WIAcademy EducateBlog

Mandatory Disclosure:
How much do sellers have to tell?

By Jacquelyn Lynn

Real estate disclosure laws are changing constantly, and even the experts don’t always agree on what a seller of residential property must tell a prospective buyer. Up until about 50 years ago, there was little, if any, legislation requiring sellers to disclose a property’s defects. If there was a problem and the buyer didn’t find out before closing, he was typically out of luck.

It’s a different world today. With the advent of the consumer protection movement in the late 1960s, we have seen thousands of state and federal regulations as well as court decisions that affect the seller’s responsibilities for disclosure in real estate transactions.

There are two primary reasons for understanding disclosure laws: One is so you do the right thing when you are selling; the other is so you know what to ask when you are buying. Laws vary widely by state, which is why you need to consult with an attorney or other expert knowledgeable in this area to make sure you are in compliance with laws that apply to you. Here are some general issues to keep in mind when it comes to disclosure:

Disclose all known serious defects. If you know of dangerous wiring, a leaky roof, flooding basement, termites, rotting wood, malfunctioning heating or air conditioning units, or any other defect that could lead to extensive and expensive property damage, personal injury, or death, disclose it. Disclose environmental hazards such as mold, mildew, lead paint, asbestos, radon, and so on. If you’re not sure if a particular defect rises to the level of “serious,” disclose it anyway. Failing to do so could leave you open to charges of attempting to intentionally mislead a buyer.

Disclose other material facts. Material facts are anything, including defects, that could affect the buyer’s decision to purchase or the price and terms of the deal. For example, if the home had been a crime scene or if a death (even a death from natural causes) occurred on the property, you should disclose that. One caveat when it comes to this: if the death was due to AIDS, check with a real estate lawyer before making the disclosure because in some states, AIDS falls into a protected class and the disclosure could subject you to discrimination claims.

If you know of any previous activity in the house that could affect future residents, disclose it. For example, a Colorado law that became effective in 2007 requires sellers of houses, condos, apartment buildings, and hotels to certify that the property has never been used to manufacture methamphetamine or, if it has, that the property has been cleaned up according to state standards. Many states require that purchase agreements and leases contain a notice that a database with information about registered sex offenders may be accessed by buyers and tenants.

Disclose external issues. Tell buyers about any external issue that may affect the property, such as natural hazards, flood zones, earthquakes, noise, various types of pollution, and any other nearby hazard. If you are aware of potential zoning changes of either the property you are selling or of adjacent properties, or of developments such as roadways or other construction that might impact the property, disclose that. Disclose the presence of easements, encroachments, or boundary disputes. It might seem absurd to suggest that a California property owner make a disclosure about earthquakes or that a seller of a home on a golf course warn about possible damage from errant golf balls, but in our litigious society, it’s better to disclose and be safe (though you might feel silly) than to fail to disclose and risk being sued.

Of course, you can’t disclose something you don’t know, but don’t count on ignorance as a defense. Some states require owners to perform certain investigations, so be sure you know what your legal obligations are.

Avoid puffing. “Puffing” is making statements that sound good but contain no facts. While statements such as “great neighborhood,” “quiet streets,” or even “super deal” are common in advertisements, they should not be offered or accepted as disclosure.

A real estate broker, an attorney, or your state department of real estate can provide you with a complete list of the disclosures required in your state. If you disclose all material facts upfront, the buyer should address them in the purchase offer and will have no contractual right to negotiate them later.

Perhaps the best rule for sellers to follow is this: If you would want to know about the issue before you purchased the property, tell the buyer before you finalize the negotiations.

Jacquelyn Lynn is a freelance writer and author of The Entrepreneur’s Almanac.

Posted 11:12 AM | Permalink | Comments (1)

Real Estate Fundamentals:

Hard Money Isn’t Necessarily Hard to Get

If hard money sounds like borrowing the hard way, relax. The term is used primarily in the United States and Canada to describe a specific type of asset-based financing where the loan is made based on the value of the real estate with little or no consideration given to the creditworthiness of the borrower. [An increasing number of hard money lenders are asking borrowers to complete credit applications and taking credit history into consideration when making a lending decision, but their primary consideration is still the collateral being offered.]

Hard money loans are designed to be short-term and are typically issued at interest rates much higher than conventional real estate loans. They are almost never made by a commercial bank or other traditional lender. Today’s hard money lenders are usually professional investors who fill a need in the market left open by conventional lenders. In fact, many real estate investors would not be able to operate without their hard money sources.

Because hard money loans are not based on traditional credit guidelines, they are riskier for the investor, which justifies the higher interest rates and points. But for an investor who needs money quickly to close a deal, the cost may be worth it. Another challenge for hard money borrowers is that loans are typically made on 50 to 65 percent of the property’s value. Real estate investors may offer additional property as collateral to obtain a larger loan amount.

Conventional lenders are bound by corporate policy as well as federal and state regulations, so they often don’t have much room to be creative when structuring loans. Hard money lenders pretty much make their own rules. They’ll finance properties conventional lenders won’t touch, including distressed or non-conforming properties. They may or may not require monthly payments and may be willing to structure your repayment plan based on how you expect the property to perform. They set terms that make consumers gasp, but investors know it’s not the cost of the money that counts, it’s the availability and timing of the funds and the overall profitability of the deal.

Finding and working with hard money lenders

Finding hard money lenders is not difficult. You can search for them on the internet—just enter “hard money lender” in any search engine, and you’ll get thousands of results. Of course, not all hard money lenders have websites and many prefer to work only in their local area where they can personally meet with borrowers and see the property. Those lenders will often run ads in local papers, including the real estate section of the daily paper and weekly shoppers. Look in the classifieds under “money to lend” or similar categories. You may also be able to find hard money lenders through a mortgage broker.

It’s a good idea to establish relationships with these funding sources before you need them so you can move quickly when you find a deal. Many hard money lenders started out as real estate investors, so they understand and welcome your preliminary inquiries.

Remember that any given hard money lender does not have unlimited funds. They may have to occasionally turn down a deal they would otherwise do because they don’t have the cash available. That’s why you need multiple hard money lenders in your funding source stable—if one can’t do your deal, you can quickly move on to another.
When you take a deal to a hard money lender, put together a complete presentation that not only shows the complete details of the property and loan proposal, but demonstrates your own professionalism as well. Include a property valuation, financial analysis, market information, photographs, and information about your own experience that will make the lender feel confident you’ll repay the loan. See “Packaging Yourself for a Loan” (Wealth Intelligence Network®, June 2007) for more advice on how to put together a winning loan package.

Finally, before you close on a hard money loan, have a real estate attorney review your loan documents to make sure you are protected and that you can’t lose the property for any reason without the lender using traditional procedures that would require due process and a court judgment.

Finding the right property is important, but it takes money—either your own or someone else’s—to close the deal. In Keys to Creative Real Estate Financing, you’ll learn virtually every real estate financing strategy there is, including working with hard money lenders. For more information about advanced training through Wealth Intelligence Academy, visit www.wiacademy.com.

By Jordan Taylor

Posted 11:06 AM | Permalink | Comments (0)

Foreclosure strategies:

Short Sales Can Lead to Tall Profits

It’s a scenario that could happen anywhere: Joe and Mary bought their house for $250,000, put just five percent down, and took out an adjustable rate mortgage. Three years later, the market is soft and overall real estate values have declined. Joe and Mary’s house has a fair market value of $230,000, their loan balance is $225,000, and their mortgage has reset—and now they can’t afford their payments.

Can you help them? Possibly—if you can negotiate a short sale with their lender.

One of the most effective foreclosure strategies, a short sale is when a lender accepts a payoff of less than the amount owed to avoid a foreclosure, or, if the foreclosure has already occurred, to unload the property and avoid greater losses. Using the example of Joe and Mary, consider that if they tried to sell through a traditional real estate agent, they’d have to come up with cash at closing to pay the broker’s commission and complete the deal. Using a short sale strategy, you can go to the lender and offer $170,000 as payment in full for the property.

If the lender accepts, everybody wins. Joe and Mary have avoided foreclosure and gotten rid of a huge burden. The lender has avoided the cost of the foreclosure, the damage of having a bad loan on its books, and the trouble of having to take possession of and then sell the property. And you have purchased a property with an automatic $60,000 in equity.

While it’s possible to do a short sale after the foreclosure when the bank actually owns the property, it’s best to use this strategy when the homeowner has received a notice of default but before the actual foreclosure. Lenders will rarely, if never, negotiate a short sale until the notice of default has been recorded. But at that point, the lender can be very motivated to give you a handsome discount to take a problem off its hands.

Properties that are over-leveraged (with mortgages exceeding the market value) and properties with multiple mortgages are prime candidates for short sales. Remember, second and third mortgages are typically wiped out at a foreclosure auction. Those lenders would rather have something than nothing and will usually be willing to negotiate with you. Of course, cosmetically distressed properties are also ripe for a short sale because lenders don’t want to get in the fix-up business.

How to do a short sale

The first step in the short sale process is to reach an agreement in writing with the homeowner. Check with a real estate attorney to determine exactly what documents you need in your state to move forward with the process.
Next, contact the lender and ask for the short sale or workout packet, which will probably be just a page or two of instructions that will tell you exactly what you need to do to make a short sale offer to that particular lender. While the information lenders request is similar, details and presentation format will likely vary. It’s important to follow the lender’s instructions precisely.

The lender will probably request a substantial amount of information on the homeowner, including a letter explaining why he has not been making his mortgage payments, bank statements, pay stubs, a copy of the real estate purchase and sale agreement, etc. Put this information together and return it to the lender as quickly as possible. Remember, the foreclosure clock is ticking.

The next step in the process is the broker price opinion, or BPO. This is an alternative to a full appraisal and is typically conducted by a local licensed real estate professional. The BPO is the secret to a successful short sale—and you want it as low as possible. Remember that real estate agents are conditioned to go for the highest appraisal possible, but you need for them to see the situation through your perspective. Never ask the person doing the BPO to do anything illegal or unethical, but let them know that you are working on a short sale and help them see the lower side of the market conditions that you want to present to the lender. The lower the BPO, the better your chances of getting the discount you want.

After the BPO is turned in, the lender will either reject or accept your short sale offer. If it’s rejected, you can renegotiate and even request a second BPO. If it’s accepted, congratulations—you’ve solved a problem for the homeowner and the lender, and made money for yourself in the process.

By Jordan Taylor

Posted 11:02 AM | Permalink | Comments (2)

I saw an online news headline that read:

Housing Bust Gets Scarier
Former NBA Star in Foreclosure

Oh, please! That an irresponsible professional athlete managed to make and squander millions of dollars has absolutely nothing to do with the state of the real estate market today.

Don’t buy into the media doom and gloom. Are there a lot of foreclosures out there? Yes, and that means opportunities for foreclosure investors.

For savvy investors, this market is not scary at all – it’s exciting and full of opportunity.

What do you think when you see headlines like the one above?

Posted 01:36 PM | Permalink | Comments (0)

A real estate investor in Flagler Beach, Florida didn’t know a computer problem at Fifth Third Bank had dumped bad information on his credit file, sending his credit score into the basement, causing him to lose deals because he couldn’t get financing, and causing his line of credit with another bank to be cut off. (See “Real-estate investor sues Fifth Third Bank over computer error”)

The problem, which Fifth Third says occurred when it was consolidating with another bank, was not disclosed to customers unless they complained—and most didn’t complain until they applied for a loan and were turned down.

Real estate investing can be a fast-moving business. While it’s possible to delay closings while problems are worked out, not every deal will wait. That’s why it’s important to keep an eye on what’s going on in every aspect of your financial life—especially in your credit file.

Posted 06:39 AM | Permalink | Comments (0)

Are mobile homes really magnets for tornados? No. But they should be magnets for smart real estate investors.

Manufacturing housing continues to be a popular option for consumers across the country, and what makes them appealing to consumers is exactly what makes them a profitable choice for investors: They are less expensive than site-built homes while offering comparable amenities.

If you’re considering mobile homes as an investment strategy, you may want to read an article that recently appeared in the Orlando Sentinel: “Despite 2007 Orlando-area tornadoes, mobile homes still popular.” Then check out our advanced training on Manufactured/Mobile Homes & RV Parks. An online course begins April 1.

Posted 09:00 AM | Permalink | Comments (0)

Here I go again, getting and sharing advice from the comics.

More than a year ago, I wrote about a Baldo comic strip that was quite profound in its message. Read that post.

A recent Louann comic strip had a different, but equally important message. Louann’s brother Brad goes to his father for advice. He says, “I wanna ask Toni out. But I’d be crushed if she said no and terrified if she said yes. So I’m like, paralyzed.”

Dad’s reply is: “Hm. Well, I’ve found that ‘crushed’ and ‘terrified’ pass, but paralyzed goes on and on.”

If you are not taking action because you don’t know what will happen if you do, your situation will never change. Don’t be paralyzed by fear. The only way to achieve your goals is to do something.

Posted 02:12 PM | Permalink | Comments (0)