Property description The next blank on most forms is for the street address, legal description, tax assessor's parcel number or other description of the property. Be as specific as possible, especially with rural properties. Attach a property description addendum, if necessary. Unless you are buying a recorded urban lot, be sure to specify the offer is subject to your approval of a survey. Be careful when filling in the blanks for the county and city. If you are not certain the property is within the city limits, don't specify it is. When the school district is important, verify the home is within the boundaries of the school district you want before making a purchase offer. The good faith earnest money deposit Legally, you don't need to make any deposit with your home purchase offer. All that is required is the buyer and seller sign the sales contract. However, few home sellers will agree to sell unless the buyer makes a modest good faith deposit. When making a purchase offer that is substantially below the asking price, a large good faith earnest money deposit will often convince the home seller to accept. There is no right or wrong amount for the earnest money deposit. Some real estate agents aim to get their homebuyers to put up a big 10 percent deposit, but this is considered too high by most buyers. A popular alternative is to make a modest deposit to accompany your purchase offer, such as $1000 or 1 percent of the sales price, but include a provision to increase the deposit to 5 percent of the home's sales price upon removal of the contingencies such as mortgage financing and a professional inspection.
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Don't let the seller hold the deposit. You should have your deposits held by a neutral escrow holder, such as a title insurance or escrow firm. Local custom may determine your deposit should be held in an escrow account. After your purchase offer has been accepted, the deposit legally belongs to the seller. Specify the purchase price and exact terms of the sale Before making a home purchase offer; be sure your real estate agent prepares a written CMA for you. This form will show recent sales prices of comparable nearby homes as well as the asking prices of neighborhood homes currently listed for sale. With the help of your realty agent, add or subtract values for the features and drawbacks of the recent sales as compared to the market value of the home you want to buy. When describing the purchase terms, don't specify "All cash to seller" if you require a new mortgage to provide that cash. Be sure your offer contains a clause making your offer contingent on approval of the mortgage. Even if you got pre-approved for a mortgage, the lender can avoid making the loan by low-balling the appraisal. The mortgage you want to obtain should be specified with detail, such as a new 30-year fixed interest rate mortgage of at least $100,000 with interest not exceeding 8 percent, a loan fee of not more than 2 percent, and a monthly payment not to exceed $733.76. If you want the seller to help finance the sale, by carrying back either a first or second mortgage, here is where you specify the terms you want. Personal property If you want any personal property included in the home sale, such as the kitchen appliances, be sure to specifically itemize them in your purchase offer. For example, specify the "General Electric side-by-side refrigerator with electronic monitor now on the premises." This stops the seller from substituting inferior replacement personal property at the last minute. Time for acceptance of your purchase offer Your purchase offer should contain a short time for the seller's acceptance. Twenty-four hours is usually sufficient unless the seller is out of town. Don't make your offer valid for a long time period, because then it will be "shopped" by the realty agent to see if a better offer from another buyer can be obtained.
Additional items to consider Try to keep your home purchase offer as clean as possible to increase its probability of acceptance by the seller. The fewer contingencies and conditions the better. Here are some additional purchase terms to consider: 
A professional inspection The buyer should pay for the professional inspection because it's for the buyer's benefit. Accompany the professional inspector. When a defect discovered is serious, such as a cracked chimney, expect the seller to pay for the repair. If the seller refuses to pay for major necessary repairs, disapprove the report and get your good faith deposit refunded.
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Seller's disclosure of known defects Many states, led by California and Maine, now require home sellers and their realty agents to disclose in writing any known defects in the residence. If your state requires
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seller disclosure of defects, your purchase offer should be contingent upon your approval of the seller's disclosure. 
Liquidated damages clause This clause specifies maximum damages a defaulting buyer must pay to the home seller if the buyer doesn't complete the purchase as agreed. Some state laws set maximum liquidated damages. As a buyer, you may want to agree to liquidate damages so you can't be held liable for more than the specified sum if you default.
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Arbitration of disputes clause Most printed real estate purchase contracts now contain an optional clause whereby the buyer and seller agree to arbitrate disputes. Misguided real estate agents, blindly following recommendations from their real estate trade groups, often suggest signing the arbitration clause. I strongly disagree. Too many uncontrollable things can go wrong with arbitration of disputes. My recommendation is don't agree to arbitration. If a dispute arises later, at that time you can decide if you prefer to go to arbitration or mediation rather than become involved in a lawsuit.
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An all-inclusive clause Although the professional inspection contingency clause is sufficient, you might want to also include an all-inclusive clause such as "This purchase offer is contingent upon buyer's attorney satisfactory inspection and approval of the purchase contract within 10 business days." This gives you a "free look" while your attorney; CPA or other trusted business advisor reviews the agreement.
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Fill out this practice purchase agreement
Purchase and Sale Agreement This agreement is made this _________day of _____________________, 20_________ between Seller(s)_________________________________________________________ and Buyer(s)____________________________________________________________ and or assignees. Seller agrees to sell and buyer agrees to buy the following described real property together with all improvements and fixtures and the personal property described below: Street Address____________________________________________________________ Legal description: _________________________________________________________ _________________________________________________County ________________. Personal property included: ________________________________________________ Earnest Money Deposit Cash To Seller At Closing Existing Loans & Liens New Loan To Seller At Closing Purchase Price
$______________________ $______________________ $______________________ $______________________ $______________________
The purchase price to be paid as follows: 1. EARNEST MONEY to be deposited with licensed title company or attorney within 48 hours of acceptance by seller. The buyer will take title subject to the following loans on terms agreeable to the buyer: A. Loan to _______________________________________ Balance $____________________________ Interest rate: _________ %, Monthly Payment $__________Loan Number Date last payment made____________________________ Loan current through______________ B. Loan to _______________________________________ Balance $____________________________ Interest rate: _________ %, Monthly Payment $__________Loan Number Date last payment made____________________________ Loan current through______________. Other liens: _______________________________________________________________________ Any overstatement in the above loan and lien amounts will be added to note to seller. Any understatement will be deducted from balance due at close. 2. THE BALANCE DUE SELLER in the amount of $ _______________ shall be paid as follows: ________________________________________________________________________________ __________________________________including interest at the rate of _______%. 3. PRORATIONS, IMPOUNDS & SECURITY DEPOSITS: Loan interest, property taxes, insurance, and rents shall be prorated as of the date of closing. All security deposits shall be transferred to buyer at closing. All impound accounts for taxes and insurance are included in the purchase price and shall be transferred to buyer at closing. Any shortage in these accounts shall be charged to seller at closing.
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4. CONDITION OF HOUSE AND APPLIANCES: Seller warrants that the house and all mechanical systems and appliances will be in good working order at closing. Buyer will have access to property for inspection and the cost of any needed repairs will be paid by seller at closing. Appliances and other personal property will be transferred by bill of sale free of encumbrances at closing. 5. CLOSING DATE AND TRANSFER OF TITLE: This transaction shall close on or before _______________, 20___. Closing will be held at _________________________ and Seller(s) agree to transfer marketable title free and clear of all encumbrances except those listed and pay any required state taxes or stamps required to record deed and mortgage. Seller agrees to furnish title insurance in the amount of the purchase price, showing no encumbrances or exceptions other than previously noted. 6. DAMAGE TO PROPERTY: Seller shall maintain property in its current condition and keep it insured against all loss until closing in the event of destruction covered by insurance, buyer may elect to close and collect the insurance proceeds. 7. DEFAULTS: If buyer defaults under this contract, any and all monies deposited by buyer(s) shall be retained by seller as full liquidated damages. If seller defaults, buyer may pursue all remedies allowed by law and seller agrees to be responsible for all costs incurred by buyer as a result of sellers default. 8. SUCCESSORS AND ASSIGNEES: The terms and conditions of this contract shall bind all successors, heirs, administrators, trustees, executors and assignees of the respective parties. 9. ACCESS ADVERTISING AND REPAIRS MADE BY BUYERS: Sellers agree that buyers may advertise property and have access during reasonable hours to show property to others. If the property is vacant and in need of repairs, buyers at their expense may make repairs and improvements, and any improvements made shall become the property of the seller should the buyer default, 10. ADDITIONAL TERMS AND CONDITIONS: _____________________________________________________________________________________________ _____________________________________________________________________________________________ _____________________________________________________________________ The undersigned have read the above information, understand it and verify that it is correct. ____________________________________ Seller
___________________ Date
____________________________________ Buyer
___________________ Date
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CHAPTER 6 PACKAGING A PROPERTY KEY STEPS STEP ONE: IDENTIFY THE OPPORTUNITY There are numerous ways to find deeply discounted properties. Start by reviewing: (1) local legal notice publications (2) For sale by Owners (3) Web-site postings (4) auction lists (5) local lenders‘ and trustees‘ networks. Don‘t forget word of mouth is the most cost effective and best deal finder you have so tell everyone what you are doing.
STEP TWO: PRELIMINARY PROPERTY RESEARCH Taking the first steps in researching a property Remember go back to the who, what, where, when, why & how •
Do a drive-by of the property. Is it worth going further?
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Physically inspect the exterior. Is it worth going further?
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Physically inspect the interior. Is it worth going further?
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Does the risk seem manageable? Is it worth going further?
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Do the numbers work? Is it worth going further?
If you are working with a realtor have them pull the sold property characteristics and statistics along with the days on market for the previous six months for the zip code. In addition, think at two levels; the price range for the buy today and for the future value when renovated tomorrow.
If you are buying a house in a $150,000 neighborhood and you renovate it to a prospective value of $225,000 and that neighborhood won‘t support a sale at that value the property is not a good deal in that area.
STEP THREE: PACKAGING THE PROPERTY Remember you are the eyes and ears of Loaning4Less in your area. What you present and show confidence in is what will be evaluated. The more you supply, the better the prospects are for the packaging to yield a purchase. Your Personal Coach will not do your work. If you want a property to be given serious consideration, the packaging of the value of that property should be complete and accurate. Take time with photos, comps, interior and
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exterior descriptions and recommendations for renovations. Be prepared to participate in the actions on your property. If you are hands off and expectant that everything will be done for you and you will sit back and collect profits you have missed the process completely and need to revisit your goals.
STEP FOUR: THE OFFER Once you have completed the property research, it is time to write an offer. Our offers to purchase have very strict guidelines. Your Personal Coach will review that criteria with you and keep you posted on the progress of the offers acceptance or rejection. Do not hang all of your hopes on one submission, acceptance and sale. You must work the numbers.
STEP FIVE: THE CONTINGENCY PERIOD Once an offer is accepted the clock starts ticking and it‘s time to get things inspected, appraised and evaluated for renovation. Although on the outside things look great and the deal solid, what lurks behind walls is another story. No property will ever be purchased without an inspection. Loaning4Less will handle all arrangements and ask for assistance in gaining entry to the property. If the inspection report reveals an unexpected situation that changes the deal we may exercise the contingency to withdraw from the contract. It happens, and be thankful an inspection was done because if it wasn‘t and a repair was required that wasn‘t planned for your profits just evaporated. There are other contingencies in a contract that your Personal Coach will review. This is the time when you should be gathering contractor bids. If your expectation of repair is no longer feasible the contingency allows us an exit strategy without cost. Remember earnest is at stake and attention to detail can mean the difference between canceling a contract the right way or losing earnest money.
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STEP SIX: THE CLOSING Once the contingency period passes and all is moving forward and title to the property is verified and insurable the closing or transfer of the property to Loaning4Less and/or its affiliates will take place. Loaning4Less will usually not close in less than 30 days, but may do a 15 day closing when possible, and all closings are conducted as mail-a-ways, so proper time must be allotted. Do not be surprised if your closing is postponed due to paperwork. In most cases we are dealing with a bank and they move very slowly.
STEP SEVEN: PROPERTY POSSESSION Once the property transfer has occurred it is time to get to work. A set of keys should be forwarded to Loaning4Less and lock-box arrangements should be made. Also, it is time to get your contractor moving, as at this point time is money and we want the property to turn quickly for the best profit.
STEP EIGHT: RENOVATION PERIOD Now that rehab is underway, details are everything. You need to keep solid, continuous conversation with your contractor and Loaning4Less. Loaning4Less will expect weekly updates and budget reviews. This will be discussed in greater detail once the process begins.
STEP NINE: SELLING THE PROPERTY It‘s almost over. Now is the time to let your Realtor work the magic they told you they would. Listing the house for resale is nothing more than entering it in a local database. Make sure there is good signage on the house along with flyers. Open houses are a pain and usually only yield nosey neighbors. Make sure pictures are available and included in marketing material. Remember, the resale-marketing plan is what it is all about now. Test your realtor‘s belief in their ability and see if they are still talking the same number for resale as they did when you bought it. If not, what happened? You should ask.
FINALLY: THE SALE It‘s complete. The property sold. What was the overall experience? Are you ready to go again?
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THE COMPONENTS OF A PROPERTY ASSESSMENT PROPERTY INSPECTION By now, you should know a great deal about the properties you have found, and your research is nearing an end. It is time to take photos and physically inspect the property. Using the forms provided, answer as many questions about the property as possible. If you have additional information about the property, include it in your property write-up.
Caution: The owners may still occupy the properties that you are about to evaluate, and they may not want you to evaluate their property. Be discrete, unless the property is vacant, in which case you can poke around to your heart‘s content.
FIND THE PROPERTY To determine the location of the property you can get a map, go online, or use mapping software to get driving directions. Normally, you will ―batch‖ your inspections, and inspect several properties at once. It is helpful to use sticky notes to indicate the individual property locations on a large street map to devise the most efficient route.
PROPERTY COMPARISONS Take notes about the property on the Property Appraisal Form. You need to find out if there is anything that stands out about the property, and evaluate how it compares to its nearest neighbors. If the property you have researched needs some repair, and nearby homes on the market do not, Loaning4Less may need to further reduce the asking price below fair market value in order to sell the property quickly. If, on the other hand, the property needs fixing, and is in a turn-around neighborhood, where older, inexpensive homes are being snapped up for repair and rehabilitation, make sure that the estimated fix up cost is figured into the purchase price of the property. A fixer is a popular home, and Loaning4Less won‘t have to wait very long to sell the property. Determine the cosmetic condition of the exterior: (use these points as a guideline): A. Does the house need fresh paint? B. Are there any bricks that need re-pointing (where the mortar is cracked or fallen out)? C. Is the landscaping attractive and well cared for? D. What is the general curb appeal?
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STRUCTURAL EVALUATION Evaluating the structural integrity of the property from the public curb or sidewalk presents some unique challenges, but it‘s easier than you might think. What you want to know is if the foundation, roof and structural elements are in good shape. To make a curbside assessment of a property‘s structure, check: A. Crooked porch steps are an indication of foundation problems B. Cracks in exterior walls, or any repairs made due to a cracked or settling foundation C. A swayback roof is indication of serious structural defects D. Blistered paint and holes in the exterior lumber and trim indicate infestation, dry rot, or moisture damage
E. Check for curled, warped, missing shingles and moss or mold on the roof F. The walls should be perfectly square and plumb
You can easily check for square and plumb walls, foundation and roof from the road. Hold a carpenter‘s square at arm‘s length. Visually line the horizontal arm of the square up with the junction between the foundation and the house (the sill plate), not the ground (the ground may slope). Visually line up the vertical arm of the carpenter‘s square with the outside wall of the house. If the wall is not exactly plumb and level, you will see a slim angle of daylight between the wall and the straightedge.
Red Flag: If there are any indications of structural defects, move on to another property. Structural repairs are very expensive and produce uncertain results.
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TAKING PHOTOS We require a clear, unobstructed view of the front. If there is an object in the way, (cars and shrubs are frequently the culprit) try to take the photo from an angle that will show as much of the property as possible. Be aware of framing and composition when taking the photos. The house should fill about two-thirds of the photo. Be sure to line the bottom of the photo up with the foundation, so the photo is visually straight, and the house does not appear to be sliding out of the photo. Try and take your photos in full daylight. Late afternoon and very early morning light is very harsh and fills the photo with long, dark shadows and odd highlights. Sometimes, it is possible to photograph the back yard from a neighboring property, from the street (with corner lots and, sometimes, cul-de-sacs), or from an alley. These ―candid‖ shots give us invaluable information. Make sure you include photographs of neighboring houses on the street, including the property line. Three views are ideal: from the front of the house across the street, one oriented to the right of the property, and one oriented to the left of the property. It is very helpful to us to be able to see the neighboring properties. Finally, get out of your vehicle. Car shots are not acceptable. Remember to label your photos! It is very difficult a week after the fact to remember which photo of a red brick house belongs with which address.
OCCUPANCY Determine if the house is occupied. Occupancy is a reasonable assurance that the mechanical systems are in good working order. Occupied properties present some unique disposition challenges. However, if the property is occupied when we obtain title, Loaning4Less must determine a fair monthly rent rate. In some cases, we will need to undertake eviction proceedings. With occupied properties, you need to call your local legal aid society, local sheriff‘s department, or a property management firm to find out what the local eviction procedure is, how long it takes, and how much does it cost.
COMMUNICATE THE PROPERTY INFORMATION Describe the overall condition of the property; identify features that may either add or remove value from the property. Describe any feature that may need repairs. You will be the only one that sees the property before acquisition, so it is important that you describe it as accurately as possible. Otherwise, Loaning4Less cannot accurately assess the property‘s full potential. Do not try to verbally sell us the property. Keep a strong focus on the outcome. Remember you‘re asking for money to back an investment deal; keep the submission in that context.
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Submission Process Submission Process
TRAINEE Customer Service
PC
Training Center
If rejected review with PC
Underwriting Review
After Repair Value Appraisal Renovation Cost Review
Property Information Evaluation
Initial Offer Market Analysis
Offer Presentation
Risk vs. Reward
Re-Sale Comp Expense Breakdown
Added Value Seller Acceptance Counter Offer Ernest $
Order Inspection
Counter Offer Evaluate Response
Confirm Rehab Cost Underwriting Appraisal & ARV Appraisal
Close
Change utilities Lock-Box on Property Send key to L4L or Affiliate
Contractor's Bid Review Agreement Established Deposit Made Bond Posted
Renovation Begins
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CHAPTER 7 WORKING WITH A CONTRACTOR Choosing a Home Repair or Remodeling Contractor is just as important as identifying a trustworthy, hardworking, knowledgeable Realtor. The Contractor on the job is responsible for facilitating the property renovation that will ultimately yield the increase in value you have identified as the potential resale price. Loaning4Less requires that three bids prepared by licensed contractors be submitted before any commitment to rehabilitation is authorized. The more detailed and time specific the bid is the better Loaning4Less can evaluate the job and financial commitment. With regard to your evaluation of the contractor remember skill and expertise is not always easy to detect. You must ask for completed job references and follow-up with your local Better Business Bureau (BBB) to identify whether or not previous clients have encountered difficulties with job completion or workmanship. Another source is the Secretary of State, to verify that the entity is in good standing. Also, check your local area for contractor warning lists or buyerbeware organizations. Always request a copy of the state license to ensure you are working with a qualified professional.
Once you have confirmed the business soundness of the contractor the next step is having them prepare a bid. Bids are generally done without charge. If a fee is requested STOP and ask yourself if this seems reasonable and verify any fee coverage with your PC. The initial bid must be compiled from an on-sight investigation, a discussion of what you think and what they might charge is not a bid. Upon completing the on-sight review a bid should be prepared that is detailed and time oriented. The bid should also include scope of labor, materials etc‌In addition, if items identified as necessary, for example interior painting are not part of the bid from your contractor, get a painting bid. It is also good practice to review your bid against the inspection report to ensure all areas are being covered. Your Personal Coach will assist in this cross-reference and review all initial bid submissions. Payment terms are an important part of analyzing a bid or a contractor. If large sums are required before a job starts walk away. Loaning4Less will not engage in a contract under those terms of payment. It is deemed reasonable to pay in thirds. In addition, we would request that documentation of work progress and completion be provided. Photos are also a great addition to a report. It is not uncommon on larger rehabilitation jobs for Loaning4Less to send a representative to inspect the project.
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How To Successfully Hire A Contractor Hiring a contractor is quite simple in a logical sense and to that end many articles have been written on the subject. So with all the resources available, why is this still a hair-puller and why do so many people get into contractor-trouble every year? One reason is that many folks ignore the warnings, thinking that they don't apply to their situation. A classic‌ "No, I don't need to ask him to write that into the contract‌ he's my brother-in-law! Of course he'll clean up the yard!" Famous last words. Some homeowners receive a referral from a friend or neighbor and don't do their own homework. They find out too late that the contractor really doesn't have a clue how to manage their job. Trust can be a dangerous thing in home repair while knowledge is strength. Don't get me wrong... I am not prejudiced against contractors, though my tone may be somewhat harsh at times. In fact, some of my best friends are contractors! But even they would admit that the world would be a better place if more homeowners followed these simple steps to make it harder for the crooks to survive! So I will first construct (couldn't resist) my list of important rules to follow when hiring a contractor and beyond‌
REALLY... WHAT DO YOU WANT? Well? Do you really know? You shouldn't even talk to a contractor before you have a fairly clear idea of the scope of the job and the desired end result. Ceramic tile or fiberglass enclosure? Multilevel deck or large platform? Vaulted or cathedral ceilings? Skylights or sun tunnels? No... you don't have to know all the minute details of laying a foundation or putting up drywall... just a clear vision of the finished job and the major components. You should never rush into any renovation or remodeling job. By doing so you are relinquishing control to the contractor. With an honest contractor, you may not have problems, as he should help you work within your budget. However, even an honest contractor can only spend so much time consulting on the minutia of your job and cannot possibly present you with samples of every product that may be available. It is patently unfair to expect him to do this, especially on smaller jobs. This is more the purview of an architect or home designer, who can be hired separately (by you or through the contractor) to do this design "legwork" for you. Rushing also benefits the unscrupulous contractor who may try to sell you the job with products that make him the most money... not necessarily in your best interests. By being detached from the decision making process through ignorance, you can't possibly make a good decision on anything. One great place to start educating yourself is in the many home-related publications. Visit any of the larger bookstores and you will find walls of magazines on home decor, remodeling and renovation. There are also many magazines that specialize in certain types of jobs, such as kitchens and bathrooms. Though these publications tend to showcase top-end products and intricate designs, the fact is you can learn much about your own likes and dislikes while educating yourself about the variety of available products... all from your living room sofa. The next logical step is window shopping, visit your local home store or lumberyard! They feature a wide selection of sidings, roofing materials, windows, doors, skylights, etc., plus extensive catalogues of products they can order for you. You can not only learn about the available styles, but also get a sense of the cost.
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You might be surprised to find that a certain style of roofing is not as expensive as you thought. Learn about the different types of skylights and why some are more leak-resistant than others. Or why windows can have special coatings to protect your furniture and carpets from the sun. Just find a knowledgeable salesperson and question him silly!! Once you have a basic idea of the types of products you want installed and the costs involved, you are in a better position to discuss these with your contractor. He may even have opinions on the products you have chosen, and you can weigh his opinions against what you have learned on your own. Then, you can work with the contractor to fill in the details of your job. This demonstrates to the contractor that you are involved in the job, not just a source of money. This mutual respect is important so that you will not have problems communicating later should a problem arise or a "change of course" in the job become necessary. Not an infrequent occurrence in home projects!
WHERE ARE THE GOOD CONTRACTORS HIDING? Though they may list hundreds of contractors, the Yellow Pages, local "Pennysaver," and newspapers, are advertising media with no credible way, desire or need to judge the contractors on their pages. Hence, they are of little value except to help you to develop a list. Space and cost considerations in these media limit the amount of information contractors can give about themselves, limiting the usefulness of the ads to the consumer. To pour salt on the wound, some of the finest contractors don't advertise frequently, if at all, making them difficult to locate. By far the best way to find a good contractor is through a direct referral from someone you trust who has successfully completed a similar project. The next best source of referrals is your local hardware store, home store or lumberyard. Established businesses loathe giving a referral to a contractor who will hurt their reputations. A business that receives valid negative feedback about a contractor will stop referring him. There are some online resources available to help you get the names of contractors but they can no more guarantee your satisfaction than the newspapers. Some gather information on licensing and insurance, which might save you some work. In the end, your adherence to the commonsense rules below will help protect you and your money. Even with a good referral, you should still be cautious and proceed from strength, not weakness. Read on to find out how to place yourself in the best position to control your job and keep the power in your hands.
THE FIRST STEP IN QUALIFYING A CONTRACTOR... THE BARE ESSENTIALS OF TRUST STOP! These next six items are required of any contractor before you can consider hiring him. The only remotely possible exceptions would be if the contractor is a trusted friend, trusted friend of a trusted friend, trusted neighbor, trusted relative or trusted psychotherapist‌ in no particular order.
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1. He should come and look at the job... Stop laughing! I know it sounds silly, but believe me, some guys will actually give a job quote over the telephone sight unseen, especially for work they have frequently done. This is most common with tradesmen, electricians and plumbers, especially when they are very busy. No problem for little hourly-type jobs (and "handy-work"...to be discussed later)... after all, it is a tribute to their experience and not a bad thing. But for the large jobs, you still want him to come to your home. Why? Well, you can tell a lot about a person by talking to him face-to-face that you just can't get over the phone. Look at his truck, his physical appearance, those eyes... direct or shifty. Is he a worker or a snake oil salesman? Political correctness be damned, there is something to be said for first impressions, even if they can sometimes be wrong. Ask him about his business, where he lives, about his family and, of course, how busy he is. Let him know you are interested in him and let him know that you only want a conscientious, quality contractor for your home. Let there be no misunderstanding that you will not accept anything but the best from him and, if applicable, his employees. 2. Licensing and/or registration ... Every state has different rules and contractors are expected to follow them. Some states require licensing for all contractors, some are based on the average size of the job, others require licensing fees per job, and some require nothing at all! In some large metropolitan areas, the rules can vary literally from block to block! Some states defer to local governments. I'm getting dizzy! To determine the licensing requirements for your area, call your local building inspector or town hall. 1. Insurance is not optional... Liability and medical insurance for contractors may or may not be required in your state, but it must be for anyone working in your home! Hiring an uninsured contractor is hiring an irresponsible contractor. Require that they present a certificate of insurance prior to signing any contracts, and call the agent to verify that the policy actually exists and what it covers. At a minimum, the contractor's general liability policy should be 100% of the value of your home.
2. References from past clients... I will be the first to admit that references can be faked. I knew one contractor who had his entire family trained to answer the phone and pretend to be other people. "Harry‌ oh yes, he is a marvelous worker, and he did so many little extras for free. Snatch him up while you can, honey!!" Right. Wonder what those extras were... bail, perhaps? A good referral can prove to you that the contractor actually knows how to do the work you are hiring him for. The sad fact is that many contractors will take on jobs beyond their skill or ability, especially if they are desperate for work. Referrals can also give you
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insight into the quality and business practices of the contractor that you can obtain nowhere else. AND BY ALL MEANS CONTACT THEM!! Don't get soft, accept his list with a doe-like grin and shove it into the circular file. Ask if the references wouldn't mind if you stopped by and looked at the work. Have some coffee, chat, spend the holidays together‌ anything you need to do to prove to yourself that this contractor is REAL, REPUTABLE, and RELIABLE. A few questions to ask are... Did the job start on schedule? If not, why not? Did the job finish on schedule? If not, why? Was the contractor present on the job, or did he have a crew do the work, and were they supervised? Did they clean up after themselves? Was the quality of the work acceptable? Overall, was working with this contractor a good experience, and would you hire him again? 3. Insist on both credit references and bank references... Most contractors maintain accounts with local suppliers making it unnecessary for you to make large, upfront payments. A contractor with no credit is to be avoided. Many consumer complaints arise from "fly-by-night" contractors, promising to do work but just taking your money and disappearing. To keep these scams going, these seedy characters constantly move their base of operations. Insisting on bank and credit references and checking them helps you to eliminate these most shady people. Trying to hire locallybased contractors with a local reputation to uphold can also be helpful.
4. Check for consumer complaints... Of these four preliminary qualifications, this is the only one that may backfire on you. OK, call the local Better Business Bureau, the local Chamber of Commerce, and the state licensing agency. Do it! But if you don't find any complaints, don't feel too cock-sure that you have found Mr. Perfect. Like many crimes that embarrass and shame people, making a poor choice in contractors is an oft silent crime. I have worked for hundreds of homeowners repairing the mistakes or the omissions of other contractors, yet when I ask if they filed a complaint, most of them have not. Some thought that talking to an attorney was filing a complaint. No, Virginia, it isn't. In some cases, they are just weary after months of contractor promises and disappointments. In the end, most just accept their dismal fate, hire other people to correct the mistakes, and silently let the errant contractor move onto the next sucker. To be fair to the contractors, many complaints filed by consumers are not really serious but instead either misunderstandings or "power plays". A customer may complain because the cost of a job increased after the customer himself made a midstream change in the plans. Another customer may decide to change the location of a window after it was already installed, expecting the contractor to absorb the additional labor costs. Some consumer complaints are out and out frauds (attempts to delay payment or get cost
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concessions from the contractor). So you must view the complaints in a complete light. They do not necessarily indicate an unreliable contractor.
5. Is he a member of any local or state trade organizations, unions or business groups? Request the names of any business organizations, associations or unions the contractor may be affiliated with. This is one more piece of evidence that the contractor is stable and "here to stay"! Fly-by-night contractors rarely stay in one place long enough to develop a history. Just realize that all contractors do not join these groups, so lack of membership is not a red flag... just another piece of information for you to use. Membership in benevolent groups and civic organizations is also a good indicator of responsibility and rootedness... both important considerations in your screening process. 6. Get at least three clearly written, understandable bids on any project... The written quote will give you first real sense of what your project will entail and how much it will cost. The quality, clarity and style of the quote will tell you a lot about the contractor and his penchant for detail. A vague or unreadable quote is useless to you, and should send up the good Old' red flag! Clarity and detail is important. Without the details of the project on paper in an understandable fashion, it is impossible for you to compare the bids from the different contractors, making your choice of contractor all the more difficult. If the dollar amounts of your bids vary wildly, don't throw up your hands in disbelief but instead try to understand why. Perhaps one contractor is using more expensive materials, a stronger "beyond code" construction technique or there was simply a miscommunication. If one bid is extraordinarily low, but the details seem to be in order, question the contractor to find out why. Be upfront... you can even tell him that you think his bid is low! Believe me... that will get his attention. If he has a sense of humor, he will probably apologize and immediately give you a higher price! Ha Ha! Seriously, taking a very low bid may be looking for trouble. It could leave the contractor cash-strapped and begging for more money later. One of the main causes of an honest contractor pulling a Houdini is that he needs money to live on, so he moves on to another job temporarily to feed the family. This is a particular problem with smaller contractors who do not have adequate credit and must "pay-as-they-go". Mounting materials costs and poor financial planning can drive them from your job and into the arms of another! Then again, you might find that the low bidder is the only one not overpricing the job. Only by having quality quotes will you be able to make an intelligent choice.
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THE WRITTEN CONTRACT... NOW THE MOMENT OF TRUTH A complete, clearly written contract is absolutely essential for both trust and peace of mind! Remember the old word-play joke about making assumptions without facts... "When you assume something, it makes an ass out of u and me!" Well, I give you a dispensation to ass-u-me when it comes to contractors. Assume that something not in the contract will not be done. For example, if it does not say in the contract that he will clean your yard after tearing off the three layers of shingles on your roof‌ better get it written in. Now contractors; don't hate me for this! I admit that it may inconvenience the conscientious contractor who was going to do the cleanup anyway. But he just has to "take it like a man" and get his erasable pen back out. With today's general atmosphere of distrust, skyrocketing homeowner dissatisfaction with contractors in general, and homeowner rip-offs being the crooked contractor's Holy Grail, all honest contractors must act with compassion towards the beleaguered, scared and possibly scarred-for-life homeowner. Everything You And The Contractor Agree To Should Be In The Contract! Here are some items that should be in all home repair contracts. You may find that your state requires the contract to meet certain requirements even beyond these suggestions. It behooves you to know them! It also behooves the contractor. The agreement may be legally unenforceable otherwise. * Complete contractor information ... be sure you have a physical address for the business, not a PO Box. Do not sign an agreement with a contractor without a verifiable address. * Work timetable... a schedule that includes at the least the starting date and ending date of the project. Without this, you only have trust to keep the contractor working on your job. * Payment schedule‌ including the up-front payment See below for more information on the up-front payment... also known as a deposit. * Exact material specifications... the only way to be sure you are getting what you paid for. * Contractor must agree to pay all subcontractors prior to receiving his last payment. * Subcontractor names should be in the contract or at least given to you in a timely manner during construction. By knowing who they are you can verify that they are paid before you issue that final check to the general contractor. Many states have "lien laws" that allow a subcontractor to attach your home if the general contractor neglects to pay them! Should I repeat that?? * Building permits... who gets them? Remember that you are ultimately responsible to see that the zoning and building laws in your area are adhered to. Get this into the contract so there are no misunderstandings later. * "Notice of Cancellation"... Many states require a "cooling off" period of a fixed number of 101
days for any contract signed in your home. These so-called "Home Solicitation" laws were designed to protect consumers from high pressure sales tactics. Vacuum cleaner and encyclopedia salesmen were two of the enablers of this type of legislation, which allows the consumer to cancel any contract within a certain number of days without any penalty. These laws generally apply to home repair contracts also, allowing you to cancel should you decide in a day or two that the contract is unacceptable. If this applies in your state, it should be included in the contract or as a separate form that is signed by you and the contractor. * A complete listing, by manufacturer, of materials used, plus samples or extra pieces purchased... Note: Probably the worst revelation years after a project is done is that you need to replace something and don't have the manufacturer's name. By requiring the contractor to supply you with some basic information, you can protect yourself from this big surprise!
Warranties and manuals... The contractor should leave all instruction manuals and warranty information with you for all applicable materials (roofing, siding, windows and doors, etc.) and appliances installed.
Paints, stains, and finishes... Ideally, the contractor should leave at least one can, full or partial, of every paint or stain that was used, as well as the names of floor finishes, trim finishes, etc. If this is impossible, you should at the least get a written list of the brands and colors of all paints, wood stains and finishes, etc. used in the project. All paint cans should also be labeled with the room they were used in. Custom paint or stain mixes should have the formula clearly marked on the top of the can.
Ceramic tile, tile grout, pre-finished wood and plastic laminate flooring, drop ceiling tiles, etc....The contractor or subcontractor should leave you with at least a dozen ceramic tiles for future repairs and color matching purposes. Tiles break and crack and tile designs can be as fleeting as the wind. Next month you won't be able to get a match! You should also obtain the grout manufacturer and color. (As an aside, there are so many standard grout colors available that you should not have to get a custom mix.) Similarly, you should be left with at least a few pieces of pre-finished wood flooring and plastic laminate flooring for possible later repairs. Also, insist on the contractor leaving a few full drop ceiling tiles... especially if you choose a special-order style!
Wallpaper... You may never need to patch the walls, but you may want to get a paint match in a few years when the ever-popular flamingo on your living room walls grows wearisome! Keep at least a partial roll stashed away.
Vinyl flooring...Though you may never have to, vinyl flooring can be patched. The results are not always ideal, but a cut square on the floor is usually better than those unusual brown rings a hot cast iron skillet leaves on vinyl. Usually.
Get the idea? Everything looks great now but "someday" you will need to do some repairs and this information and these materials will save you time and money. I wish just half of my clients had this information available!
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SHOULD YOU HAVE AN ATTORNEY READ THE CONTRACT? If you feel the contract has language you do not understand, or if you are unsure of your responsibilities under it, by all means have your attorney read it. It shouldn't cost too much and will undoubtedly be a very small percentage of the total cost of the job. Remember that the attorney will not be as interested in the particulars of the work outlined in the contracts, but rather the responsibilities and liabilities YOU will accept when you sign it. At the least, having your lawyer look the contract over will give you some peace of mind.
PROTECT YOURSELF BY CONTROLLING THE JOB! By having a good contract, you have established the rules by which your project will be done. You and the contractor now have a framework to do business. However, "stuff" happens and you may find that the contract may need to be flexed a little to keep the wheels of progress turning. Ever hear the expression, "Money is power"? This should be your mantra in dealing with a home improvement contractor. By knowing how your money is being spent and by controlling the flow of money from your pocket to his you control the job. So a few simple rules to keep the power in your pocket... 
Minimize up-front payments... Some articles on this topic insist that any upfront payment is unwarranted. I think this is an unrealistic position. First, if the contractor must purchase custom materials for your job, it is reasonable for him to want payment in advance, especially if these materials cannot be returned if you change your mind. To protect your interests and pocketbook, you can either let the contractor give you a list and make the purchases yourself, or let the contractor place the order but you write the check to the supplier... not the contractor. By controlling the money, you prevent the unscrupulous contractor from taking your money and hitting the road... one of the more common consumer complaints. California law, for example, allows a maximum up front payment of 10% or $1000.00 on any job. This is a reasonable position. It gives the contractor some working capital, shows him that you are also committed to the job, and still keeps monetary control of the job in your hands. If you live in an area where there are a limited number of quality contractors, a so-called "seller's market", an upfront payment may be the only way to lock in a busy contractor. Check with your local or state government to see if you have similar rules.

Get all job changes in writing Jobs don't always go smoothly; unexpected things can happen that change the job. Usually, this means more cost to the homeowner. If you accept the contractor's explanation of the problem and the cost, make sure you receive an amended contract or a
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work order that you and the contractor sign. It describes the problem, the solution, the particulars of labor and materials, and a payment schedule 
Only pay for completed work... Your contract should have a payment schedule. Depending on the job, you should only make payments that reflect the job's progress, not some arbitrary timetable. At the halfway point you should have paid approximately half the cost. Under no circumstances should you pay the contractor in advance for any work not completed except for 1) the upfront payment mentioned earlier or 2) when there has been a work order signed by you requiring extra work. A typical problem situation... contractor approaches homeowner and says that he is out of money, rubs a tear from his eye and sobs that he needs more cash to complete the job. The homeowner pays more money and the contractor disappears. Job not completed, contractor moves on to another job and the homeowner is left in the lurch. Though it is easy to be sympathetic to a beleaguered contractor, the fact is that this is a business transaction, not charity. You can always hire someone to complete the job... if you have money to do so. Giving that money to the contractor before completion of the work is asking for trouble.
ENTER THE HONEST CONTRACTOR... STAGE LEFT!! When I first sent this article to my editor/agent Lin Erickson, this last section did not exist. Her first response to this article was, "This is an excellent piece of work... but I believe you have ended this article on a very anti-contractor note." And, as is almost always the case, she's absolutely right! I have been personally involved in hundreds of homeowner nightmares involving contractors who were irresponsible, lazy, or just downright dishonest. And so from my perspective it is very easy to get into a negative jag when it comes to this topic. Still, the undeniable fact is that the vast majority of contractors are hardworking, quality craftsmen and businessmen who are trying their best to live up to the expectations of their clients. They must take responsibility for materials that arrive late or are defective, subcontractors that don't show up on time or do low quality work, laborers who become ill, the whims of Mother Nature and Big Brother, and Lord knows what other unexpected events. They must be politicians in dealing with the local building inspector, psychologists when dealing with a displaced and inconvenienced homeowner and still, through all this, keep a positive attitude. I made a personal decision years ago to not enter the contractor fray and instead slide into the somewhat less complicated world of the handyman. I have nothing but respect for the men and women who each and every day improves the lives and homes of the folks they work for. And you should too.
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Letter of understanding by and between __________ as contractor and Loaning4Lessas property owner Of _______________________
It is understood that the above contractor will perform all aspects of executed bid a copy of which is attached, for the agreed upon job price which includes all material and labor. Should the contractor require additional subcontractors not specified as a separate invoice prior to the executed bid, contractor is responsible for all compensation to sub-contractor. In the event a job change order is required; no work shall commence or be scheduled until an authorized party of Loaning4Less agrees to change. Unless otherwise specified only new builder grade materials will be used. When possible material specifications will be forwarded to Loaning4Less. This includes but is not limited to kitchen components, fixtures, flooring, appliances; exterior finishes to include doors and windows. Contractor will report job progress directly to Loaning4Less not less than weekly and include photos as draws are requested. . At the time of this agreement it is anticipated that the following items will be invoiced outside of the above referenced bid; not applicable. Barring any unforeseen work stoppage or delay caused by either party the job will be completed in its entirety within __ weeks from start date_______. Should the property require electrical or plumbing attention only a licensed and certified professional will be used. All necessary permits if any will be pulled and closed out at the time of completion. All local building codes will be adhered to and properly inspected. Payment of above job will be paid in draws and submitted to Loaning4Less on the appropriate forms with all required documentation. A final payment will be made after job completion and final walk through and punch list completed. In the event any of the above required aspects related to licensed sub-contractors, permitting or building code violations occur final payment will be withheld until item(s) is corrected at the expense of the contractor. Draw requests will be processed within 7 to 10 days of receipt and confirmation of work completion. It is understood that the payment structure will not change and all materials for job progress and completion must be paid out of draw structure. In the event the job site is abandoned by contractor or contractor appointed sub-contractors for three (3) consecutive days without notification to Loaning4Less this agreement is nullified and no further payments will be made to contractor. In the event of this occurrence; Contractor and affiliates may not enter the property without express permission from an authorized person of Loaning4Less. It is agreed that as payment is made the property is released from any and all liens associated with job equal to the payment. Upon final payment a Lien waiver will be executed.
This agreement is entered into with full review and understanding. No alterations or verbal promises expressed or implied are made part of this agreement. In the event a dispute between parties should arise it is agreed that mediation/arbitration will be the course of resolution. Executed this _____day of______, _______ By: ______________ Contractor/Authorized Signor
By: ___________________ Authorized Signor for Loaning4Less
For:______________________________________________
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PERFORMANCE BOND From Wikipedia, the free encyclopedia
Jump to: navigation, search A performance bond is a surety bond issued by an insurance company to guarantee satisfactory completion of a project by a contractor. For example, a contractor may cause a performance bond to be issued in favor of a client for whom the contractor is constructing a building. If the contractor fails to construct the building according to the specifications laid out by the contract (most often due to the bankruptcy of the contractor), the client is guaranteed compensation for any monetary loss up to the amount of the performance bond. Performance bonds are commonly used in the development of real property, where an owner or investor may require the developer to assure that contractors or project managers procure such bonds in order to guarantee that the value of the work will not be lost in the case of an unfortunate event (such as insolvency of the contractor). The term is also used to denote a collateral deposit intended to secure a Futures contract, commonly known as margin. Performance bonds have been around since 2,750 BC and, more recently, the Romans developed laws of surety around 150 AD, the principles of which still exist.[citation needed]
SURETY BOND From Wikipedia, the free encyclopedia
Jump to: navigation, search The examples and perspective in this article or section may not represent a worldwide view of the subject. Please improve this article or discuss the issue on the talk page.
A surety bond is a contract among at least three parties: 
The principal - the primary party who will be performing a contractual obligation

The obligee - the party who is the recipient of the obligation, and

The surety - who ensures that the principal's obligations will be performed.
Through this agreement, the surety agrees to uphold - for the benefit of the obligee - the contractual promises (obligations) made by the principal if the principal fails to uphold its promises to the obligee. The contract is formed so as to induce the obligee to contract with the principal, i.e., to demonstrate the credibility of the principal and guarantee performance and completion per the terms of the agreement. There are two main categories of bond types: contract bonds and commercial bonds. Contract bonds guarantee a specific contract. Examples include performance, bid, supply, maintenance and subdivision bonds. Commercial bonds guarantee per the terms of the bond form. Examples include license & permit, union bonds, etc. Suretyship bonds originated hundreds of years ago as a mechanism through which trade over long distance could be encouraged. They are frequently used in the construction industry: in 106
order to obtain a contract to build the project, the general contractor (and often the subcontractors as well) must provide the owner a bond for its performance of the terms of the contract. Conversely, owners and contractors may also provide payment bonds to ensure that subcontractors and suppliers are paid for work done. Under the Miller Act, payment and performance bonds are required for general contractors on all U.S. federal government construction projects where the contract price exceeds $100,000.00. Surety bonds are also used in other situations, for example, to secure the proper performance of fiduciary duties by persons in positions of private or public trust. A key term in nearly every surety bond is the penal sum. This is a specified amount of money which is the maximum amount that the surety will be required to pay in the event of the principal's default. This allows the surety to assess the risk involved in giving the bond; the premium charged is determined accordingly. If the principal defaults and the surety turns out to be insolvent, the purpose of the bond is rendered nugatory. Thus, the surety on a bond is usually an insurance company whose solvency is verified by private audit, governmental regulation, or both. The principal will pay a premium (usually annually) in exchange for the bonding company's financial strength to extend surety credit. In the event of a claim, the surety will investigate it. If it turns out to be a valid claim, the surety will pay it and then turn to the principal for reimbursement of the amount paid on the claim and any legal fees incurred. A bail bond is a type of surety bond used to secure the release from custody of a person charged with a criminal offense. Under such a contract, the principal is the accused, the obligee is the government, and the surety is the bail bondsman.
PROTECT YOURSELF FROM CONTRACTOR FRAUD - TRUTH ABOUT WEBSITES THAT ADVERTISE CONTRACTOR PRESCREENING By Max Sheppard
Today‘s lifestyles demand making the most of every minute of the day. Cell phones, fast food, and Internet banking have become commonplace in almost every household. Not surprisingly, Internet dating and matchmaking web sites have become phenomenally popular as well. Last month alone, over 3 million dating/matchmaking searches were done by people seeking Mr. or Mrs. Right. Online Dating Magazine estimates Internet dating results in more than 120,000 marriages annually. Another kind of Internet matchmaking service has also become highly popular. One for homeowners on a quest to find reputable contractors for remodeling, renovation, home repair, and new construction purposes. As with any other resource, some are more dependable than others. In response to fierce competition, and enticement to attract more consumers, a growing number of service providers advertise prescreened contractors.
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But does prescreening offer the consumer protection, or create risk hazards? What pitfalls might be involved when consumers fail to follow up with a screening process of their own?
MATCHMAKING SERVICES WITH PRESCREENED SERVICE PROVIDERS; BEWARE OF RISKS INVOLVED This popular contractor matching service maintains an extensive database of prescreened contractors.‖ "Our free contractor referral service provides verified US insured and licensed contractors.‖ ―We prescreen all contractors before we choose to partner with them…a contractor must provide proof of insurance and licensing…and must also submit a solid list of previous customer references.‖ Such are the assertions made by 3 different consumer-to-contractor matchmaking services that prescreen member service providers. They sound good. Until, one begins considering possible drawbacks. Or what dangers could be lurking behind such carefully worded sales pitches. The first area of concern is that consumers can be lulled into a false sense of security by this type of matchmaking service. Putting them at risk for hiring a contractor based upon old, outdated information. Contractor proof of insurance, licensing, and other credentials that checked out even just a few short weeks prior could no longer be valid. And references offered at the time of membership, obsolete and no longer reflective of the contractor‘s workmanship. In addition, any number of personal problems or health complications might have arisen that could affect the work quality or integrity of services. The second area of concern is the screening process itself: • how extensive is it • ―who‖ implements it • what resources are used Each of these aspects directly affect whether or not information gleaned is truly a reliable gauge as to the contractor‘s professionalism, credibility, and reliability as a service provider – even at the time of membership. Combine these concerns with the fact consumer-to-contractor prescreening service providers offer no written guarantee that contractor members will perform as expected. Or that licensing, insurance coverage and good standing as a service provider are still in tact at the time of hiring.
CONTRACTOR FRAUD ON THE RISE As the construction industry continues to boom across the United States and Canada, so do scam artists. A growing number of fraudulent contractors obtain huge sums of money upfront from unsuspecting business and homeowners. And then disappear before work is completed, or even begun.
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LOANING4LESS
Rehab Request Form
Contractor Name:
Project Owner:
Property Address:
Date Opened:
Date Closed:
Contractor Phone Number:
Project Number:
Status:
Property Description
Purchase Price:_________
After Repair Value:_________ Living SF:____________ Foundation SF:__________ Total Rooms___ Bedrooms___ Bathrooms___ Units___ Type of Property: SFR__2Family__3Family___Condo___ Municipal Water___ Well___ Municipal Sewer___ Septic___
Check any extraordinary condition that exist and provide a description if necessary. Descriptions: Structural Damage __ Weather Damage __ Water Damage __ Fire Damage __ Underground Oil Tank __ Environmental Hazards __ Safety Hazards __ Building Code Violations__ Insect Damage __ Others
Start Date: ____________ End Date: _____________
Rehab Budget Unit Abbreviations: Square Feet = SF Rooms= Rms Linear Feet=LF Square Yard=SY Each (items)=EA Cubic Yard=CY
Rehab Project Grounds Landscaping/ Lawn Tree Removal/ Prune Patio/Deck Pool/Hot Tub Driveway Sidewalks Fence Steps Grounds Other
Replace or Repair
Lot Size=
Detail Description
Qty Unit
Requested $
SF $
SF
$
EA SF EA SF SF LF LF
$ $ $ $ $ $ $
Reviewer Comments:
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Rehab Project
Replace or Repair
Detail/ Description
Qty Unit
Requested $
Exterior Windows Exterior Doors Wood __ Metal__ Sliders__ Masonry Roof
EA
$ $
EA SF
$
Roof: Squares_______ Type______ Roof: Overlay___Strip___ Plywood___
SF
$
Exterior Pain/Stain
SF
$
Siding Repair/Replace
$
Type:__________
Gutter&Downspouts
SF LF
Facia & Soffit Enclosed Porches
SF
$ $ $
Attached Garage Door Detached Garage Door QTY/Size___Siding___ Roof___ Comments:
Rehab Project
$
EA
QTY Single__ Double__
Replace or Repair
EA
$
Detail/ Description
Qty Unit
Requested $
Interior Flooring Carpet Hardwood Tile Vinyl Sub-Floor
SY SF SF SY SF
$ $ $ $ $
Kitchen(s) # of____ Cabinets Countertops Fixtures/Plumbing Appliances:Range__ Fridge_
LF LF EA
$ $ $ $
Dishwasher___Other__
EA
$
Comments: Bathroom(s) # 0f____ Vanity Tub/Shower Fixtures/Plumbing Other Rehab Project
SF EA EA
Replace or
$ $ $ $ Detail/ Description
Qty Unit
110
Requested $
Repair
Interior Closets & Doors Sheetrock Partition/Wall Framing Interior Paint Interior Stairs Interior Other
EA
$
SF SF SF RMS
$ $ $ $ $
LF
$
EA
$
LS EA EA
$ $ $
Systems Plumbing/Internal Piping
Furnace (check one) Heat__Gas__Oil__
Ductwork Hot water Heater A/C Electrical: Repairs/Fixtures Service/Upgrade Septic & Sewer Lines Well & Outside Water Lines
Sump Pump Systems Other:
$ EA EA EA EA
$ $ $ $
House Structure Foundation Basement Walls Basement Floors Floor Joints & Beams Insulation Chimney Structure Other
SF SF SF EA SF SF SF
$ $ $ $ $ $ $
Comments:
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Rehab Project
Replace or Repair
Qty
Detail/ Description
Unit
Requested $
Environmental Work Under Ground Oil Tank Asbestos - Exposed Lead Paint - Exposed Mold Environmental Other
EA LF SF SF
$ $ $ $ $
Misc. Other Site Dumpster Demolition Exterior Clean-Up Interior Clean-Up
Y or N Y or N Y or N Y or N
EA SF CY CY
$ $ $ $
Permits & Inspections Required Inspections Well & Septic Wood Eating Insects Mold Lead Paint Other Permits Building Permits
Cost Y or N Y or N Y or N Y or N Y or N
$ $ $ $ $ Cost $
Certificate of Occupancy
$ Total Estimated Cost for Repairs
$
Budget Summary Additional Expenses Description
Qty.
Unit Price
Subtotal
Total Balance
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Extended Price
Building Contractors List Contractor Company
Name
Address
Please list all known contractors expected to do work on this property. Please contact Loaning4Less with any and all changes or additions during the entire rehab project.
Telephone Number
Contact Person
Email Address
Certification & Signatures I (we) certify that I (we) have personally inspected this property. To the best of my (our) knowledge we have identified all known repairs and will take action to correct. We will complete all repairs in a workmanlike manner and in compliance with all federal, state, county, and local building codes.
Sign and print your name.
Date
Signature Print
Date
Signature
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CHAPTER 8 WE OWN IT; NOW WHAT DO WE DO? THIS IS WHERE IT GETS EXCITING! It is also the point in which we are totally reliant on your professional actions, project control and are exposed to the most risk. You will not make a penny if you walk away from the project after the close. This is what you worked for and where your work will pay-off if you work with us through to conclusion of resale. You‘ve found a property that makes sense as an investment. You‘ve received approval from funding, the seller has agreed to the price and terms. Now what? There is still plenty to do before we go to the closing table. Although the property has been visually inspected and repairs have been noted, it is strongly suggested and a Loaning4Less must, that a professional inspection be performed. The Inspector has to be licensed and certified to conduct home inspections. During the inspection, all of the major systems of the house will be checked. The gas and electricity must be operating for the inspection to be complete. The furnace and hot water heater will be checked. The electrical and plumbing systems will be tested. The roof will be looked at for damages and age. The foundation of the home will be closely inspected to be solid. All appliances will be checked for proper operation. Considering that we are buying a home that most likely needs repair, there will be some deficiencies that we are willing to accept. There are some problems that are unacceptable at any price, and if any of those are discovered the contract would be cancelled. Otherwise we evaluate what the inspection showed and either accept the property in its present condition or ask for repairs or monetary concessions be made. It is not an uncommon practice to accept a property ―as-is.‖ This however does not mean that we will forgo an inspection. After the inspection has been done and we confirm our desire to proceed, the next step is submitting the property to the lending underwriters for review. This process has changed greatly over the course of the past six months due primarily to what has transpired in the sub-prime markets. The lender not only looks at the value of the property but will also consider various other facts relative to the property. When you begin investing on your own it is advantageous for you to establish a relationship with one or more mortgage lenders. Loaning4Less has several resources in this arena and would be more than happy to refer you. If all clears underwriting the lender will order an appraisal on the house. The appraisal must be performed by a licensed, authorized appraiser acceptable to the lender. The appraisal will value the property at a dollar amount for what it is worth as it is. In some cases when valuations to the upside are significant due to a large renovation project we may ask for a subject-to appraisal to be included at an additional expense to support our projections of resale. If the subject-to appraisal is not in line with our expectations we will not proceed under the current set of circumstances presented. At a minimum the property has to represent a value of the contract purchase price or above in order to proceed. The appraisal will also note any deficiencies that have to be corrected before closing.
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Once the appraisal is acceptable, the closing can be scheduled. The closing will be performed by a title company or attorney, depending on the state. The buyer will be notified of how much money they will need to bring to the closing for down payment and closing costs. When Loaning4Less buys a property it is typically out of state, so the closing documents will have to be mailed to Loaning4Less to execute and then return for the property to actually be transferred. We will communicate this at the onset of our negotiations as these type of closings need to take into consideration the document transfer time. At or shortly after the closing, we will need to obtain keys for the house and change the utilities into our name. If necessary, extra keys need to be made. A lockbox must be put on the house so any necessary contractors can gain entry. Before the work can begin, Loaning4Less will reevaluate the contractor bids and have an agreement signed by the contractor covering the estimated time the job will take and outline the payment arrangements. We request that upon closing you send a set of keys to our corporate office and place the lock-box on the property.
Once the work has begun, a close watch on the progress of the job needs to happen. The job can take on a life of its own if not carefully monitored. Timeframes, job specifications and budget must be closely adhered to. Any change from the original bid must be agreed to in writing by Loaning4Less. When the work begins, a For Sale By Owner sign should be placed in the yard so potential buyers will know who to contact for information about the property. The work is complete and the house is beautiful. The job was completed in less time than was anticipated and for less money than the original bid. If this happens clone yourself and continue on in your ventures. However, experience shows that this is probably not the case, but at least the project is done. If there has been no interest from a buyer for the house, than we will consider listing the house with a Realtor. Even though the house is listed, there are still things to be done to assure that the house is in the best possible condition for resale. The yard needs to be maintained and the house needs to be clean. With a little luck, and a lot of homework, our house should sell quickly, because it will be reasonably priced and in tip-top shape. It is important to remember that you represent the interests of Loaning4Less when managing the project. The ultimate goal is profit. We make money when money is in motion so stick with it. If the property project slows and carry time is increased profit will diminish. If the property repairs begin to far exceed our expectation than profit will diminish. There is a point when the home will reach its break-even point which will require us to liquidate or rent. We will do so by whatever legal means necessary. This is just the nature of the business and losses accrue much faster when the property is idol. You need to remain involved. If you walk away from the project you‘re jeopardizing everything we‘ve worked for. It is not acceptable to appear at the closing and then disappear until the work is done and expect to receive any benefit.
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Offer Acceptance through Resale Offer Acceptanc e
Inspection Performed Inspection Not What We Expected
Cancel Contract Or Re-negotiate
Inspection OK
Acceptable Re-negotiation
Lender Underwriting 30 + Days
Appraisal Deal Cancelled
Appraisal Problem or not apprised @ contract purchase price
Appraisal OK
Closing
Get KeysChange Utilities to our name
Acceptable Renegotiation
Cancel Contract or Renegotiate
Cancelled Review Contractor Bids
Begin Re-Hab
Re-Hab Complete
Property for Sale
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CHAPTER 9 PRACTICAL APPLICATION CASE STUDY #1 What is a good Comparable? The best comparable for a house, is the same exact model in the same neighborhood. When a builder goes into an area, and develops a subdivision, they typically build three or four different models of homes, making comparing homes in the same neighborhood relatively easy. In this case, the houses have all been built around the same time, with similar workmanship and materials, with the same area amenities. The task of finding a good comparable becomes much more difficult when the subject house is not in a typical subdivision neighborhood. When this is the case, follow these general guidelines for finding a good comparable: Style of home - Ranch (one level); two story, Multi-level, Victorian, etc. Age of homeSize of home - Square feet; Compare above grade square feet only Time elapsed since the house has soldProximity to subject - the closer the better, but must be a similar type neighborhood. Similar features
Which of the following is the best comparable for a subject house built in 1970, twostory, brick construction, 1650 square feet, full unfinished basement, 2 car attached garage? a. Ranch style, 2500 square feet, 3 car attached garage, stucco, no basement, built in 1972, one tenth of a mile away. Sold 2 months ago b. Two-story, 1700 square feet, partial finished basement, 1 car attached garage, brick, built in 1998, one half mile away. Sold 1 year ago c. Multi-level Victorian, 1650 square feet, one car detached garage, built in 1925, one mile away. Sold 1 week ago d. Ranch style, 1500 square feet, partial unfinished basement, 2 car attached garage, built in 1969, two houses away. Sold 4 months ago
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How many comps do I need? a. 25 or more b. 10 to 15 c. 4 to 8 d. One is plenty
Where do I find the best comps? For the most part, the best comps come from the Multiple Listing Service and the county records. If a house was sold through a Realtor, the sold information will be in the MLS. If a Realtor was not involved in the sale, the county or local recording office will have evidence of the sale. The information is public record. Beware that Realtors can manipulate the comps to make it appear that the value of a home may be more or less than it actually is. They can give you only the high end or low end of what the comps show to easily skew the real picture. Ask the Realtor for a low, middle and high comp for your subject property. Do some research yourself so you know the range of value in a particular area. Go to the local recording website for sold pricing. Look on Realtor.com for active pricing.
Other important things to consider: Curb appeal - The house looks well maintained and is nicely landscaped. Condition of exterior - The condition of the roof, paint, chimney, driveway, fences and landscaping is good. Nearby amenities - Walking distance to shops, restaurants and parks. Neighborhood - Is the house well-kept but all others around it falling apart? Are there rundown vehicles or other unsightly objects on the street or in the driveways? Traffic/noise - Is it located on a busy street or near a noisy freeway? Is it close to railroad tracks? Schools — Is it in a good school district? Whether you have kids ,or not, owning a home in a top school district adds tremendous value to a home. This can be
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subjective, and most Realtors won‘t comment about school districts, but good information is available online as to test scores and other important information.
CASE STUDY #2 How do you estimate for repairs? Although ideal, it is unrealistic to have a contractors bid for every property submission. It is however, very important to have an accurate estimate for repairs in order to properly evaluate a property for purchase. It is also a requirement of Loaning4Lessto have several Contractor bids once a property has been approved for funding. As time goes on, you will become more experienced when estimating for a kitchen or bathroom remodel. What you can do, with or without experience is to objectively look at the house and list everything that is in need of repair or updating. It is easier to take off cost then to add it later. What is the approximate cost to carpet an area 30 x 50 feet with mid-grade carpet? a. $110-$155 b. $265-$315 c. $355-$405 d. $475-525
What is the approximate cost to paint a 1000 square foot interior area? a. $415-$495 b. $550-$660 c. $650-$780 d. $840-$960
What is the minimum cost for a complete kitchen remodel, including all appliances, new cabinets, new solid surface countertops and new flooring? a. $2,500 b. $10,000 c. $5,000 d. $15,000 ***Kitchen remodel projects can vary widely depending on the size of the kitchen, how many cabinets, how much counter space and what the quality of materials and appliances being used are. It is safe to assume that anytime a complete kitchen remodel will be done, that a minimum of $10,000 will have to be spent.
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***It is a good idea to get several bids from different contractors. It may not be wise to go with the contractor that submits the lowest bid. The lowest bid may end up costing more in the long run if you have to go in and have work redone. It is always important to get references for the contractor from people that they have done work for in the past.
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CASE STUDY #3 How do you add value to real estate? The most common way to add value to real estate is by improving it in some way, shape or form. The most typical improvements come in the form of remodeling, updating or adding square footage. It is a mistake to over improve or under improve a house that is purchased as a fix and flip. Over improving can eat up profit. It is very possible to over improve a house, making it so much better than anything around, that a higher price just cannot be supported, because of where it sits. Under improving can drastically hurt resale, which in turn will also affect profit. You can‘t command the higher prices in an area, if the rehab done on the house is of a poor quality.
What are some of the best improvements to make to a house? Kitchen and bathroom remodeling bring the highest return on investment. They also happen to be the most costly remodel jobs. New carpet and fresh paint can put a whole new look on a house for a relatively small financial investment. Clean up the front yard landscape and make sure the house has good curb appeal. It is a must for the house to give a good first impression. Many times, if a potential buyer does not like the looks of a house from the outside, they will never even bother to go in. If you were evaluating the following scenarios, which do you think would be the best case for the greatest return on a house to buy and sell? (Assume that days on the market for resale are all equal.) a. A house built in 1938 with the original boiler. The water heater has been replaced within the last six years. Very little updating has been done, but the house has always been well maintained. The house is in an area of older homes that are all being renovated. The owner has recently moved into a nursing home. The house could be purchased at a 30% discount from average fair market value. b. A house built in 1970 that has been a rental for the past ten years. The owner fixed things when needed, but the house has had several different tenants over the years. The house has been vacant for six months. The house is in an area of at least 30% rentals. The house could be purchased at a 20% discount from average fair market value. c. A house built in 2004 that has been on the market for 90+ days. The house is in great condition and just needs to have the kitchen painted. (It‘s bright purple!) You know that you can paint it for $200 yourself. The house is in a subdivision with all of the other homes in the area less than five years old. The house is listed for $275,000, but you can purchase it for $225,000.
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d. A house built in 1962 that is Bank owned. The original owners had financial difficulties and could not make their payments. They loved the house and always took great care of it, maintaining and updating everything as it needed to be done. The house backs to a busy road. The bank has the house listed at fair market value, but they would let it go at a 15% discount.
OTHER IMPORTANT THINGS TO CONSIDER When considering how much time and money to put into a remodeling project on a house for resale, remember to keep it neutral. By doing so, it is more likely that the house will appeal to a wide range of buyers. Remember when choosing materials for the project keep the quality of material in line with the resale price of the house. For example, don‘t use top of the line appliances in a starter home. By the same token, don‘t use low-end finishes in a custom home.
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This is not a legal text, and the editors are not in the business of giving legal advice. Rather, “The Textbook” is intended as an introductory guide to real estate and should not be relied upon for specific legal or financial advice. The Loaning4Less Training Program is designed solely to act as a guide to assist the layperson to understand the basics of real estate law as it relates to purchasing foreclosed properties. Real estate transactions are complex and have economic and tax consequences whether you choose to use Loaning4Less funds, or finance your purchase independently. Nothing in “The Textbook” is intended to offer specific legal, business, accounting or tax advice. Nor is it designed to replace the services of legal, business, accounting or tax professionals.
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