« June 2008 | Main | August 2008 »
One of our students in the Norfolk, VA, area has started a Wealth Intelligence Academy group on meetups,com. She wants to get together with like-minded folks to share ideas, network, learn, and more. Here's the link to her page if you want to check it out: http://realestate.meetup.com/1456/. And if you decide to start another group in another area, let us know and we'll help spread the news.
A recent AP news report said that some Atlanta area real estate agents selling REO foreclosed properties are being held liable for code violations by city inspectors. According to the AP report, several agents have been taken to court and fined.
If you are investing in foreclosures or own properties with code violations, it’s a good idea to move quickly to correct the problems. If you are cited, don’t ignore the notice. Contact your code enforcement department and let them know you are working on the problem.
Surviving a Bear Market
By Lance Garvin
Whether you are a seasoned investor or just getting started, the question “What do I do in a bear market?” will most likely arise. Some of you may have heard that money can be made in any type of market environment—up, down, or sideways. In this article, I want to briefly talk about a few options you have in a down market that will help you protect your money. Some of them can even make money.
1. Liquidate and take a cash position.
If you are thinking that the stocks you currently own are not going up any further, then it is time to close out your positions and hang on to your hard-earned cash. There is not much upside to idle funds, but having them available to do other things, such as paying down debt or even saving them for a rainy day, will help you stave off the insomnia often facing bulls during bear season.
2. Diversify.
The old adage “Never put all of your eggs in one basket” applies here. During bull markets, equities are a great place to be. During bear markets, however, investors are cursing the word equities. Allocating various percentages of your portfolio among stocks, exchange-traded funds (ETFs), bonds, cash, and other assets will prevent all of your eggs from breaking should one of your baskets take a beating.
3. Buy insurance on your stock.
If you own something of value, like a home or a car, chances are you own insurance on it. Stocks should be no different. Many investors have equity portfolios worth even more than their homes and cars, yet they fail to consider protecting these assets. Usually called a “protective put” or a “married put,” this type of option can give you insurance on the stocks you own and offset your losses while allowing you unlimited profit potential on these long positions. If you are unsure about the near-term, downside-market risks on your long positions, this protective measure will still allow you to play the potential upside while protecting you from the downside.
4. Sell, sell, and sell.
As an investor you can either cut your losses as stocks are heading down or sell short (sell without owning) at a certain price and then buy the stock back as a lower price after it has fallen further. This strategy, called “shorting,” is not always readily understood by those new to the stock market. A more aggressive approach, it is not recommended for everyone but can be a great tactic when used correctly with protective measures. Although the topic of shorting extends far beyond this article, selling short can be a tremendous play as stocks are falling—especially since stocks can sometimes fall faster than they rise during times of fear in the market.
5. Invest in contra market funds or short funds.
Some investors have the pleasure of making money as stocks go down. Contra market, short, long-short, or bear funds are all types of funds that sell short, buy “put” options, or utilize some other approach to gain value as stocks lose value. You can purchase or go long with these funds instead of directly taking on the risks of shorting stock or playing options. The downside to these vehicles is they sometimes require a minimum investment amount, and the fund managers will usually charge an annual fee or an assets-under-management percentage, normally around two or three percent. If looking into one of these types of funds, be sure to find out all the fees involved beforehand.
6. Invest in real estate.
As in the stock market, there are a myriad ways to get started in real estate. One of the biggest reasons people do not is because of the perceived complexity. Sure, dealing with land and development can be tricky, but you can become a real estate investor on a very simple level if you know how. Owning a piece of property can bring profits through positive cash flow (when the income from the property exceeds the costs on the property), appreciation from repairs and upgrades on the property, or even increases in market value. Owning real estate can also allow you to deduct interest paid along with other expenses come tax time.
When all is said and done, first check with your broker, tax advisor, mentor, or coach to see which strategies might be right for you. Always take into consideration your risk tolerance, as well as your overall goals, when making decisions about investing. And remember, protecting the money you’ve earned is your number one objective. Making money when others are losing it—that’s even better!
Lance Garvin is a veteran trader in the stock market who has been a fund manager for two different hedge funds and held the NASD series 63 and 65.
Title insurance provides the property buyer and/or the mortgage lender protection against losses resulting from unknown defects in the title to a property that occur prior to the closing of a real estate transaction. Unknown defects in a title, such as any outstanding liens or encumbrances, can result in additional costs in the future or even invalidate a buyer’s right of ownership in the property, and might also invalidate the lender’s security interest in the policy. Title insurance policies will cover the insured party for any covered losses and legal fees that might arise out of such problems.
Nearly all lenders require that property buyers purchase the lender’s title insurance policy for an amount equal to the loan. The lender’s policy will remain in effect until the amount financed has been repaid, the property is resold, or until refinancing has occurred. The lender’s policy only covers the lender’s loss and does not protect the buyer from losses arising from defects in title.
An owner’s policy may be purchased by either the seller or the buyer. The policy is issued to the buyer and remains in effect as long as the buyer owns or maintains an ownership interest in the insured property.
A title policy is usually paid for with a one-time premium that is handled at the closing of the real estate transaction. Premium discounts might be available if both owner’s and lender’s policies are purchased from the same title insurance company.
Source: National Association of Insurance Commissioners
Are You Ready to Close?
Almost anyone who has ever purchased real estate can tell stories of problems at closing that ranged from minor glitches to massive headaches—and sometimes even resulted in the deal falling apart. Your closings will go more smoothly if you understand what you need to do and prepare ahead of time.
You find a property, you complete your due diligence, and you negotiate a deal that both you and the seller are satisfied with—but there’s still one more step in the process: the closing. There is no circumstance where the old saying, “the job’s not finished until the paperwork is done” is more appropriate. A real estate closing is where you complete the transaction, where the buyer pays the money and the seller takes ownership of the property. And though it sounds simple, there’s a lot of paperwork and it needs to be done accurately. What’s more, no two closings will ever be exactly alike. That’s why real estate investors need to understand everything involved in the closing process and what they need to bring to the table whether they are buying or selling.
Most real estate closings are actually finalizing two transactions: the sale of the real estate and the mortgage loan (or loans) if you’re financing the property. As the buyer, you’ll have to prepare for and do the paperwork for both.
Typically, the seller is responsible for obtaining for a title search and title insurance for the buyer. Sellers usually pay for this, although it can be negotiated. Sellers are also responsible for making any agreed-on repairs to the property and arranging for the buyer to have a final walk-through.
Buyers are responsible for obtaining title insurance for the lender. They are also responsible for insuring the property to at least the minimum requirements of the lender. Buyers also schedule all property inspections and review the reports.
Of course, just about everything involved in a real estate transaction is negotiable. So even though it’s traditional for a seller to do and pay for certain things and a buyer to do and pay for other things, if you both agree, you don’t have to do what’s customary.
Before the closing
Once a deal is finalized, the next step is to schedule the closing. Be sure you allow enough time to complete all the pre-closing tasks but that you set the closing date before your lender’s commitment or any interest rate lock expires. Also consider how the closing date might affect your cash flow based on issues such as when down payments are paid, prorated items such as property taxes and homeowner’s association fees, and, if you are buying an occupied rental property, the transfer from seller to buyer of the prorated rents and deposits.
Once the closing date is set, review your documents. Make a list of what you need to do to meet the conditions of your loan offer, such as arranging for a termite certificate, following up with the seller to make sure specified repairs are made, having the property inspected, obtaining insurance, and securing title services. Not all lenders require the same things on every deal, so be sure you know exactly what you need to do and how it must be documented so you can get it done before closing.
A few days before the closing, carefully review your HUD-1 or final closing statement. Check all the numbers; be sure that the interest rate and other fees are accurate, you’re getting all the credits due you, you’re paying only what you agreed to pay and that the seller is paying what he agreed to pay, and all the lender, title, and escrow fees are accurate and what you agreed to. Take the time to check every math calculation—mistakes happen, even with the most conscientious of document preparers.
You should also review the preliminary report or guarantee of title insurance. Check to see if the legal description is accurate and that any liens or encumbrances are properly described. Check with the title agent or attorney handling the closing to be sure that the documents correctly reflect the way you want to take title to the property.
Finally, inspect the property just prior to closing. Be sure it’s in the condition you are expecting and that the seller has met all the conditions of the purchase contract.
At the closing
A well-run closing should take about an hour and will include a lot of documents that need to be signed. Though most will be standard, you should read them all.
The mortgage documents you can expect to see, read, and sign include the truth in lending statement, which lists the interest rate, annual percentage rate, amount financed, and the total cost of the loan over its life (check and double-check these numbers before signing); an itemization of the amount financed; a monthly payment letter, which breaks down your monthly payment into principal, interest, taxes, insurance, and other monthly escrows (check these numbers as carefully); the note itself; and the mortgage. There may be other documents required by either your state or the lender. Read each one and don’t allow yourself to be rushed in to signing anything you haven’t carefully reviewed and completely understand.
The real estate documents you’ll have to sign include the HUD-1 or disclosure/settlement statement (even though you’ve already reviewed this document, do it again); a warranty deed, which is the instrument that transfers the title of the property; proration agreements; tax and utility receipts; a name affidavit certifying that you are who you say you are (bring photo ID); a statement acknowledging that you have seen all the reports regarding the property; and a search or abstract of title, which gives a list of every document that has ever been recorded about the property.
You should be told prior to the closing how much money you’ll need to bring. Don’t bring cash to closing; make it a cashier’s check.
At the end of the closing, you should receive the keys to the property. Congratulations!
Jacquelyn Lynn (www.jacquelynlynn.com) is a business writer, speaker, and author of The Entrepreneur’s Almanac.
Finding Farming Areas, Driving for Dollars, and Cultivating Our Market
By Mich Christensen
What is a farming area, how do we find it, and what do we do when we find it?
When we decide to become an investor, we go through the process of getting an education, gaining access to current information, and then implementing what we have learned. Here are some of the first steps in finding our “farming areas,” and once we find them, what to do with them. As beginners, we may start out with one or perhaps two areas that we may be interested in farming. Then as time and experience allows, we expand into additional areas.
As investors, we are like the traditional farmer who designates an area for a particular crop, prepare the soil, plants the seeds, then waters and fertilizes until it’s time to harvest—only for us, our crop is houses and our harvest produces money. We find and identify various areas which suit our investment style, and then we choose a few to farm. We identify these areas and get familiar with what is there (find the land and till it). We see what the areas have to offer, do our due diligence on the neighborhoods and properties, and then we make our offers (planting the seeds).
What is Driving for Dollars?
How do we find our farming areas and properties? We may take an area, such as a county, and split that up into quarters (northeast, northwest, southwest, and southeast). This can be accomplished within a city as well. After we have split it into manageable areas, we start familiarizing ourselves with the different areas within that section. We can now determine several things. What type and kind of area is it? Is it low income, working income, or moderate income? How much are the properties in these areas—what are sellers asking for these types of properties and what have these types of properties sold for? Once we have discovered this, we can move forward determining exactly which areas we may want to work.
Cultivating Our Market
The next step is to cultivate those areas and plant the seeds. A family member or friend that is a real estate agent can come in handy in this process. Or you can go into any real estate office that has a Realtor to obtain an MLS (multiple listing service) one-liner, which is a report containing just one line information about properties that fit your specifics. Give a real estate agent with MLS access the criteria and parameters of the types of properties to look for, and they can print that basic one-liner list for you. This is done either by city, zip codes, or county areas. For example, you might ask for properties on the market from $0 to $60,000 in a defined area. The MLS one-liner will provide the following information on those properties:
MLS number
Street address
City
How many bedrooms
Baths
Garages
How many square feet of living area
Price
Days on the market (sometimes we are not able to obtain the days on the market, however, if it is supplied, it gives us an indication of how long it has been on the market and perhaps how motivated the seller may be)
In investing, cultivating means that we canvas our farming areas to keep track of what is happening in that area, what is new, and where it is going. We cultivate by getting to know the different areas, the people, and the properties. We make offers and then complete the contract, reaping what we have sowed. Sometimes we will keep this property and rent it out, sell it, or perhaps just wholesale it to someone else, possibly a rehabber, a wholesaler, or an investor.
Cultivating is not just looking at an area, but identifying what is happening there to bring forth any production of crops (in our case potential properties). Are there any—or even many—properties that are boarded up, abandoned, vacant, or ugly? Have you found some properties that need work and are neglected? Do you know how we identify them? Look carefully. Look for window treatments, such as curtains. Have they been moved as you have driven by in that last week? How about garbage day—were the trash bins out? If not, the occupants may be on vacation—or they may have moved. Are there newspapers on the porch and are they starting to pile up? How about walkways or thoroughfares in the grass? If you see trash in the yard, is it new or weathered? If it is weathered, it could be that the person who may live there is away, an invalid, or elderly, or it could be a vacant property. Maybe the owner has passed away or is living in a nursing facility.
You can always knock on the neighbors’ door and inquire about the house next door. Sometimes they will give you a lot of information. Other times they will be tight-lipped. Or you can just knock on the door of the property itself and see if anyone is home. If they are, just let them know that you are an investor looking for properties in the area. They might tell you that they are, or are not, interested in selling. If no one is there, you might walk back to the side of the building and see whether the electric meter is running. Remember where you are—if you are in the city or out of the city limits—as this may affect how long the electric company may leave the meter when a property is vacant. Some cities will take the meter out if it has been vacant more than three months. You could even call the electric company and see what their policies are for vacant properties to find out how long they might leave the meter in the box.
By cultivating your market, you’ll identify potential deals that fit the investment strategies you want to use. And as you increase your cultivating skills, you’ll increase the opportunities you find.
Mich Christensen is a real estate coach for Wealth Intelligence Academy, Inc.
A report from the Center for Media Research reveals some interesting facts about the wealth of Americans. The report says that a new segment of wealthy Americans has emerged in recent years:
“Known as the New Mass Affluent, this new crop of wealthy Americans were born of the post-war boom, raised in middle-class suburbs and benefited from college educations and years of economic prosperity during the bull market of the 1990s. Today they're the empty-nesters converting their kids' old rooms to home gyms, the well-heeled shopping at Costco and the workaholics fiddling with their BlackBerry on the express commuter train.”
These people are also investing and could be ideal financial partners for real estate investors.
Click here to read the full post by Jack Loechner (you have to sign up, but the account is free), then look around at the people who know who fit the demographic he describes. You may have some funding sources right in front of you that you never thought about before.