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How Real Estate Title Insurance Works
1. You are about ready to purchase a parcel of real estate. Before closing the sale, you have a title insurance company do a preliminary title search to make sure there are no defects in your title. Everything is OK, so you arrange to close the sale as soon as the title insurance company can issue you a policy. The title insurance company does a last-minute search to make sure there haven’t been any changes, closes the sale, and issues you a title insurance policy.
2. The title insurance company finds that the seller’s title is fine, but alas – you are paying for the property with a bank loan, and the bank wants a mortgage on the property in exchange. So tell the closing agent to get you a title policy that makes an exception in its coverage for your mortgage. The bank, meanwhile, will issue the money only when it receives a title policy showing that it has a valid first mortgage on your property. Except for that mortgage, you’re covered against any encumbrances or other title defects on the property.
3. Your title insurance company checks out the seller’s title and discovers that it has a mortgage on it (probably taken out when the seller purchased the property). So make sure that the closing agent closes escrow only when the title insurance company issues a policy that does not list the owner’s mortgage as an exception to its coverage. Of course they’re not gonna do that until the mortgage is paid off, thus putting the ball in the owner’s court. But you can smooth this one over by agreeing with the owner that part of your purchase money be paid to the holder of the mortgage in order to extinguish it. This will clear up the title and cause the title insurance company to issue a policy with no exceptions, clearing the way for you to close the sale on your terms.
Mortgage Types
Adjustable Rate Mortgage(ARM): An adjustable rate mortgage (ARM), variable rate mortgage or floating rate mortgage is a mortgage loan where the interest rate on the note is periodically adjusted based on an index. This is done to ensure a steady margin for the lender, whose own cost of funding will usually be related to the index. Consequently, payments made by the borrower may change over time with the changing interest rate (alternatively, the term of the loan may change).
Conventional Mortgage: A mortgage that is not insured or guaranteed by the government, as opposed to a government mortgage
Commercial Mortgage: Loans to finance commercial properties. For multi-family homes and apartment buildings, offices, industrial buildings, and retail development plans. Loan to Value typically up to 80%. We can also finance raw land depending on the property and situation.
80-20 Mortgage: The 80/20 mortgage, often called piggyback loans or 100 % financing, allows the borrower to purchase a home without having to submit a down payment or pay private mortgage insurance by taking out two loans - one for 80 % of the purchase price and one for the remaining 20 %, totaling 100 % of the purchase price. The second 20 % mortgage backs up the first mortgage, thus eliminating the need for private mortgage insurance.
Conforming Mortgage: Any loan that conforms to the underwriting guidelines of Fannie Mae or Freddie Mac is called a "conforming loan". Guidelines such as the maximum loan amount, down payment percentage, borrower and co-borrower credit, borrower and co-borrower income requirements, and appropriate property types. The conforming limit changes yearly, as determined by Freddie Mac and Fannie Mae, based on October to October data. The conforming limit has risen substantially in the last few years as housing prices have skyrocketed in the United States, and now most home loans in the metropolitan areas exceed the conforming limit. Homeowners can avoid exceeding the conforming limit by breaking their loan up into a first and second mortgage. If you keep your first loan at say $416,999, you can add a second mortgage behind it up to $200,000 or more without breaking the conforming limit.
Here are the conforming limits for other residential property types:
Two-unit properties: $533,850 Three-unit properties: $645,300 Four-unit properties: $801,950
For properties in Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the loan limits are 50 percent higher.
Fixed Rate Mortgage: You are probably familiar with a fixed rate mortgage. Your parents more than likely had one, as did their parents before them. The major advantage of fixed rate mortgages is that they present predictable housing costs for the life of the loan. Fixed rate mortgages are available for 10, 15, 20 and 30 year terms.
Jumbo Mortgage: A jumbo mortgage is a mortgage with a loan amount above the industry standard definition of the conventional, conforming mortgage loan maximum. This maximum is set by the two largest secondary market lenders, Fannie Mae and Freddie Mac.
Real Estate Investing
You've heard of the potential payoff from real estate investing. The good news is, it's true! The bad news is, it won't happen for most people. Why? They have unrealistic expectations. Real estate investing isn't a "get rich quick" endeavor, although it sometimes happens. No real business is. So, prepare to make a serious time commitment. Would you expect to become extremely wealthy at anything in just a few months? Know that you'll have to keep learning, keep getting contracts, and keep putting time into it.
Still in? Great, you're a realist! Your first step is to choose an area to focus on. Do you want to purchase run-down properties and repair them to sell for profit (rehabilitate, or rehab them)? Do you want to buy properties and turn them quickly (flipping)? Maybe you want to buy properties, then lease them to potential buyers with an option for them to purchase them later, while you accumulate equity. There are pros and cons to each of these, depending on your financial position, your location, your available time, and other considerations. We'll be going over them all in future issues of the newsletter. You'll find the possibilities exciting.
Once you know what you're looking at draft your plan IN WRITING. People who do this get three times as much done in the same amount of time. Set long-term goals for 3, 5 and 10 years out for what you want your cash, equity, and cash flow to be. Then, you can work backwards from there to set 1-year, 6-month, and 3-month goals. Without this, you'll be driving without a map, taking or skipping deals without regard to how they fit into your big picture. Leaves lots of room for "Wish I'da's...." Don't do it! You can always adjust your plan as you go along.
Keep your day job for as long as possible. If and when it seems time to go, before you do, get some of those low- to no-interest credit cards that are out there. It could really ease some cash flow worries to be able to tap on a $10,000 line if you're doing a fixer-upper and run into an unforeseen problem with no additional bank draw in sight.
Get an attorney who knows and understands the creative options of real estate. Some banks just don't understand simultaneous closings, for example; you'll want your lawyer to know how to smooth things so that there aren't any snags that cost you time and money. Some even have their own title companies. A good place to ask for a referral is to ask a mid- to large-sized developer. This is one place not to haggle about price; he or she will be worth their weight in gold when they can get your deals done and you know that you can sleep at night because it's been done quickly and right.
As soon as you decide to get into real estate investing, begin building your list of buyers. We'll be covering more on this later; but, when you meet them, learn as much as you can about the kinds of deals they do, how long it takes them to conclude a deal, and so on. Most people love to talk about how they became successful, if you ask respectfully and don't waste their time.
Warning, warning! Think very long and hard before taking on a partner. If you do, it should be somebody who brings something to the party that you don't have, and it should be for one deal only until you see how things go.
Which brings us to how to set up your company. You should set up a separate corporate entity for each deal. An LLC is cheap and easy to set up. Land trusts are even better, because your name isn't personally in the public records, inviting some chump to sue you. The idea is to keep your personal assets off the table if something goes wrong. Talk with your attorney about it; he has forms that can have you done in a few minutes.
Finally, if you've made your plan, you have to work it to get anywhere. If you're not out there making any offers, you're never going to close any deals. No deals closed, no profits. If you're not making any profits, you're not in business, you're dreaming. Set a number of deals you're going to bid on per week and per month, and then get out there. Make it happen!
Understanding Real Estate Booms, Busts, and Bubbles
The basic laws of supply and demand can teach us many things when it comes to investing our money. For years, real estate has been one of the best markets in which to invest money and to realize a solid profit in a reasonably short period of time. Real estate though, much like any other market, will realize increases and decreases in both the supply and demand of properties. In this article, we will examine the life cycle of real estate booms and busts. We will also look at how real estate bubbles occur, and how to prevent yourself from being caught in one. And finally, we will look at how to profit from real estate in times of both boom and bust.
The Real Estate Boom Of The Mid-2000's During a major growth cycle in real estate prices, when demand for living space is outpacing the supply of homes, lots of people can make tons of profit buying investment properties to resell at a later date. With the record low interest rates of the past few years, America experienced a major boom cycle in real estate. Investors across the nation experienced record profits, as people began looking to upgrade their homes and to buy vacation homes for themselves.
All across the country, regional pockets surfaced where demand was outstripping supply in record volumes. New home builders got into the game building more new homes at record rates. Real estate investors got into the boom themselves, buying older properties and investing the money to improve the value of the homes.
In an average year, any home that goes on the market will be available for between four and five months, before the home sells. During the administration of Bush Sr., the average time for a home to be on the market was between five and seven months. During the recent real estate boom, under Bush Jr., many markets were experiencing a window of only a few days, between when the home went on the market and when a buyer was signing the contract.
What happens is that the buyer has been on the house hunt for so long that when they finally see a house they want, they offer to sign a contract immediately, to make sure that they do not lose out on another desired home purchase. This is a true "seller's market", where the seller holds all of the cards and the buyer is at the mercy of the seller and the market.
When demand is strong and supply is small, we see record turn-around times on home sales, and we see real estate prices increase at double digit percentage rates. This is what is referred to by some as "hyper-inflation" in real estate pricing.
Now, in every real estate cycle, we see growth and we see slow downs. The trick to hugely profitable real estate investing is to get in while the prices are rising at staggering rates. But, what often happens is that the late-comers in a real estate boom will pay exaggerated prices for a home, and then get stuck holding the bag when the bottom falls out --- when supply outstrips demand and prices for homes begin to drop.
This is what some people in the industry refer to as the "real estate bubble". If an investor is to be successful, he or she needs to get in and get out of the market, before the real estate "bubble" bursts.
How Real Estate Booms Occur At any one time, regional real estate markets are either in a boom or bust cycle. If you are wise and you watch trends in your market, you can see when a boom is ready to happen.
For example, let's say that an area or large city is seeing tremendous growth in the number of people moving there, but this same area lacks sufficient housing for those people. The trend is expected to continue as large companies are planning on opening new businesses in the area, which will bring in even more people looking for housing. If a real estate investor is aware that these changes are on the horizon, then that investor can make a smart move and purchase relatively inexpensive housing, make some home improvements, and then sell that house at the peak of demand and realize a huge profit on their investment.
Many Industries Profit In Boom Times When real estate boom cycles occur, more people than just the real estate investor will profit from the trend. Some of these other people include real estate agents, home improvement contractors, and building supply stores. People in these industries will reap great profits during the real estate boom cycle.
Imagine that you are a real estate agent that makes a profit from every home that you sell. The real estate boom is going to be especially good for you, because you may be able to get that commission twice --- once when the home is sold to the investor, and again when the investor sells the home. Real estate agents have learned that marketing themselves to these real estate investors is good business. Real estate agents will go out of their way to point investors to value properties, and some will even offer to reduce their commission ever so slightly, if the investor agrees to use the same real estate agent when the house is resold.
This makes good business sense for the real estate agents. Since real estate agents are operating off of a commission, a percentage of the home's sale price, agreeing to offer discounts to real estate investors means that the real estate agent may surrender a small amount of money the first time that the home is sold, but that he or she will more than make up for that reduction when the house is resold at a higher price by the real estate investor.
Home improvement contractors are also realizing that it is a smart decision to align themselves with real estate investors in these situations. When there is no real estate boom occurring, home improvement contractors are forced to rely on the occasional home improvement job they can acquire from home owners.
From a management standpoint, it makes good business sense for the contractors to work with a handful of investors that have purchased multiple properties. This is far easier to manage than to have one project per customer. This reduces the amount of time spent in customer service, accounts receivable, and reduces headaches in general. Building supply stores like Lowes and Home Depot also benefit strongly from real estate booms. Everyone profits when the real estate market is in boom cycle.
How To Spot A Real Estate Bubble Real estate bubbles occur when a market is overheated and people are still investing in property for profit, but the supply is on the verge of outpacing the demand for homes.
If you are smart, you can spot the bubble while it is developing. And if you can foresee the burst of the bubble, you can get out of the market with your profits intact.
Many individual investors make the mistake of seeing the signs of a bubble market, and not taking steps to avoid loss. If the time between the listing of a home and the sale of a home begins increasing, then that is a sure sign that the real estate market is cooling. Given that during a normal year in a normal market, the average turn-around time is four to five months from the listing of a home to the sale of that home, we have a solid marker for determining how soon we should expect the bubble to burst.
If the peak turn-around time was five days, and the current rate is now fifteen days, then you don't have much to worry about just yet. But, you really should keep your eyes to the horizon. If the current turn-around time is now three to four months, then the boom market has played itself out, and you can forget about the huge profits you could have made six months ago.
As the turn-around time begins to grow, the price pressures on sellers will start to accelerate. It is true that you could have sold the home for a $75,000 markup when the market turn-around time was five days, but now that the turn-around time is three months, you really should consider dropping your price and getting your profits, before you find yourself sitting in a market where your real estate investment is significantly over-priced.
Sometimes The Best Investment Is Aligning Yourself With The Right Third-Party
For the average joe, investing in real estate can be a big winner, but it can also force the investor to bankruptcy. Yes, the average joe can reap huge profits if they buy a home property for resell, but the average joe seldom has the connections or knowledge to know when the market is cooling down. Far too often, the average joe is the late-comer in a real estate boom cycle, and far too often they pay the exaggerated prices believing that they will reap the same profits the big investors have been taking. But the last man in usually takes the biggest losses, and for the average individual who is attempting to play in this market, they are the ones who can least afford the huge losses when the real estate bubble bursts.
No matter what role you find yourself in during a real estate cycle, it is important that you take full advantage the opportunities that are presented. If you take advantage of the laws of supply and demand and make smart alignments with third-parties, you too can profit from real estate.
Not all of us are cut out to be real estate agents. And not all of us are cut out to get into the home improvement business. But the opportunities in real estate are more varied than most of us realize. There are many opportunities out there for folks who want to profit from real estate, that do not require individuals to invest in property or to get a license to sell real estate.
There are plenty of companies out there who have a stake in the real estate industry who need people on the ground to help them to make money. One example is those big corporate real estate investors. Many of them need boots on the ground to find value properties to invest in. You can align yourself with these investors to help them to find property to buy, and these investors will reward you with a finder's fee. Along this same line of thinking, there are ample opportunities for individuals, who want to align themselves with third-party companies, to earn a nice living in real estate without being an investor.
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About the Author: Written by: Casey Moher - http://www.CashRetrievalSystems.com
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