How to Avoid Real Estate Scams and Fraud

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Whenever large amounts of money change hands, encountering scams or fraud can be a risk. Real Estate is often a target because uninformed buyers do not use the safeguards that have been built into the purchase process to help protect them.

I recently read of a scam where a guy would find empty foreclosed homes, break in, change the locks, and put up a “For Sale by Owner” sign. He would then meet with prospective buyers and offer to carry the financing with only $5,000 down. He would pocket the down payment money and do the same thing again a few more times before moving on to “sell” another house that wasn’t his to sell.

Caveat Emptor is Latin for “buyer beware”. You must remember that an ounce of prevention is always worth a pound of cure. No one except attorneys win when things go through the legal system. To help avoid potential pitfalls in purchasing a home, start by using a licensed agent to represent you. They can guide you to the best licensed and insured escrow and title insurance companies to help you locate a licensed home inspector and licensed appraiser. These professionals can help assure your transaction goes smoothly and your best interests are protected.

Escrow companies gather documents from the buyer and seller and hold funds in a trust account to disburse as instructed by the purchase contract at closing. They are also responsible for preparing the title for transfer and recording it. The escrow officer will not allow the escrow to close until all documents are received, reviewed and signed. In some states, attorneys specializing in real estate transactions oversee the closings.

Title companies review the chain of title and check for any liens, judgments, or encumbrances that need to be cleared before the title can transfer. They will issue clear title and defend you if a lawsuit is brought by another claiming an interest or ownership in the property. Title companies work closely with escrow officers to ensure a smooth transaction.

Home inspectors are an important part of the purchase process. They are hired by the buyer to thoroughly inspect the property for functionality of all appliances and systems, such as heating and air conditioning (HVAC), water heaters, roofs, etc. Their report is often used to have the seller correct noted deficiencies before close of escrow, or to make an allowance for these repairs in the purchase price.

Appraisers determine the market value of the property for the buyer and lender. They use a variety of methods to determine value, the most important of which is recently sold “comps” or comparable sales in the local area. Appraisers must be licensed and are paid for by the buyer, however they are now regulated by a third party Appraisal Management Company and are chosen at random from a Rolodex so the lender cannot chose who appraises the home. In fact, the buyer’s agent cannot communicate with the appraiser once the appraisal has been developed and sent to the client.

When you use a conventional lender to finance a piece of real estate that you are buying, they require you to use these 4 professional services to ensure they are protected on the property that they are lending you money to purchase.

When you pay cash or use seller financing on a property, you are not required to review anything or use any of these services. However, the only way to assure you have a great investing experience no matter what is to go through the proper steps of being a wise investor. No matter your level of investment experience, the Marshall Reddick Real Estate Network (MRREN) always encourages our investors to follow these simple steps. The cost of these services is minimal compared to the protection they provide.

When you take the time to do things correctly, you will have peace of mind since everything is being handled properly by professionals.

Happy investing!

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BIG News in the Bond Market: Where are Rates Headed?

The Fed announced this week that they will continue to taper 10 Billion per month on their Quantitative Easing (QE) bond purchasing program and will purchase 55 Billion in the next 30 days down from 65 Billion last month. We anticipate this will continue month over month as Unemployment (despite the bad weather) has continued to improve and world economic issues (Global issues with Russia and Ukraine which have been pressuring US and other world markets) are expected to improve in the coming months. Remember, bad domestic and global economic news generally causes rates to go down, and good news causes rates to go up.

The Fed also announced it will begin raising its Federal Fund rate (rate at which the Federal Reserve lends money to banks) within 6 months after the QE bond purchasing program ends. This is HUGE news for rates as the previous census was they would not raise the FED FUND RATE for CONSIDERABLE time or even within our own lifetime after the QE bond purchasing program ends. Yesterday, the bond market sold off nearly 100 Basis points (1.00%) and rates went up nearly .25% in one trading session (15 and 30 year fixed) following the news.

To put QE in perspective: Before the recession in 2006, the US Federal reserve held 700 Billion in mortgage backed securities. Today, the fed holds nearly 2.1 trillion of all US mortgage debt and the number will continue to rise month over month until the QE bond purchasing program is finished (estimated in November of this year).

There will be a tipping point where buying mortgage bonds will no longer be a way to artificially keep rates low as the fed will own nearly all US mortgage debt and the QE bond purchasing program will have run its course (bubble in the bond market). This tipping point could hit as early as June of this year and already many large institutions are hedging themselves for a higher rate environment before QE is over.

We don’t know if this will happen before the Fed completes its QE bond purchasing program but all economic indicators are pointing at significantly higher rates by late summer. Rates on all fixed products (10 year, 15 year, 20 year and 30 year fixed loans) are still are still at historic lows but not for long.

If you would like to speak to an MRREN qualified mortgage consultant about qualifying for a new purchase or refinance, call us at 949-885-8180 or email info@mrren.com

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Understanding Your HUD-1 Statement

Congratulations! You are in the exciting process of closing on a property and building your net worth. It is important to know and understand several key articles related to the sale.

HUD stands for Housing and Urban Development. It is the document used by escrow companies to compile all the figures necessary to close the sale. It is the final document escrow sends to the lender in order to fund the loan. Included in the HUD statement is a list of all costs associated with the transaction.

Page 1 is a summary of the amounts paid by borrower and amounts due the seller. The left hand column is the borrower’s summary and the right hand column is the seller’s summary. The bottom line #303 shows the amount due from buyer and line #603 shows the amount due the seller after costs.

Page 2 “Settlement Charges” is a breakdown of all costs:

  • Section 700 shows the total real estate broker fees, who pays them and how they are split.
  • Section 800 shows fees associated with loan such as appraisal and origination fees.
  • Section 900 shows fees required by the lender to be paid in advance, like prorated interest or insurance.
  • Section 1000 shows reserves to be deposited with lender for taxes and insurance.
  • Section 1100 shows the title insurance charges and who pays them.
  • Section 1200 shows recording fees and transfer charges and who pays which.
  • Section 1300 shows additional settlement charges and who pays them.
  • Section 1400 shows the total settlement charges for the borrower and seller.

Page 3 compares the Good Faith Estimate to the actual HUD-1 charges and recaps your loan terms such as amount of loan, length of term, interest rate and fees.

Page 4 is the final signature page where you acknowledge all the above is accurate. It is important that you read the HUD-1 statement carefully and understand it fully as it’s the last document requiring signature before funding and recording.  You can request to have your lender send you out a copy of your loan documents 3 or 4 days before closing for review. Your lender or escrow officer should be able to answer any specific questions you have regarding your loan documents before signing.

It is always a good idea to read all contracts thoroughly before you sign.   It is particularly important that you read and understand your purchase agreement and HUD-1. Loan disclosures are routine and can stack very high, but these two documents are essential to review carefully.

Your MRREN Real Estate Advisor is available to help answer any questions you have. If you do not currently have an advisor assigned to you, call us at (949) 885-8180 and we can appoint someone dedicated to helping you succeed every step of the way!

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Don’t Quit Your Day Job!

It’s a fairly common misconception that one can simply quit their day job, become a full time real estate investor and get rich quick. The late night infomercials say it can be done easily, so why not you too? Real estate investing can be a get rich program if done right, but it can be a get poor program if done wrong.

Most of us spend years perfecting our trade or craft. Life is about learning, making mistakes and always improving. Investing is about planning for your future and wisely investing 10% to 20% of your earnings into safe, secure vehicles that produce a good return. Investing is not meant to take the place of your job, it is meant to supplement your income and to secure a comfortable retirement. Only over time will income from investments replace the income from your job.

Quitting your day job prematurely will actually hinder your ability to invest. Conventional lenders look for at least 2 years of employment history in the same or similar field. Without the ability to borrow and leverage your investment dollar, you lose the ability to maximize your return on investment. Paying cash becomes your only option, and your path to achieving wealth becomes an uphill climb.

Many of the real estate “gurus” paint an unrealistic picture of the path to wealth in real estate. In most cases the only one who gets rich quick is the “guru” himself, selling you his surefire path to wealth DVD for only $$$. Have you ever heard the expression: “If it sounds too good to be true, it probably is?” If someone is telling you that you can quit your day job after investing only $ for their “proven success program,” you should change the channel and put your credit card away.

Be the best you that you can be whether a doctor, lawyer, craftsman, teacher, etc. Discipline yourself to live on 80% or less of your take home pay. Save money by paying yourself at least 10% first of what you make and investing it wisely. Look for investment vehicles with strong track records of steady growth. You will need multiple streams of income to retire well.

The income from your job is the critical ingredient to help fuel your investments. Without steady pay you are forcing yourself to make quick and desperate decisions. Even if you have plenty of money saved, that won’t matter when a lender goes to qualify you for financing. It’s not he or she who makes the most money that wins; it is he or she who saves and invests it wisely that wins.

Quote of the week: “You are worth what you’ve saved, not the millions you’ve made.”

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Introducing the New Financial Evaluator from MRREN

It’s fast, it’s fun, and easy to use! Our new mortgage calculator with built in cash flow forecasts and annual Cash-on-Cash Returns is here! You can even find out your 10 and 20 year projected profits based on average appreciation rate, annual cash flow and principal pay down. THIS THING ROCKS!

All of the blue cells are customizable to your property. To start: click on the blue (Property Address) bar and fill in the address of the property you are considering.

Line 9: (right side corner) enter the square footage. This will auto-calculate the price per square foot when sales price is entered.

Line 10: Enter sales price.

Line 11: Enter percentage down payment. Note: Conventional down payment guidelines allow for a 20% down payment on SFH’s unless you have 4 or more mortgages in which case 25% down is the minimum. For 2-4 unit properties, 25% down is the minimum unless you have 4 or more mortgages in which case 30% down is the minimum.

Line 13: Enter interest rate on loan (CLICK HERE to contact an MRREN approved lender to find out your rate).

Line 14: Enter term of loan in years (We suggest 30 year fixed rate loans).

Line 20: Enter projected monthly rent (Be conservative!)

Line 22: Enter vacancy rate. Note: We have found that 8% is a safe number to use as this allows for one 30-day vacancy every year. This will vary based on the market you are buying in. Consult an MRREN advisor for more details.

Line 27: Enter annual taxes.

Line 28: Enter insurance quote (Call our MRREN approved insurance agent Stan Dreckman for a quote: 562-594-6541 x15)

Line 29: Enter maintenance factor. Note: This will vary based on the age of the property, condition and quality of property management. Better screening of tenants usually means less maintenance issues! We typically use 8% unless the property is new or newer which we sometimes allow 4%-6% for, but we suggest using 8% just to be safe.

Line 30: Enter property management percentage. Use MRREN approved property managers for reduced rates!

Line 31: Enter HOA fees if any.

Each time you change a value in a blue area, it auto-calculates a change in an adjacent cell value. When completed, this gives a clear picture of your investment. It is particularly helpful when comparing one potential investment property to another.

You can download the MRREN Investment Analysis in Microsoft Excel NOW by clicking this link: http://www.mrren.com/analysis.xls

We hope you enjoy our efforts! Call one of our Real Estate Advisors for professional help when evaluating properties and comparing markets. We’re here to help at: (949) 885-8180

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Last Chance for Mortgages Below 5%?

On January 30th, Jerry Kronenberg from MainStreet.com posted the following article on Yahoo Finance:

Last year’s 3.5% mortgage rates are long gone — and experts say consumers who hold off buying or refinancing homes in hopes that sub-4% interest levels will return could miss out on today’s sub-5% rates, too.

“We think 3.5% rates are in the rearview mirror now,” says Mike Fratantoni, chief economist at the Mortgage Bankers Association. “It’s highly unlikely that we’re going to get back to those levels again.”

Benchmark U.S. mortgage rates hit a record-low of around 3.5% in late 2012 and early 2013 as the Federal Reserve’s Quantitative Easing III program helped push long-term interest rates into the cellar. Under QE3, the central bank had been buying $85 billion of Treasury bonds and mortgage-backed securities each month in a bid to drive rates on mortgages and other long-term debt down.

But mortgage rates shot up to around 4.4% last summer after the Fed hinted in May at plans to begin winding QE3 down.

Now, market watchers expect QE3′s phaseout and the strengthening U.S. economy’s increased inflation risks to push mortgage rates to 5% or higher by year’s end.

Fratantoni predicts rates will hit 5% by summer 2014 and 5.3% by Dec. 31.

“The U.S. economy is growing again, the Fed is beginning to back off of its very-aggressive policy to lower rates and we have [increasing federal budget-deficit] pressures,” he says. “Given all of that, rates are much more likely to go up than down from here.”

Market tracker Zillow also foresees 5% mortgage rates later this year, but economic research director Svenja Gudell says interest levels should rise slowly enough to give consumers plenty of time to buy or refinance places first.

“I don’t think there’s the need to rush out and buy a house this very second,” she says. “But I’d recommend locking in a mortgage below 5%, because I expect rates to continue rising.”

On the plus side, Gudell believes lenders will have to ease today’s relatively tight lending standards to keep their home-loan operations humming. After all, she says, higher interest rates typically reduce consumer demand for mortgages.

“I think we’ll see banks be more generous about extending credit to people who perhaps would have had a trouble getting mortgages in 2013,” the expert says.

For instance, Gudell predicts lenders will lower the FICO score required for the best home-loan rates to around 710 from today’s approximately 740.

But Lawrence Yun, chief economist at the National Association of Realtors, says consumers shouldn’t expect sub-4% mortgage rates to return any time soon unless a “major shock” throws the economy back into recession.

“I think that if people are hoping for some temporary dip in rates, they’ll be disappointed,” says Yun, who forecasts 5.3% rates by late 2014. “I realize that many people have seen colleagues and friends lock in mortgages at record-low rates and are jealous. But for now, those rates are history.”

If you would like to speak to an MRREN qualified mortgage consultant about purchasing or refinancing your home or investment property, call us at 949-885-8180 or email info@mrren.com.

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Maintaining a Separate Rental Account

Savvy real estate investors maintain a separate checking account for deposit of rents and payment of expenditures for a very simple reason: It is next to impossible to determine profit and loss if you co-mingle personal funds with rental income. It is also much easier to prepare your taxes at year-end if you isolate your rental income and expenditures in a separate account.

The account you set up for your rentals does not have to be (and should not be) a business account, just a separate personal checking account that you instruct your property manager(s) to ACH, or direct deposit your rents into. Consider naming the account your “Marshall Reddick Account” and watch it grow over the years much like you would any retirement account. Once isolated from your personal funds, it is easy to track how your rental property or properties have performed. Your CPA will love you for setting up a separate account when it comes time to prepare your schedule E.

For extra safe measures, consider initially funding the account with an amount equal to 6 months of mortgage payments. Think of it as a “rainy day” fund. Once you have over 4 mortgages, most lenders actually require proof of 6 months mortgage reserves on each rental property you own.

The whole point here is that you need to treat your rental properties as a business in order to track their profitability and be able to make informed decisions down the road about sale or exchange. Review your portfolio at least annually for performance. Over time, things may change in a city where you’ve purchased. To make informed adjustments to your portfolio you need to have quick access to the financial facts much as you would in a review of your stock portfolio.

Remember, our team is always here to help: (949) 885-8180.

Good luck and happy investing!

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Lessons Learned from the Last Downturn

2014 promises to be a banner year for real estate investing. We spent most of 2013 working our way through leftover foreclosure inventory and seeing steady price increases all over the country. This year will find a more stable real estate market and rising prices as demand continues to exceed supply.

Probably the biggest lesson we learned from this last downturn is not to let greed cloud your good judgment. Some of our members became overleveraged through risky financing available at the time, buying more and more property thinking the real estate market would climb forever. Smart investors were selling in 2007 instead of buying. Another lesson we learned is to never over encumber your property with more debt than the rent will cover. By doing so, investors expose themselves to unnecessary risk.

When you over encumber one property to buy another, you are building a house of cards by weakening the foundation of your portfolio. Used wisely, leverage is a good thing, but always keep an eye on the bottom line for positive cash flow. Remember, an investment does not fit the definition of an investment unless it produces a positive return on your hard-earned investment dollar, otherwise it’s called speculating.

Back in 2007, some of our members sensed we were at or near the top of the market and sold off all or part of their real estate holdings. One of our investors sold off half of his properties to pay off the other half completely. Another investor sold off about 80% of his portfolio keeping only his top performers, waited 3 years, then re-purchased twice as many as he sold.

Looking back at the last cycle, we saw the rents hold fairly steady even though the value of most properties declined by 40% or more in some cases compared to the market high in 2007. I feel fortunate to have sold one property at the height of the market for a $100,000 profit before taxes. My wife and I are already planning which properties we will sell and which we will hold at the top of this next cycle. We will be keeping a much closer eye on timing the market this go-around. “Crystal-ballers” speculate the top of the market may occur in 2017. The top of the cycle is a great time to consolidate your portfolio by selling some to pay off others or to 1031 Exchange your single families into multi-unit buildings. We found increased rental demand in most parts of the country during this last downturn. Investors who were properly positioned with a sound financial basis prospered tremendously. Continue to keep an eye on our blog posts and email updates for up-to-date market trends.

If you live in Southern California, this is an event highly worth attending this week: 2014 Housing Market Forecast.

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Researching Comps Online

Ever try typing your address into Zillow.com and wonder how the heck they value your home at $30,000 less than your neighbor’s that is smaller? Or type your address into Trulia.com and find it is $40,000 more than Zillow’s estimate?

The truth is, these sites are at best ballpark estimates and vary greatly depending on the market activity in your area of interest. These sites base their estimates on recently recorded sales from the county. What they do not take into account are things like condition, upgrades, and lot premiums paid for views or location. Within the same city there can also be value differences associated with the quality of schools, proximity to parks, recreation and shopping. Case in point: I own a rental in Bakersfield, CA where there are 2 high schools. One has a rating of 3, the other 8 out of 10 on the state’s rating system. Guess what the first question prospective tenants ask? “Which high school will this neighborhood attend?”

All cities have good and bad or better and worse neighborhoods. Zillow and other internet valuation sites are zip code driven and include a large variety of neighborhoods. Think of it as a shotgun approach. The danger that we see all too many novice investors make is basing their purchase decision entirely on the often misleading information they gather online. In order to get a more accurate value estimate, the next step in accuracy is what’s called a CMA or Comparative Market Analysis. This report, usually prepared by a local realtor, focuses more on neighborhood and makes allowances for square footage, age, and number of bedrooms and baths. While still not a full appraisal that requires examination of the property inside and out, it is much more accurate.

When you sign a purchase agreement you have what’s known as an “Inspection Period” which is often 10 days but can be negotiated. During the process, a 3rd party appraiser visits and determines the true value of your home, and a 3rd party home inspector visits the property and determines the actual condition. You will also want to order title insurance and talk to a property manager to find out if this is a property that will rent quickly to good paying tenants.

Viewing sales history may give you an indication of market direction, but has no bearing on what the property is worth today. Buying a home, whether for personal or investment use, is not a small purchase. It is critical you know as much as possible about present value and the neighborhood to determine its’ suitability. This isn’t Amazon, you are not buying a neatly little packaged widget. You’re buying a house and the right amount of fact finding needs to take place.

By working with a team of local experts who know the area and know what you’re looking for, it allows you to find the best properties available. The moral of the story is, internet based valuation systems can’t possibly produce the results of a local team. Buying a home is simply too big of an investment to rely on a computer model for value and quality of neighborhood. And first-time investors listen carefully: Do not get swayed by price. Buying the cheapest property on the block does NOT mean it’s the best value or that it will make you the most money in the long-run. In real estate, like anything else, you often get what you pay for.

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Financing for real estate investors

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