Thinking of Becoming a Real Estate Investor

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Thinking of becoming a real estate investor? The first thing that will make this endeavor achievable is that the investor must understand his or her market. There are two different types of markets. One type of market is a seller’s market, and the other type of market is the buyer’s market.

The Buyer’s Market

In a buyer’s market, the buyer must be aware that being in a buyer’s market doesn’t make the buyer’s job any easier. It just gives the buyer more flexibility. Remember in a buyer’s market, there may be several buyers for one property or only one buyer for a property. If there are no other buyers for a property by virtue of the length of time the property has been on the market then a low offer may come in to the seller. Sorry sellers. However, sellers that do not mean that the property has to given away, but it may mean that the seller could have to settle for less than the seller anticipated selling his or her home for.

Another thing that makes a buyer’s market advantageous to the buyer and not to the seller is that there are a lot of homes to choice from that may meet the buyer’s criteria.

The Seller’s Market

In a seller’s market, on the other hand, the seller has the upper hand. The seller can price his or her home significantly above market value and negotiate the purchase price to exact what the seller wants the purchase price to be. Sorry buyers. If the buyer really wants a home in a seller’s market, the buyer must succumb to the seller’s terms in order to get the home. As a matter of fact, in a seller’s market the inventory of homes for sale that may meet the buyer’s criteria are fewer.

Choosing the Property

Once the investor has ascertained the type of market he or she is in then the investor is ready to buy. Now, the investor must determine what type of properties work best for him or her. That means does the investor want to purchase single family homes or multi units? With single family homes, it is very important to determine what will happen if the property is vacant. The investor must determine if he or she can pay the mortgage if there is a mortgage on top of other expenses if there is not a tenant or the tenant is not paying. In those calculation must be the upkeep of the building to include utilities and maintenance not only the mortgage, taxes, and insurance. If that is affordable then move forward. If not, then look at those options with a multi unit and determine which scenario works better for the investor’s financial situation if there are vacancy. Do not be fooled that there will not be vacancy during sometime of the investor’s ownership, so it is best to look at that now rather than later.

Now, that the investor has determined which property type works better for his or her financial situation, the investor can now move forward. Another thing that the investor must consider is that it is always must easier to rent three plus bedrooms than a two or one bedroom.

Buy and Hold

Up until now, the suggested scenario for the investor has been about the possibility of buy and hold. What is buy and hold? Well, buy and hold is when the investor buys the property and hold it to rent it for a pre-determine number of years. It is important to note that in order for this to be successful the investor must consider the area in which the property is located. The investor wants to purchase a property that is desirable to both renters and homeowners. By doing this, it makes it easier to sell for a profit when the investor determines that he or she wants to sell.

Fix and Flip

There is yet another way to be a real estate investor and it is called fix and flip. Fix and flip is fixing up the property to flip or sell it to someone else. Under the fix and flip, if the new buyer is acquiring financing to purchase the property then the investor will have to have owned the property for at least six months to be able to sell. Be aware that some lenders may require that the investor owned it longer. Incidentally, due to recent market changes the latter is no longer true.

The investor may be wondering how the financial institution of the buyer knows how long the seller/investor has owned the property well the lender requires a clear chain of title. The chain of title will show if there is any liens and/or judgment, but it also shows the chain of ownership. The chain of title shows the dates of transfer of title or ownership. The chain of title also let’s the lender know if the property is marketable and free to transfer ownership. The investor may also be wondering where the chain of title comes from? The chain of title comes from an abstract of the title. An abstract of the title is a condensed history of ownership of the property which is gathered by the abstracter through public record.

Once the Title Company and lender determine that the property is free and clear to sell. The lender needs to know that the buyer is free and clear of liens and judgments, as well. The reason is that the liens and judgment that the buyer may have may attach to the property, so a search is done on the buyer by their name and social security number. By the way, the liens and judgment are a concern to the lender is that those liens or judgments can super succeed the lender’s mortgage; the lender wants the mortgage to be first on the property. If judgments or liens do show up for the buyer because the buyer has a common name, then buyer completes a name affidavit that can clear up most information that may come up. The name affidavit has the buyer’s name, social security number, marital status, last five years of addresses, etc. This information is used to rule out judgment or lien that may appear.

Ways to Sell the Investment Property

Let’s discuss different ways to sell the property under a fix and flip scenario. The seller/investor may consider a lease option. Under a lease option, the seller must do a judgment search on the potential buyer/tenant before attaching them to the property because the judgment and or liens on the potential buyer/tenant may attach to the property. As a seller, it is apparent that the investor do not want to pay someone else bills, so pay to have the search done.

Once the search is complete and it is determined that the potential buyer/tenant does not have any judgment and/or liens draw up the lease/option contract. Consult an attorney when doing this to ensure all options of ownership and releasing option are examined.

Under most lease agreement, the buyer pays a non-refundable deposit. This deposit is negotiated between the parties and credited to the buyer at time of purchase. Under some agreement, the deposit is credited to the buyer only if the buyer does not default on the lease agreement and exercise their option before the expiration of the lease agreement.

The seller will also credit the buyer a certain portion of the monthly lease payment that the buyer/tenant makes in a timely manner to the buyer at time of closing. However, the buyer/tenant shall not receive any credit for monthly payment made after the due date specified in the contract.

Incidentally, it is important to note that the buyer/tenant can only exercise their right to purchase in writing. It is also important to note that the option to purchase is not transferable.

It is important to work with the potential tenant/buyer to help them clear their credit issue by referring them to a professional that will help the tenant/buyer determine what need to be corrected on their credit and keep up with the tenant/buyer progress on doing what is required to correct the tenant/buyer’s credit. The reason this is important for the life of the lease the investor can not sell the property without proper notice to the tenant/buyer.

Getting Back to the Basics

Now, that the investor’s option have discussed let’s get back to some basics. Let’s say the investor buys a fixer upper. With a fixer upper, there are not many insurance options or so the investor may think. The investor may go to one insurance company and the company may tell the investor that the insurance can not insure the new purchase until after repair, and the investor still decides to move on with the purchase. The investor does not have his or her interest in the property insured. Well, there are companies that offer the insurance the investor needs. The investor just needs to know what companies offer it and what that type of insurance is called. It is called builder’s risk or a vacancy policy. The companies that offer these policies are Allstate, American Family, and Farmers Insurance. Allstate’s policy covers the property for a year, but it does not cover the investor once the investor has a tenant in the property. Once a tenant is in the property you must have a landlord policy.

American Family’s policy covers the property for three months, and then at the end of the three month the investor either buys another three month policy because the property is not ready for occupancy or gets a landlord policy.

Once the investor’s insurance is in place or even before purchase find out about permits for the jobs needed for the fixer upper. The investor needs to do this so that jobs will not be stop by the city inspector and the investor loses money as a results. This is very important in a fix and flip scenario because the investor stands to have to pay expenses that the investor did not calculate for. This is also called holding cost, so do research that can not be spoke to enough research, research, research.

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