May 31, 2006
Real Estate Law
Real Estate — Law Everywhere
Apart from possibly medicine, there's no area of human endeavor more intricately intertwined with legal trappings than Real Estate. Because of the larger amounts of money involved, and the centrality of property for living and carrying out so many commercial transactions, the rules have become complicated and many hands are in the pie.
But for the investor it's essential for long-term profitability to gain a healthy familiarity with property-related law.
One good place to start is: The Contract.
In any real estate contract there must be 'mutual assent'. Each party has to agree to an exchange — in writing. The old saw is true: a verbal agreement isn't worth the paper it's written on.
The contract has to identify who those parties are and the property being exchanged and for how much. And to be enforceable, consideration — the benefit that induces a promise — must exist. Then the contract has to be signed by parties of legal age and sound mind. This latter must be loosely defined, given the inherent insanity of real estate investing as a business.
As part of the consideration aspect, the property itself must be worth what the seller and lenders claim, as determined (at least approximately) by appraisals and other means.
Flipping (buying and rapidly re-selling property) for example, is perfectly legal —— until an unscrupulous investor buys a cheap, run down property and conspires with a mortgage broker to doctor documents to bring an inflated price. When government bodies guarantee the loans on such properties, you can be assured they'll take an interest in the transaction. And they don't look favorably on fraud.
Commercial properties have whole other sets of regulations covering their exchange and use.
Tenants in almost all countries have certain rights independent of specific contractual clauses. Even Communist China, for example, has recently adopted legislation defining and protecting property rights. As an example, even in triple-net leases — an arrangement in which the lessee is responsible for maintenance, repairs, insurance, etc — landlords have to do more than simply collect a check each month.
Lenders are governed by complex rules that direct or restrict how much can be loaned, what paperwork is required in terms of title, insurance, even what kinds of advertising offering financing can be made.
Tax law introduces yet another layer of complexity into real estate investment. Very few autos or boats end up with tax liens against them, but it's hardly unknown in real estate deals to have to clear them before title can be passed.
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So for those considering real estate investing, or beginning to become involved in one of the lowest risk, most potentially lucrative businesses around, one can offer no more sound advice than this: When it comes to real estate law, do your homework — before it's needed. It's much more expensive to do afterward.
Posted by RealEstate at 05:55 PM | Comments (0)
May 30, 2006
Real Estate Investing : Urban Or Rural?
As population shifts occur throughout the world many are finding it possible and desirable to move from urban areas to rural, mountain, and even island locales. In that fact lies a new opportunity for investment.
But before rushing off to plunk down a few thousand or a few million to cash in on the trend, consider some of the differences entailed in non-urban investments.
Rural, mountain and island areas have much more concern for and pay more attention to environmental issues. Even though in many areas or countries regulations are more relaxed, the local citizens tend to take more personal responsibility for ensuring clean water, adherence to fishing and hunting regulations, proper recreational vehicle use, etc. So, when it comes time to sell a property, potential buyers are going to be looking more closely in some cases.
In some areas population is growing due to influx of retirees, increasing use of the Internet to run home based businesses and other factors. In others, populations are declining. Research is essential to try to predict whether that great deal today will be profitable in three to five years.
Also, as non-urban demographics fluctuate it can require greater advertising over a wider area and take longer to build a pool of qualified buyers. Smaller populations means fewer buyers locally, but you can compensate by using the Internet to advertise to a larger area and attract those that are looking to relocate or purchase a second residence.
It can also take longer to find desirable properties to buy at potentially profitable prices. In areas where property values are rising rapidly, high demand snaps up good properties quickly. That leaves only those that are more difficult to evaluate as investments.
And non-urban properties are inherently more difficult to evaluate, since they're often unique. Most tract homes and small commercial properties are very similar across the U.S. and other developed countries. Developers keep costs low by reusing the same plan and building on similar, small plots. But farms, ranches, mountain homes, lake homes, island property, etc are all different not only from one region to the next, but within the same locale. A villa in the south of France is very different from a vineyard only a few kilometers away. A large mountain cabin on a lake is very unlike a horse property a mile down the road.
Comps for such properties can only be guessed at and lenders know this, making financing more difficult. Most non-urban financiers have learned to take such factors into account, but they often require more solid credit and larger down payments as a result.
And if you plan to buy, fix-up and sell you need to take into account the potentially greater difficulty of finding qualified, reliable contractors and labor. Labor prices in such markets may surprise you — it's not the case that lower average wages in such areas translates to cheaper help. Such specialized skills often command a greater price and involve longer time frames for getting work completed.
Just to make things more complicated, there are different regulations for rural areas, and they vary of course from country to country. Tax issues need to be factored in along with exchange rates and other Government considerations.
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But despite all the potential hurdles, property values continue to rise as a consequence of urban flight — going on now for decades — along with increasing technology enabling new forms of business and employment in non-urban areas. Now's a good time to start looking.
Posted by RealEstate at 05:57 PM | Comments (0)
May 29, 2006
Real Estate — FSBO or Agent?
Real Estate — FSBO or Agent, Which Is Best For You?
With the growth of the Internet, the prospect of 'going' FSBO — For Sale By Owner — as a method for selling your home is more attractive than ever.
Still, 6% of $200,000 is $12,000 and many find the prospect of keeping that money for themselves irresistible. Here are some things to consider when deciding whether to use an agent or 'go' FSBO.
In order to sell a property quickly and profitably, you have to know the market. If your listed price is even 1% off the average you will either sit on the property for a long time or fail to make as much as you could have on the sale.
Beyond the need to get an accurate, professional appraisal — required whether FSBO'ing or using an agent — agents can provide 'comps' listing the recent sale price of comparable properties. They also know the market and can often tell you whether your price is reasonable.
However, with the increasing availability of similar information on the Internet, FSBO is becoming a more realistic option. If you can access and analyze the data, FSBO may be for you.
Agents put your property in a database called an MLS, a Multiple Listing Service, to which other agents as well as potential buyers — through the agent — have access. MLS data is more difficult for the average person to gain access to and in some states you need a license to obtain the data. Almost in every case, one is required to be a member of the MLS service and pay a fee.
This is only the first step toward advertising your property far and wide to potential buyers. But, again, with the growth of Internet sites advertising homes for sale, along with other traditional options, you may find you no longer need the service once provided almost exclusively by agents.
Some individuals are natural negotiators and some have learned through long experience how to attract buyers and get the best deal. Some, though, will always be on the losing end of a proposition. Only you can decide how effective you can be in negotiating a fair, acceptable price and whether that process is enjoyable or torture.
Once you've listed the property, advertised it widely enough to attract buyers and negotiated a price one will accept, the most difficult part of the process begins. Every state and country has a long and complex list of laws about how a real estate transaction has to be carried out.
Deposits have to be made of the right amounts and at the right times in an escrow account, and insurance regulations have to be met. Title history is investigated and a hundred other details completed before ownership can be transferred and profits (if any) gained. If you don't have the knowledge or temperament for this sort of thing, FSBO is not for you.
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But, on the bright side, there are dozens of books, Internet sites, and low-cost 'seller assistance' businesses that can guide you through the process, often at a much lower cost than agent commissions.
Investigate before you decide, and best of luck.
Posted by RealEstate at 11:23 PM | Comments (0)
May 28, 2006
Real Estate Lenders
Real Estate — From The Lender's Point of View
It's a hard fact but although lenders may be friendly, they are not your friend. This doesn't make them bad, it just means that they — like you — are engaging in business, not social relations. Though they will often decide in your favor on a borderline case if you have a long-term working relationship, this is not charity, but an intelligent business judgment. They have good reason to believe you will be able to repay the loan at a profit to them.
Past history means: Credit history, including number and size of loans taken out, repayment history and so forth. FICO scores and other hard data are available in abundance and will be looked at.
It also includes income history — how much profit have you made on other investments and over how long a period? They'll examine income statements and at least three years of tax returns. They'll want a full accounting of outstanding debt and any legal judgments gained or issues in progress.
Overall, this is summed up in one word — experience. Have you previously shown you can and will repay a loan, which requires not only good character but good business judgment? Real Estate is a tough market, there's a lot of competition because there's a lot of potential for making money. The lender will want to know you can make some, so they will too.
Current facts get examined with equal care. The lender will examine the appraised value of a property on which they're considering loaning money. Banks as a rule do not lend based on collateral, they are looking for cash flow and positive income. They'll usually finance no more than 75% of the appraised value of the property.
Most lenders will put a limit of 50% LTV (Loan-to-Value) on undeveloped land, for example. If the property contains commercial structures, they'll want to know what income can be expected from those businesses — whether it's in the form of rent from a multi-dwelling apartment complex or lease income from small business owners.
And, of course, profit is income retained AFTER expenses, so they'll need to know how much it costs to maintain the land and commercial structures. Insurance, repairs, taxes and a host of other costs come along with any property ownership. The lender will want to know you can pay these AND pay their interest charges.
Most lenders will strive for shorter repayment periods, 20-year fixed is on the long side for many investment loans, and often a balloon payment after five or ten years is required. Longer terms benefit you because you can avoid paying for new appraisals, origination fees and other financing costs.
If your lender seeks a shorter period, you should try to arrange re-pricing at the end of five years, rather than having to come up with a large amount of cash. Something along the lines of "prevailing prime rate plus a 1% premium" is often an acceptable alternative.
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Lenders may not be your friend, but neither do they have to be an enemy — they can be a kind of partner. Keep in mind, everything is negotiable.
Posted by RealEstate at 11:26 PM | Comments (0)
May 27, 2006
Real Estate Marketing
Real Estate — Marketing, Ancient Art and Modern Science
Marketing is something everyone loves to hate, but you can't get around the fact that very little gets sold without it. Definitions vary, but marketing is roughly the development and execution of a strategy to sell something — which includes research, advertising, promotion and sales.
That means it's important to know local market prices before the property is purchased, while it's being prepared and advertised, and all during negotiations, some of which go on for weeks or longer.
You need this data in order to judge whether the current price is one which allows you to turn the property over at a profit, but also in order to know whether and where to compromise during negotiations. The stated price of a property, after all, is only one factor in the total. Are you going to pay for those needed repairs or does the buyer? And who will pay which, and what percentage of, closing costs? These numbers can and will vary depending on local market conditions, which can only be known by good research.
Advertising, too, is a key part of a marketing strategy. You need to attract as large a pool of real potential buyers in order to create a competitive bidding scenario. Those 'just looking' don't count as real potential buyers, especially if they don't have solid financing. That's another research item for the list.
Advertising, like most business today, has expanded far beyond traditional boundaries. Word of mouth is still helpful, as are local newspapers and specialized trade publications, but the added 800-pound gorilla today is the Internet. With Local Search and new image library features, most search engines play a far larger role than in years past. And that role is growing.
Internet sites devoted to real estate investment have grown dramatically in the past few years, and show no signs of leveling off anytime soon. For Sale By Owner (FSBO) sites, realtor specific sites showing properties, mortgage financing and a dozen other categories have blossomed on the web.
A good marketing strategy will take advantage of that and devote considerable resources to advertising on sites with good traffic (the amount of which can be discovered by — you guessed it — research). Take advantage of all the technology available and add clear interior and exterior photos, 360 degree views, and video of the property and the surrounding area.
Two of the key benefits to having a good marketing strategy is the ability to move inventory and control costs while doing it.
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In order to be a successful investor you have to be able to find a property that can be turned over in accord with your time table and at a profit. Even long term investors need to find properties that are undervalued, then promote and sell them for more than their accumulated costs. A good marketing strategy is essential for achieving those goals.
Posted by RealEstate at 11:28 PM | Comments (0)
May 26, 2006
Real Estate Financial Instruments
Real Estate —— Property or Paper?
Appraisals and inspections, marketing, renters, rehabs... it can all add up to a huge headache. But real estate investing is still exciting and lucrative. What to do? Consider investing in real estate-based financial instruments instead.
There are Equity REITS which invest in and own properties. Revenues come primarily from rents. Mortgage REITs deal in investment and ownership of mortgages rather than property with revenue coming mainly from interest on the loans. Hybrid REITs do both.
Keep in mind, however, that REITs are closed-end — mutual funds that have a specific number of shares for sale and once sold can't be redeemed through the fund. They have to be bought and sold to other investors as you would corporate stock, through a broker.
REITs are required to pay out at least 90% of their taxable profits as dividends to shareholders, so they can be relatively high yield. In terms of total return — dividends plus price appreciation — they're similar to small-cap stocks, with on average two-thirds of the return coming from dividends. They're therefore sensitive to interest rate changes. As interest rates increase REIT prices tend to decline.
MBS
MBS (Mortgage-Backed Securities) are a type of bond in which the paper is backed by a pool of mortgage loans. In the U.S. lenders make about $2.8 trillion in such loans annually with about 80% being covered by mortgage-backed securities.
Investors in mortgage securities earn a coupon rate of interest, like other kinds of bonds. But in contrast to other bonds, they receive repayments of the principle in increments over the life of the security, as the underlying mortgage loans are paid off, rather than on one large payment at maturity.
One of the advantages, one which lends the security some stability, is the statistical effect of pooling loans. No single or small number of loans that pre-pay or default wipes out the investor's entire investment.
But pre-payment of mortgages does occur for a certain percentage and that introduces some risk. The investor isn't aware of or interested in which loans pre-pay, but the fact that some do causes them to be sensitive to interest rate changes, one of the major influences in pre-pay rate. If borrowers took mortgages at 8% and rates drop to 5% a certain number are going to re-finance, causing the original to pay off early.
So, if interest rates are likely to fall, it's best to avoid pre-payable MBS. Closed MBS are, in that scenario, a better alternative.
There are specialized instruments like CMOs — collateralized mortgage obligations — and REMICs — Real Estate Mortgage Investment Conduits with similar behavior and risks. ETFs — Fixed Income Exchange-Traded Funds, too, sometimes are supported by underlying mortgage-backed securities and trade on the major stock exchanges. They're designed to track the performance of specific bond indexes, which track performance of an underlying bond market, such as MBS.
SELF-DIRECTED IRAs
You can even set up an individual IRA (Individual Retirement Account) that allows you to add assets in the form of raw land, single-family homes, apartments and other commercial buildings, rather than straight cash inputs. This allows you to take advantage of your knowledge of real estate, while avoiding some of the downside of actual property management.
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Whichever instrument you choose, and there are many others, be sure to do your homework and get the advice of a financial professional before investing large amounts. The sharks can always smell fresh blood in the water.
Posted by RealEstate at 11:30 PM | Comments (0)
Real Estate Career?
Real Estate — Tough Career Choice
Set your own hours, spend a lot of time outdoors, make lots of money. Sound good? With a career in Real Estate it is possible to have those things. But free lunches are hard to come by and this is no exception. Being a Real Estate Broker or Agent is a tough career choice.
Part businessperson, part psychologist, part friend and always far too busy, an agent participates in every phase of a transaction. He or she needs to know the local and larger market, have at hand an encyclopedic knowledge of related law and oversee dozens of details on several simultaneous deals. And all this while sometimes working from early morning until late at night, any day of the week.
Sales, of course, is central to any successful agent's career. The ability to initiate, negotiate and close a deal that's acceptable and fair to all parties is a skill with many facets. Enthusiasm and the desire and ability to work with people is a paramount.
But a sale starts before a property is listed and doesn't end when the agreement is reached. Before properties are listed they're discovered, appraised and compared. When agreement is reached, a new phase begins involving escrow accounts, title companies, insurance requirements, inspections and a host of other complex undertakings. In between, properties have to be prepared for sale and advertised and potential clients sought and brought for showings. And you thought brain surgery was complicated!
Since real estate transactions usually involve large sums, individuals involved can and often do get very upset when things don't go exactly as planned. And things rarely go exactly as planned when so many things have to happen just right, many of which are interdependent. Keeping everyone satisfied, or mollifying them when they can't be, and moving the process forward requires a very special set of skills.
There are also definite slow sales periods, sometimes a particular month, sometimes longer, where there may be lots of activity and a hundred things to do but few sales to show for the effort. This is especially true given the continuing amount of fierce competition from the large number of agents in the same geographical area. In 2004 in the U.S., brokers and agents numbered about 460,000, many of whom worked only part-time.
And all for a commission of a few percent. Although the potential for a high income is definitely present, particularly in the healthy market of the last few years, many agents make much less than many think. In the U.S. the middle 50 percent earned between $23,500 and $58,110 per year.
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But on the upside, and there assuredly is one, there are those attractive features mentioned at the outset. For the entrepreneurial type, the freedom to set one's hours, to take risks and reap rewards consequent with one's own efforts and the varied locations and kinds of activity can be extremely gratifying. And sometimes the money isn't bad, either.
Posted by RealEstate at 12:20 AM | Comments (0)
