ARV – CAP RATE – HUD – MLS – NNN – REO – OWC – ETC…

Real estate investors, brokers and agents are as guilty as any other industry practitioners at using jargon and abbreviations that seem commonplace to us, but are often confusing to our clients and customers. As a reminder to slow down and explain these important terms and concepts, especially to new clients, here is a list of the most common jargon and simple explanations:

• ARV – After-Repaired Value. The estimated resale or new appraisal value of a property after remodeling or repairs are complete.
• CMA – Comparative Market Analysis.  A report run by a real estate professional to estimate the value of a property for a listing.
• CAP  (Cap Rate) = Capitalization Rate.  A measure of the quality of an income property investment based on income and expenses expressed as a ratio. (NOI/COST=CAP)
• COCR – Cash on Cash Return.  A simple calculation of the return on initial cash invested relative to annual cash flow. (cash flow/initial investment).
• DBA – Doing Business As.   Business name registered as ancillary to the actual entity or person filing taxes or bank account deposits.
• DOT – Deed of Trust.  Document filed by a lender to publicly show proof of loan or lien on real property.
• FHA – Federal Housing Administration. The federal agency in the Department of Housing and Urban Development that insures residential mortgages.
• HOA – Homeowners Association.  A group that governs a subdivision, condominium or planned community or other real estate with a common purpose.
• HUD – Housing and Urban Development.  The United States federal department that administers federal programs dealing with housing.
• I/O- Interest Only (loan). A type of loan amortization in which the principal balance of the loan neither increases nor decreases.
• IRR – Internal Rate of Return.  The average annual compound rate of return received by an investor over the life of their investment.
• L/O – Lease Option.  A written agreement between a property owner and a tenant that allows the tenant to use a property in exchange for rent, but it also gives the tenant the option to buy the property for a certain price within a specified time period.
• LLC – Limited Liability Company.  A legal structure for businesses which is designed to combine attributes of corporate and partnership structures.
• LOI – Letter of Intent.  A document outlining an agreement between two or more parties before the agreement is finalized.
• LTC – Loan to Cost.  The ratio of the price paid for a property to amount of the loan used to finance the purchase.  Often used to calculate a purchase AND repair or build costs.
• LTV – Loan to Value.  The amount of money being loaned (borrowed) against the appraised value.

• MLS – Multiple Listing Service. Local or regional service that compiles available real estate for sale by member brokers including detailed information, generally computerized and online.
• NNN – Triple Net Lease.  A lease in which, in addition to the rent, the tenant is required to pay for property taxes, insurance and maintenance.
• NOI – Net Operating Income.  Annual income after all expenses (property taxes, ins., & maintenance) except debt service (mortgage payment).
• NOO – Non-Owner Occupied.  Homes that are acquired specifically for investment purposes, also a type of loan for investment property.
• OWC – Owner Will Carry (owner financing).  A type of financing in which the seller accepts a promissory note as a portion of the purchase price. Also called owner or seller financing.
• PITI – Principal, Interest, Taxes and Insurance.   The total monthly payment a borrower makes to the lender.  If private mortgage insurance is required, that will be included in the amount as well.
• PMI – Private Mortgage Insurance.  Insurance paid by a borrower to protect the lender in case of default. PMI is typically charged to the borrower when the Loan-To-Value Ratio is greater than 80%.
• POA – Power of Attorney.  A written authorization to an agent to perform specified acts on behalf of his principal, usually to sign closing documents. This may be granted as either a general or a limited power.
• POF – Proof of Funds. A document by which the principal’s bank states that the principal owns the funds required for the transaction.
• REO – Real Estate Owned. REO is a class of property owned by a lender, typically a bank, after an unsuccessful sale at a foreclosure auction.
• ROI – Return On Investment.  A measure used to evaluate the quality of an investment or to compare different investments. Return/Cost expressed as a percentage or a ratio.
• SFR – Single Family Residence.  A standard home with no common areas, or sharing of common walls intended to be occupied by 1 family.

FHA Mortgage Broker and Banker Lender Time Frame

This scenario has happened often enough in our office recently that it has become newsworthy and worth sharing with other real estate agents, buyers and investors:  Our buyer clients are getting a competitive advantage in the 1^st time home buyer and investment property markets because of a mortgage strategy, and by working with a specific type of financing company – FHA approved mortgage banker that underwrites and funds locally on a warehouse line.

Too many offers, too long to close

Fastest Loan, Lowest Rates

Are you shopping for a house in the Denver real estate market, or an agent representing a buyer, in the $300K and under price point?   Are you experiencing stiff competition for good properties that are priced correctly?  Here’s an explanation:

• Moratoriums on foreclosure properties and REO inventory hold backs
• Inventory is down to historic lows in the lower price ranges
• 1^st Time buyer demand is high for remodeled houses and sweat equity bargains
• Investor demand for flip and rental properties is feverish

The most common challenges we hear from our agents and buyer clients:

• Multiple competing offers for good properties and losing deals
• Challenging lending environment and changing rules
• Very long underwriting timelines for loan approvals
• An over correction on appraisal values that are below market price

How do you compete in this market for the best priced properties?

We have had success lately winning contracts by offering shorter closing times to the seller or listing agent.  All things being equal, shorter escrow periods get attention.   Most sellers are motivated to close quickly, especially investors who have remodeled a house for resale.  Also, with the first-time homebuyer tax credit deadline fast approaching, it is doubly important to have confidence in your lender’s ability to get the loan done quickly.

Use a mortgage company that directly underwrites your loan

There are many articles online about the differences between mortgage brokers, mortgage brokers, and correspondent lenders, so I won’t go into detail in this post.  But the key difference for buyer, seller and agent alike is the time-frame for underwriting and funding.   In order to write offers for fast closes, you will need to work with a finance company that underwrites and approves loans in-house.  The best companies are approved to sell bundled loans directly to FHA.  Ask!

Brian Neufuss is the mortgage lender that we have worked with for the past several years.  And he deserves some accolades for his work recently in building relationships and getting loans approved locally and quickly with far less “red tape” than any other that we’ve worked with.  He has benefitted our clients and real estate investment business, but has also impressed listing agents whom our clients have purchased through.

Please know that this is a freely given endorsement and recommendation of Brian’s expert services with no intent other than to thank him.  He has consistently pushed deals through for us with the lowest possible rates, whether for owner-occupant, first time home buyer, investment property or refinances.  Please feel free to contact him to ask questions about his business and system at the following number or use our Contact Form on our website and I will forward to him (we don’t put email addresses on the website for the spam bots to grab).

Fastest Loan Approvals in the West

Brian Neufuss, Mortgage Banker

Denver, Colorado

303-250-1841 direct line

*Private and Hard Money Loans also available for Investors

Self Directed, IRA Loans, Property Types, Investment Groups

In 2009 we have had a lot more requests and questions from clients about using IRA funds to purchase investment real estate for fix and flip projects and rental properties.  So I thought I would post an FAQ with answers.  Here are the Top 5 Questions from 1^st time investors using their IRA funds to buy income property:

#1 How do I get access to my IRA funds to buy a house?

In order to begin the process, you will need to establish a self-directed IRA account.  It is unlikely that you will be able to obtain this type of IRA account with your current brokerage or bank.  A quick Google search will retrieve many custodians who help investors open IRAs for real estate purchases.  After comprehensive due diligence of many of these companies, we have selected Equity Trust Company for our own accounts and recommend that our clients include this company as part of their selection process for a custodian.  Consider account and transaction fees, allowed structures, types of entities, consulting and customer service when selecting a custodian.

#2 Can I get a Loan in my IRA to purchase investment property?

Yes, you can get a loan for up to 65% of the purchase price of a property in your IRA using what is called a “non-recourse” loan.  This type of loan is not personally guaranteed by you, it is only secured by the property within your IRA account.  One of the leading lenders in Colorado serving IRA customers is First Bank.  They have a specific and streamlined program that we highly recommend.  You can read about all the plan and property qualifications at this link called Loans to Purchase Real Estate in your Retirement Account.

#3 What kinds of property can I buy using my IRA funds?

Within your IRA, you will have many options for real estate investments.  The most common is purchasing property directly and getting fee simple title.  The title will be held in the name of your IRA, not your personal or business name (with or without leverage or loans).  Another option is buying into ownership of LLC’s or Limited Partnerships that own and operate income property.  Your IRA may also be a lender that holds a mortgage on a property that pays interest to your IRA that is secured by real property.  This is called investing in notes (promissory notes).  In the first two examples, your IRA is the owner of a property, and the last example your IRA is a lender to an owner of the property.  Any of these can be good investments for your retirements funds, all of them have risks and should be only be undertaken after careful consideration.  After all, these are your life savings!

#4 How can I get the Money out of my IRA?

Well, here’s the bad news and the good news:  You cannot pay yourself or take profits or cash-flow from real estate investments in your IRA and put them in your pocket today.  Sorry.  But, the good news is that you are doing yourself a favor by growing your net worth and savings and that will increase your borrowing capacity and ability to do deals outside your IRA accounts for current income or short-term capital gains.

What do I do First? Or How Do I Get Started?

Sometimes this is the first question, and sometimes it’s the last!  I always recommend that investors (especially novice investors) begin the process by interviewing and hiring two experienced and competent advisors.  First, an accountant and second an agent or real estate investment advisor.  It is critical to choose real estate professionals that understand the benefits and risks of investing in real estate (whether in your IRA or otherwise).  Be aware that there are many accountants and real estate agents that are very knowledgeable about normal transactions, but there are only a limited number that specialize in investment property, and even fewer who understand IRA rules and regulations.  In other words, don’t just hire your brother-in-law!  Seek out people who have been where you want to go.  Find people who have an existing team that you can use; leverage other professionals who have paved the way for you!

NOW is the time to get started, Happy Investing!

If you or someone you know is interested in these types of IRA real estate investments, please us the Contact Form for additional information.

My Interview with a Special Investigator

I was having a pretty normal day at the office, comping properties, checking on email etc.  Until a pleasant looking woman arrived unannounced just after lunch and handed me her card:  Special Investigator for the Denver District Attorney. Ouch.  She asked me if I had a few minutes?  What else could I say, but “c’mon in…”

I asked what it was about, and learned that a certain property that we purchased and then resold last year was under a fraud investigation.  A fraud, apparently, that is becoming more and more prevalent in today’s real estate market and investors need to be aware:  people selling property that does not belong to them.   She asked me to pull the file for the property and then asked for copies of several of the documents.   Lots of weird questions ensued:  Please describe the seller’s, height, weight, distinguishing features?  She then showed me some pictures.  What do you remember about the ex-wife?  Excuse me?  What ex-wife?  I remember the son and the mom from closing, that’s it.  And they did not look anything like the people in the pictures!

Interesting thing was that we DID receive a call to the office earlier in the year from a person who complained that someone had sold her house without her permission.  But she sounded kind of crazy and we get calls from weirdos a lot in this business, so none of us really thought much about it.  But remembering that call, all of a sudden I felt like I was starring on the TV show Law and Order, so I had to ask:  “Should I be calling my attorney?” She sweetly replied that is was not necessary at this point (right), and informed me she is “a cop, not an attorney.”  (whew?)

So the story goes, apparently the “seller’s” of this particular house may not have had the right to sell the property.  This was a mild case compared to the blatant fraud that is happening with other deals, according to the investigator.  In this instance the husband “allegedly” removed the ex-wife from the deed with a Quit Claim deed without her permission and then sold the property and kept all the proceeds.  In my head the question kept coming up:  Am I in any way responsible for this?

After a pretty long cop-like conversation, I’m pretty sure I convinced her that our office and business had nothing to do with the Quit Claim deed and alleged fraud.  Although she admitted there were some red flags.  The organized groups that commit this type of fraud use a team of investors and agents, have in-house notary and use small private title companies to close the transactions.  We have that in common with the criminals.  Thankfully, we do keep impeccable records of our transactions and we were able to provide all documents she requested.  And the dates confirmed that our affiliated people or companies were not involved with the forged signature on the deed.  She also made phone calls to the title company and all the employees who were involved in the transaction and all our “stories matched.”

The investigator suggested that we make some procedural changes to our buying system which I would like to pass them along to other investors:  Ask for and get a copy of the driver’s license of the person who is signing the purchase contract at the time of signing. Make sure the driver’s license matches the title work, and be watchful of strange title occurances (like Quit Claim deed, power of attorney, etc).  We have previously left this type of identity checking to the title closer and never paid much attention during escrow if the title work came back clean.  In all my years of investing, this has never happened to me before, and hopefull will never happen again based on the new procedure.  Investors, keep a sharp eye out for this type of fraud!

Remodel Time-line and Tips

Estimating repairs, staying on budget and working with contractors is perhaps the most mysterious and difficult aspect of the business of flipping houses.  As any good investor will tell you, you make your money when you buy.  But all too many investors LOSE all the profit in the remodeling or rehabbing process.  Here are the three most common mistakes made by novice fix and flip real estate investors:

• Under-estimating repair costs
• Over-improving properties
• Under-improving properties

General Contractor Guidelines:

• Begin interviewing contractors before you find a project
• Determine cost plus or complete bid procedure
• Pay contractors timely, but don’t let them get ahead of you on payments
• Obtain lien releases with every check you write

Before You Begin Repairs and Remodeling:

• Switch over utilities the day you close!
  • The title company may offer to help, but don’t trust that they will do so timely.
  • Contractors will not be able to start repairs without the utilities.
  • Avoid delays by contacting the utility companies before you close about any special procedures if the house has been vacant for a long time.
• Change locks, change lock box code, secure property by boarding up any broken windows and doors.
• If you are replacing windows, measure and order them right away.  It can take up to two weeks for delivery, the timing will be perfect if you order them first.
• If you are replacing the roof, pull a permit right away and put it in the window prior to beginning demolition work.

Specific Order of Fix and Flip Repairs:   Continue reading…

Keep Updated Personal Financial Statements

The best preparation for meeting with a lender – especially a private or hard money lender – is to have your “docs in a row.” When I work with a new client that does not have a current personal financial statement, our first step is to get their complete financial picture onto an organized spreadsheet.  Some are pleasantly surprised to learn their true Net Worth, some are disappointed (but motivated!).  Everyone thanks for me for this exercise when we are finished.  Creating a PFS is also beneficial for owner occupant buyers.  It is just as fun to impress traditional mortgage bankers by uploading your loan application to his computer from your thumb drive.  You get instant respect.

Don’t Believe “Pre-Qualification Letters”

Many real estate brokers will leave the process of organizing financials to a mortgage broker or banker.  But consider the value to your client, and yourself, of working on this together as a first step.  By assisting your client from initial financing to post closing follow-up, you earn higher respect as a real estate professional.   Also, I prefer to know a clients credentials *before* I spend my valuable time with them shopping for properties.   I have found over time that prospects who are unwilling to share financial information with me are far less likely to actually buy, so this one criteria is an excellent method of “separating the wheat from from the chafe.” This is especially true among people who call themselves real estate investors; there are lots of people who purchase real estate investment courses and attend the “guru seminars,” but never actually purchase any real estate.

Whether you are working with a traditional mortgage broker, local banker, or private equity lender, having financial documents organized and presentable at a moments notice is always impressive.  So impressive, in fact, that with private lenders it even makes up for a certain amount of weaknesses that may be present in the statement itself.

“Do or Do Not.  There is no Try” – Yoda

What’s the moral of the story?  As an investor you should always have your financial statements ready to show mortgage professionals,  bankers, private lenders, and potential partners.  As an buyer agent or broker, you should review (and help prepare if necessary) financial information from your clients.  You are asking for problems if you believe a “pre-qualification letter” means your buyer will close.  I go so far as to carry mine on a thumb drive that is attached to my key chain.   The password protected folder has following documents in .pdf format:

• Color photo scan of driver’s license and SSN card
• Excel worksheet of Personal Financial Statement
• Excel spreadsheet of Real Estate Owned
  (includes insurance policy numbers, loan numbers, rate, payment, etc)
• Current personal and business bank statements
• Current investment and IRA statements
• 3 Years of personal and business tax returns
• Copies of Operating Agreements for all Partnerships
• Completed 1003 Application

Everyone Starts ‘Somewhere’

Even if you do not have an “impressive” financial statement right now, you should create a PFS. It is important to know where you are in order to determine how to grow your assets and reduce your liabilities. There are investing programs for people of any current financial status.  You can indeed get into the real estate business with “no money down and bad credit,” but you must be realistic about the process and the path.  And you should not take advantage of the work of others by presenting yourself otherwise, like many novice investors do with agents and owners of property.  On the other hand, if you have substantial assets, you will want to learn about programs that leverage and protect your assets to their fullest potential.  This usually means finding and working with quality agents, operators and sponsors.

In our next segment on Financing and Capital we will be reviewing ratios of a financial statements, please stay tuned by getting our updates via RSS and/or email.

Scouts – Dealers – Rehabbers – Landlords

I have a few key methods of qualifying real estate investors to determine whether or not I want to work with them.  This has little to do with the amount of experience they have, and less to do with the amount of money they have then you may think.  These are both important factors in determining how I will work with an investor.  But the critical factor in whether to work with them is based in their commitment and integrity.

During my first interview or call with a new referral, I ask the standard questions about their experience, available capital and credit score.  More importantly, however, are the questions about their goals and intentions.  The way certain questions are answered, including was is NOT said, usually gives me a good indication about whether I can establish a mutually beneficial relationship.  With practice, you can learn these evaluation skills to qualify investors, and only work with those who will be good clients.

The first step in this learning process is to understand the Types of Residential Real Estate Investors.  This will allow you to differentiate between clients, customers and vendors as you grow your business through networking and marketing.  All investors will fall into one or more of the following categories.  Less experienced investors generally require more time, but more experienced investors will require more skill and knowledge to earn their business.  As always, the relationship must be a “win-win.”  Continue reading…

Capitalize on an Underserved $300 Billion Market

As the nation continues to take its proverbial medicine for the spoils of Wall Street’s residential real estate backed securities fiasco, Realtors are suffering massive drops in transactions and income. If you are working the traditional residential market, you’re likely facing pretty grim volume now, and for the near future.  How about this for a change?

Stop Sucking Wind

• STOP wasting your time working evenings and weekends with “liar buyers” who drag you to see hundreds of houses and never make a decision.
• STOP listing over-priced properties that never sell or taking on Short Sales that require hundreds of hours of negotiations.
• STOP begging your friends and family for their real estate transactions and ruining relationships over business.
• STOP expensive and time consuming prospecting and holding lonely Open Houses.
• STOP working with clients that are barely qualified for loans and hoping the deals close to get paid.

Yes, you really can STOP all this nonsense by learning a few new skills and making a simple change in the type of client you work with.  In a down market, residential real estate investors are very active buyers (and sellers too).

Investors are desperately seeking good real estate agents who specialize in investments.

Continue reading…