Steps to Prepare for Home Ownership

This is a very sensitive topic to talk about given the current situation that our economy is in.  I am in no way ignorant to the fact that many good people are losing their home due to the downturn in our economy.  The only hopes of this article is to educate my audience on the steps (as determined from my experience) to purchase a home if it is a good investment option for the particular person.

Over a year or two ago, the terms foreclosures, auctions, short sales, etc would have seemed like a foreign language to most Americans.  I mean after all, I have never heard my parents talk about any of the terms previously listed the whole time that they have owned their home.  Now, it is common place to see advertisements for foreclosure auctions, or even receive emails to your inbox announcing a fire sale of condos at "below builder price".

With the abundance of vacant properties in America, in my opinion, it is a great time for the first time home buyer, second time home buyer or even the investment buyer to look at purchasing a home.  It is definitely a buyer's market and with patience and the preparation, home ownership is just around the corner for many Americans.  I did some research on the topic and found the following link that was interesting to try to explain the previous downturns of the housing market in America:

Housing Data Shows Downturn Could Be Prolonged

Although this particular article claims that this housing downturn could persist eight years, I am optimistic that we are at a point where houses are beginning to be a good value again.  I am currently in the process of pursuing an investment property and wanted to share some of the preparation that was needed in order to begin this process:

1. Ask yourself the following questions and be honest
• What is your price point for your house that you can afford?
  
• As a personal rule of thumb, I have always believed that the primary mortgage should not be anymore than 33% of your take home (after taxes) pay.
• What location do you want your house to be in?
• What type of house do you want?  (Townhome, Single Family, Condo)?
  
• How big do you want your house to be?
  
• What special features you want in your home?
2. Write down a description of your home
• This step is important so you do not compromise on getting the house that you want.  Throughout this process of searching for a home, I got discouraged when others beat me to the punch when placing a contract on homes that had 60 - 70% of what I wanted.  However, I eventually found the house that had 90%+ of what I wanted and I currently have it under contract.
3. Research your Credit Score
• There are a multitude of ways to research your credit score on the Internet.  Below are the free alternatives that I use:
1. https://www.annualcreditreport.com/cra/index.jsp
   
2. http://www.creditkarma.com/
   
• Realistically, many of the loan officers I spoke with stated that they are looking for 700+ credit scores.  However, do not get discouraged if your credit score is not that high, I recommend to at least try, the worst thing they can say is "no".
4. Find a Real Estate agent
• A real estate agent can determine how your home buying process will be.  They generally handle all of the paper work and discussions with the seller (or the seller's real estate agent).
• In addition to that, they will be the ones to make the necessary arrangements to view the property.  
• Usually they also have easy access to people you may need during the home buying process (inspectors, general contractors, loan mortgage officers, etc).
5. Research homes
• There are many things to take in consideration when purchasing a home.  Below is a short list with somethings worth considering:
1. Utilities
2. Taxes
3. Repair on the home
4. Maintenance
5. Location
• For more things to consider, look at the article at the following link.
6. Find a Mortgage Broker
• Talk to the mortgage broker to find out what packages they have and make an educated decision on which offered package is best for you.
• Get financial records in order for loan qualification process, what you will need:
1. Last two paycheck stubs
2. 60 days worth of bank and investment account statements.
3. W-2s from the last two years
• A few important notes:
• The loan company should be able to provide you with a loan pre-qualification letter and Good Faith Estimate without any type of commitment to obtain the loan with the company.  You should use these documents to compare offers and get the best deal possible.
• One concern that many people have when it comes to obtaining loans is the credit-check process.  From this article, credit scorers look at all credit inquiries made within a 14-day interval as being the same as one inquiry.  This will allow you to shop around for mortgages for a two week period without substantial negative impact on your credit score.

As I am in the stage of just getting my home under contract, I am currently waiting to proceed with purchasing this home.  However, I find that educating yourself about the home buying process is the best thing that you can do in order to successfully proceed with purchasing a house.  There is a lot that goes into the process of purchasing a home but the information in this article can at least help the novice to get started in the process.  It may seem overwhelming at times, but if you get the right people on your team (real estate agent and mortgage broker), you will find that it will progress and you will be owning your new home before you know it.

Please let us know if you have any comments or questions below.  Stay Disciplined!

Previous articles that relate to this topic:

http://getmoneyandmore.blogspot.com/2008/10/are-foreclosures-good-investment.html

http://getmoneyandmore.blogspot.com/2008/11/more-information-for-foreclosure.html

Disclaimer:  The ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment adviser.

More Information for Foreclosure Investments

I realize that the previous post about the foreclosures was a bit incomplete because I did not really leave you with too many links that you can use to actively research the foreclosure market. Having these tools listed in this article can help you decide whether an investment in the foreclosure market is a sound decision.

Finding Foreclosures

As mentioned in the previous articles, foreclosure listings can be bought in three different phases. Those three phases are:

1. Pre-Foreclosure (Short Sale)
   
2. Foreclosure by the Bank (Courthouse Steps)
3. Sold/Auctioned as a Foreclosure

Below are some of the links that you can use for researching these properties. Please hover over the links for a description of each link.

Atlanta Journal Constitution Foreclosure Listing

US Home Auctions

Hudson and Marshall Auctions

Georgia MLS

Trulia

Due Diligence

Part of the due diligence for determining whether or not any property is a good investment is find out key pieces of information. Some of the things to research are:

1. Crime in the Area
2. Schools in the Area
3. Property Taxes to pay
4. Previous value of the home
   

Below are some of the links that you can use for researching this information. Please hover over the links for a description of each link.

Atlanta Police Google Map Showing Crimes in the City of Atlanta

Listing of the current and previous value of a home

Georgia MLS

County Tax Records for Homes in Georgia

Getting the Finances in Order

The last and in my opinion, the most important step is getting your finances in order to purchase any kind of investment. In addition to the information listed in my previous post below is a website that contains great information to help calculate whether or not you are in a good position to finance an investment.

Great Place to learn about Financing an Investment

I hope that these links assist in your decision of whether or not to pursue an investment in real estate. Please share with us any other links that you find useful to assist you in your decision of whether or not to invest.

Stay Disciplined!

Are foreclosures a good investment?

Every Cloud Has A Silver Lining ( be hopeful because difficult times always lead to better days ... ) - Unknown (quoted from GoEnglish)

Everyone knows about the huge sub-prime mortgage debacle that is unfolding in our country right now. According to the New York Times, (link to article), six million people are expected to default on their mortgages this year. In addition to that, houses are rapidly decreasing in value all over the United States due to lack of demand. Although this is really bad news, for some, it presents a huge opportunity.

This opportunity is to diversify your current investment portfolio. I have been looking into expanding my investment portfolio into the real estate arena because stocks are still highly volatile and the prices in the real estate market have fallen drastically. Plus, having a guaranteed way to make passive residual income is very appealing. However, before diving in head first, I wanted to take the steps to educate myself on the topic to see if it is a viable way to invest.

Earlier this week, I attended a Foreclosure Investment Property Seminar at the Georgia Tech Alumni Association given by Mary Beth Lake who is a Realtor with the Harry Norman Realtors company. She provided us a very informative and interesting presentation that covered the pros and the cons of investing in Foreclosure properties. I felt that this presentation is great information to share with anyone who was thinking about investing in Foreclosures or Real Estate in general. Below is a summary of the presentation she provided as well as some of my added notes:

Investment Real Estate (Foreclosures)

Investment Real Estate: Real estate that generates income or is otherwise intended for investment purposes rather than as a primary residence. (Citation)

Foreclosures

Foreclosures are typically "distressed" properties that a bank repossesses in means to recover the cost of the loan that a homeowner has defaulted on. Foreclosure usually progresses in the following stages:

1. Pre-Foreclosure
• If the homeowner misses one mortgage payment, the foreclosure process can begin.
  
• Sometimes during the pre-foreclosure stage, the bank will work with the homeowner and agree on a "Short Sale" in which the bank agrees to take a lower price on the home than what is actually owed.
2. Foreclosure by the Bank
• The bank goes through the process of evicting the tenant out of the home and repossessing the home to put it up for sale.
• The bank can advertise the home on the courthouse steps to have the property bidded on.
  
• Some states are non-judicial meaning that the bank does not have to take the home owner to court to evict them.
  
3. Sold/Auctioned as a Foreclosure
• The bank can sell the home on the courthouse steps.
• If the home does not sell, the bank can choose to list the who with an Real Estate Owned (REO) Agent who can either choose to sell the property through a public auction or by using the traditional means such as the Multiple Listing Service (MLS).
  

Caution: Pre-foreclosures and Short Sales can take a lot of time and require a lot of patience. Short sales are very risky and foreclosure homes are usually sold without any disclosures. This is important to know because states like Georgia are "Buyer Beware" which means the buyer would not be able to hand back the property if they decide they do not want it anymore after signing the contract.

Due Diligence

Prior to investing in the foreclosure market, much due diligence needs to be done to determine whether or not the home is a good investment. To assist in the planning of this one must realize the four financial benefits of owning investment real estate and how to calculate them. The four benefits are the following:

1. Income
2. Principal Reduction
3. Income Tax Savings
4. Appreciation

Income: Revenue generated by the Real Estate property (rent).

Principal Reduction: Reducing the amount borrowed or the amount still owed on a loan.

Income Tax Savings: Deductions that you can claim on your income from owning Investment Real Estate. For more details, click the "Financial World" link. (Financial World )

Appreciation: An increase in the value of an asset over time. (Investopedia)

To assist with the analysis of the investment property, the presenter (Mary Beth) provided us with an excel spreadsheet she acquired from Tom Lundstedt who gives seminars about investing in Real Estate. (Thanks Mary Beth and Tom!) This file is accessible to our members through the "files section" on the Pamplona Finance Google Groups Page.

For those who review the pre-filled excel spreadsheet, the scenario to accompany that file is listed below:

Scenario:

• You are investigating a property in east Point that is listed for $139,000. You think that you can negotiate the seller down to at least $130,000.
• You plan to put 20% down and pay all the closing costs.
• You would like to close in early December 2008 so that you can make any necessary repairs over your holiday break and hopefully have it leased by January 1st 2009. You plan to lease it for a year.

Some other useful tips during due diligence is to do the following:

• Use the tool to analyze multiple homes in the area.
• Fill out a Schedule E for Real Estate Investments to claim on your taxes.
• Can request a Schedule E if purchasing this home from a Real Estate Investor.

For more information about the Schedule E, consult about.com article here.

Gathering the Money to Invest

With the economy being in the state that it is, many investors are not able to reach deep into their bank accounts to put the money up to obtain an investment property. Most first time investors will have to take some type of loan from a bank and pay the money back over an extended amount of time. This part of the presentation was given by George Connolly who is a mortgage broker with SunTrust Mortgage. Below are the initial requirements needed to finance a Real Estate Investment if borrowing the money from a bank:

1. 20% of the sale price down payment.
2. 3% closing cost of the loan.
3. Six month property emergency fund to cover mortgage and monthly expenses when the house is not generating income.
4. $5,000 - $10,000 in liquid reserve for repairs, emergencies.
5. Monthly expenses
• Accounting Fees
• Attorney Fees
• Landscape Maintenance
• Utilities
• Taxes
• Insurance
  

The Exit Strategy

With all businesses, it is important to know what you are going to do once you figure that the property is no longer a good investment or you are ready to cash in. In the optimum situation, the house will appreciate over time and you will build equity in the home. Equity is the difference between the current market value of the property and the amount the owner still owes on the mortgage. (Investopedia) There are three ways to move the equity:

1. Sell the current property and buy another.
• Will have to pay Capital Gains Taxes. (Captial Gains Tax Calculator)
  
2. Refinance the current property and use the money to buy another property.
3. 1031 Exchange.
• 1031 Exchange - A tax deferred exchange that is for like-kind investement with property with a specified strict time period. (IRS)

More Useful Information

• Always purchase Owner's Title Insurance.
• Financiing can make the difference between a property performing well or going down the drain.
• Don't confuse Inflation with Appreciation.
• Places to purchase a great deal
• Excellent School Districts
• Developed/Developing areas
• Places you would not mind living yourself
• Get a team of proven professionals to assist you with investment decisions. Team should include the following:
• Accountant
• Attorney
• Loan Officer
• Property Management Company
• Realtor
• 1031 Exchange Qualified Intermediary

One thing that the presenter shared with us is that Foreclosed homes are a lot of work and may not be as lucrative of an investment as many people think it is. To help with your decision, I have included a video that I took while surveying a home that I found on www.ushomeauction.com.

In summary, if you are willing to put in the effort, time and money needed, a foreclosure can be a good investment. However, I think that it may be worth the time and effort to spend a little extra money on a non-foreclosed home as it may require less work to make it habitable for re-sell or a tenant. From my research, I have learned that it if you want to invest in Real Estate, do not just limit yourself to searching for foreclosed homes.

Do you think that Foreclosures are still a good investment? Please leave your comments below.

Stay Disciplined!

Bankruptcy and Foreclosure Avoidance

One of our members gave a great presentation on education about bankruptcy and foreclosure. In order to prevent something, you need to understand the cause and purpose behind it. The presentation that Micah gave was informative as well as very eye-opening. Below are the notes taken from the presentation.

Bankruptcy and Foreclosure Avoidance: 4/12/08

Real Estate Seminar at Georgia Tech
Lender Presented the following information:

• Buying Real Estate can be used as an investment tool
• Real Estate in Georgia appreciates on average 6.2% per year

Reasons to choose Real Estate over stocks

• Leverage
• Example: If one wanted to make 6.2% interest on $100,000 in a stock, one would have to invest a full $100,000 into that stock. However, in Real Estate, you can put $10,000 down on the $100,000 investment, it appreciate 6.2% in one year and then sell it for the full $100,000 + 6.2% interest accrued on the properly

Foreclosure

• Government is making it harder to obtain loans. New requirements in place to make sure that you can afford the loan before signing up for it.
• The government and loan companies were less strict before and people started to obtain loans they could not repay.
• Foreclosure is typically executed on a home after the buyer gets behind three mortgage payments (typically failing to pay for three months).
• The bank usually tries to warn the buyer prior to the foreclosure notice

Foreclosures buyouts occur the 1st Tuesday of each month. An attorney has to publish into the county's records publicly one month before the foreclosure is executed. Investors typically go to the courthouse to find out which homes are being foreclosed on and by up the remaining amount on the loan. The investor typically tries to work with the buyer directly to prevent foreclosure while renegotiating the terms with the buyer to make more money than the investor put up for the buyer.

Foreclosure Avoidance

1. Mortgage companies do not want to foreclose on homes due to both parties lose in that situation.
2. Establish a good relationship with the mortgage company so alternatives can be agreed upon in the case that the original terms to the loan are failing to work over time.
3. Contact the mortgage company in advance at the first sign of problems to repay the loan.

Bankruptcy Definitions:

Chapter 7, 11, and 13 bankruptcy definitions

Rearages: After one files a claim for bankruptcy, it is the increased payment to make up for the loan + late fees all in one package.

"An ounce of prevention prevents a pound of cure"

It is best to avoid bankruptcy at all costs as it causes heartache and grief for at least 3 - 5 years of your life. In addition to that, debtors usually sell your debt amongst each other create a continuous cycle of the same debt remaining on your credit for an indefinite period of time.

Before declaring bankruptcy, try to settle the debt with the creditor at a lower price. Most companies rather get something rather than nothing. If you do decide to do this, be sure to document all procedures and always obtain the agreement in writing. Always obtain a reference number, name and worker ID when working with customer service representatives.

Always dispute negative ratings that are in error on your credit. After a formal dispute is issued to a debtor, they have 30 days to challenge the dispute or it can be removed from your credit.

More Information on Disputing Credit Errors

Please share your comments below about this topic or let us know if you wish to have more information about the subject.