shortsaleil

Building Financial Freedom Through Real Estate Investing

March 28, 2012
Leave a Comment

Jeff Donnellan Re/Max

A book that I recently read had this quote and I was deeply impacted by the thought of having control over my time.

” What do you consider the signs of a successful life?  Many people think that accumulating wealth & belongings is the central sign of success: others are happy to have their health and retirement security.  You need to come up with your own definition,  but here is an idea about success that deserves consideration.  Success may be defined as achieving complete financial and personal freedom.  That allows you to do as you please while maintaining complete control over how you spend your time.”  – Michael Thomsett

Everyone has a dream about their future and how they would spend time if money was not a factor.  Your work doesn’t define who you are, but provides a means to an end.  A way to pay for living expenses, obligations and hopefully enough to save for investing or retirement.  Real estate investing can be a means to an end and a way to take control of your time while becoming financially free.  Rental properties have four advantages that no other investment can combine.

– Cash Flow

– Appreciation

– Leverage & Loan Amortization

– Tax advantages

A rental property can generate monthly income that can be used to pay bills or reinvest into the property to increase its value or overall ownership.  Most real estate appreciates over time.  A home purchased today for $250,000 that appreciates at 3% per year will be worth $336,000 in 10 years.  Residential home loans can leverage your down payment.  With a 20% down payment a buyer can borrow five times more than what they put in and over time the loan is amortized to pay down more principal.  This allows the owner to gain more equity each year of ownership.  The tax advantages of owning real estate can be significant.  The interest paid on the loan is a tax deduction as well as depreciated home value.  The IRS allows the value of a home to be depreciated down to zero over 27.5 years.  This creates a paper lose when the home is creating cash flow and appreciation every year.

Real estate should be viewed as a long-term non-liquid asset and its value compounds over time.  This period is usually 5-10 years and called seasoning.  If a property cash flows the owner can choose the correct time to sell for maximum profit in a good market,  instead of being forced to sell and lose value in a bad market.

Many people who I speak with are interested in real estate investing, but don’t know how to begin.  Saving enough cash for down payment can be difficult and usually doesn’t come quickly.  I tell them to think of the time used to save as a learning period as well.  Learn as much as possible about mortgages, properties available and plan the details of the purchase.  One way to begin investing immediately is to buy a 2-4 flat and live in one of the units.  By taking this approach you can get owner occupied financing ( lower rates, better loan terms & smaller down payment).

Another way to begin is called move up and rent out.  This is where the owner of an existing home rents out their current home and purchases a different home to live in.  Again the advantage of owner occupied financing comes in to play so cash flow is more likely.  The challenge in this scenario would be financing.  Today you would have to qualify for both loans or have more than 20% equity in your current home.  This is to prevent a “buy & dump” which is when some one purchases a new home and stops paying for the old one.

The next most common way to begin is buying real estate as pure investment.  Usually a larger down payment of 25% is needed, but the larger down payment will help the investment cash flow because less money is going toward paying a mortgage.  Real estate investors at this stage are looking at properties for ROI or return on investment, and not as a stepping stone.  Make sure your Realtor or real estate adviser can provide details on ROI for each property so you can make an informed decision.

Real estate investing is not for everyone.  There are some down sides like dealing with tenants needs, repairs, & possible vacancies.  Choosing the right team to help you is of the most importance.  A Realtor with investment experience can help in the selection of properties or help manage rentals.  A mortgage lender can suggest the best form of financing and qualify you for the appropriate purchase price.  An accountant can plan your taxes in order to take advantages of the most deductions and pay less in income tax each year.  Real estate attorneys act as an insurance policy & protecting your interests from losses.  Selecting the correct advisers will set you up for success.

http://www.webhomesearcher.com

Advertisements

Building a New Home

March 7, 2012
Leave a Comment

Jeff Donnellan Re/Max

Building an new home is an exciting process and some times necessary when the real estate market is short on supply of what you need or want.  When people have specific needs or looking for that forever home it’s important to get what you want, otherwise you just end up moving again.

The home builder market has shrunk considerably since 2007, with many being stuck with a large inventory and eventually declaring bankruptcy.  In many ways this was a good thing since it cleared out many of the people that had no idea what they were doing as well as the disreputable business men.  What remains is the best of the best and home builders with a well run business.  Most home builders do not build spec homes any more or if they do, the selection is very limited.  Because of this they some times charge a premium which is a little bit over market.

The benefits of a building a new home are that you get to make all the selections, such as location, lot, features and amenities with no trade offs or remodeling.  The benefits of projected long term ownership and energy efficiency can be well worth paying a bit over market because moving costs are extremely expensive when you consider closing cost, hiring a Realtor and paying commissions.

Once you find the right home builder and location it’s important to negotiate the final price of the home with the lot and all upgrades.  Find out what is standard and what is an upgrade.  Ask about the materials used and how they effect over all usage, durability and energy efficiency.  Make sure the home builder provides a warranty and is reliable about fixing any issues that go wrong in the 1st months of ownership.  Also ask for at least 3 referrals.

The largest challenge is planning a strategic move.  Financing plays key role and may take some creative financing to make it work since many home buyers also have a home to sell.  Here are some options that can set you up for success if you currently own a home and want to build a new one.

1.  You many need to qualify for loans, your current and the new one in order to start construction.  The construction period is usually 4-6 months.  This would give 3-5 months to market your home and find a buyer.  This may be challenge depending your current real estate market.

2.  Qualify for both loans and rent out your existing home just before construction is complete.  This may be a great option if you can afford the new down payment and use rents to pay your existing mortgage.

3.  Find alternative financing or a portfolio loan.  The rates may be a bit higher but they do not have to meet conforming mortgage standards and could be a bit more flexible.  Many of these mortgage lenders will set up a refinance with in 1 year once the mortgage has  seasoned and you build property management history.  At that point you can qualify for a conforming loan with lower rates.

4.  Option 4 is to sell your home and find temporary living while the new home is being built.  This could be a short term rental of 6 months.  The key to this option this option would be to select all the details of your new home and once you get a purchase contract for your existing home, get the construction process started immediately.

Good luck with your new home.

www.webhomesearcher.com


Real Estate Short Sale Deadline Nears

March 4, 2012
Leave a Comment

Jeff Donnellan  Re/Max

Click here for Short Sale HELP

The Mortgage Debt Forgiveness Act is set to expire at the end 2012.  This act provides tax exemptions to home owners who have a deficiency judgement as the result of a foreclosed or short sale their home.  A deficiency judgment is an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying promissory note, or loan, in full.  The IRS considers this taxable income.  For example is a mortgage balance is 100k and and after the home is sold through short sale or foreclosure the total amount recovered after expenses is 50k.  The IRS would consider the 50k of debt cancellation as taxable income.  The Mortgage Debt Forgiveness Act is an exemption for home owners to not be taxed on forgiven debt, but this is the last year to claim it.

A major benefit of a short sale over a foreclosure is the ability to negotiate the deficiency judgement away.  When using an experienced short sale Realtor & attorney they will most likely be able have the bank release the mortgage deficiency and have it reported to your credit scores as “paid in full” or “settled.”  This has a dramatic difference simply because a foreclosure will not be on the record, which will damage credit for 7-10 years.  In effect it’s like a fresh start with the slate wiped clean, giving home owners a chance to start over and one day purchase again.

Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

  • Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
  • Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
  • Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
  • Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.
  • Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.

More information is available on the IRS website http://www.irs.gov/individuals/article/0,,id=179414,00.html


Steps to Purchasing a Chicago Home

March 2, 2012
Leave a Comment

Jeff Donnellan

www.webhomesearcher.com

So you’ve found that perfect home after searching for a week, a month, or a year.  So what’s next?   Most likely you’ve already done your pre-approval and financially qualified the home to make sure it’s in your budget.  The next steps will show in detail of how to make that perfect home yours.

1.  Ask for the Home owner’s disclosures such as “lead paint”, “Radon”, and the Seller’s disclosure that lists about 20 items that are critical to a well-functioning home.  If you are buying a foreclosure the seller will not provide disclosures.  So a home inspection is crucial.

2.  Next a CMA or Comparative Market Analysis prepared by gathering at least 3 sold homes with in close proximity and similar features will help determine value and offer price.  If a home is asking 200k and the comparable sales are 195k, the home is well priced.

3.  Making the offer:  These are the 5 negotiable parts of the contract.

  • Price
  • Earnest Money ( good faith deposit kept in escrow until closing when it is returned)
  • Closing Date
  • Personal property ( appliances, fixtures, furniture)
  • Financing (FHA, VA, Conventional, Cash)

4.  After the contract is negotiated it’s time to get busy.  A home inspection should be scheduled in the 1st 5 days after acceptance.  The inspection will help determine if there are any defective parts of the home and issues that need to be repaired.

5.  An attorney should be contact as well to review the contract and get in writing  home inspection issues that the seller agreed to fix or give as cash credits. (with in 10 business days  after contract acceptance)

6.  Contact your mortgage lender and let them know you have an accepted contract.  They will take a mortgage application and start your loan processing.  They will ask for additional documentation such as bank statements, pay stubs, w 2’s and tax returns.

7.  Many of the next steps take place behind the scenes.  The underwriting your loan will begin to make sure all documentation is place and the appraisal will be order to verify the property’s value meets the loan amount.

8.  A mortgage commitment will be issued stating that funds are approved and awaiting the closing.

9.  You will want to do a final walk through of the home usually the day before or morning of closing to make sure no damage was done to the home when the seller moved out and that all agreed upon items have been left in place.

10.  And finally the Closing.  Your mortgage funds will be wired to the title company where the closing is taking place and loan documents will be signed.  Items needed:  A cashier check for down payment, & closing costs made out to the title company and Identification like drivers license or passport.

Congratulations!!! You’re now the proud owner of  a home.


Chicago Real Estate: 10 Things to Know Before Buying a Short Sale

January 31, 2012
Leave a Comment

Roughly 15-20% of the Chicago Real Estate Market would be classified as a short sale.  This is when a home owner owes more than what their home is worth, (usually behind on payments ) and is asking their bank permission from their bank to pay less than what is owed on the mortgage.  According to MLS data from Oct. 2011 short sales sold for 77.3% of market value where as traditional sales and Bank Foreclosures sold for 92.1% & 88.6% respectively.   So how does the average home buyer go about taking advantage of this deep discount.

1. Be patient!  Short sale can take as little as 60-120 days but in some cases up to 6 months.  It’s a complicated process and moves      slowly because most banks are understaffed in this department or experience high turnover.

2.  No short sale is ever the same.  Find out what bank owns the loan and if there is a 2nd loan on the home as well.  Some banks are easier and faster to deal with than others.

3.  If the price of a home is too good to be true than it probably is.  Ask how the listing Realtor determined the listing price.  Is it based upon market value? Did the bank determine the asking price ?  Or was it a negotiated price of a previous offer?  Did the agent just make it up?

4.  Be sure to find out how much the seller owes on their loan(s).  The less they are shorting their bank the more likely the sale will be approved.  If they are asking 150k and their loans are 400k chances are it will be difficult to prove the drastic loss.

5.  Ask if the listing agent has previous short sale experience.  This is critical.  An experienced agent will have all the documentation necessary to submit a complete short sale package to the bank for approval.  Incomplete packages are the number 1 reason for delays.

6.  Has a BPO been completed or ordered?  This is the 1st milestone in the short sale process.  The bank will order a BPO or broker price opinion after receiving the short sale package.  This is done by a 3rd party and helps a national bank determine home values in a specific neighborhood.  Some times this valuation will come back higher than the offer price or even the listing price.

7.  Another key question to ask “have there been any previous offers?”  Often times if a previous offer fell short critical information was learned like issues during the home inspection, problems financing the home because of repairs needed, acceptable sale price for the bank or just how quickly did the bank respond.

8.  Make sure the seller is cooperative.  A short sale seller is going to be dealing with a hardship like loss of job, income reduction or insolvency.  As a buyer you want to know they are engaged in the process and not in denial or stalling for time.  You will know this if they make the home available for showings, timely completion of contract, and short sale package submission.

9.  Be sure to ask for regular updates.  Usually every 1-2 weeks events will take place as a sign the short sale process is moving along and the listing Realtor is actively following up with bank.

10.  Be ready to close.  Make sure you have an approval letter submitted with your offer and your loan ready to close before the banks final acceptance.  This will greatly speed up the process on the back end by not waiting 30 days for loan processing.

When choosing a Realtor to help in your purchase make sure they are experienced and comfortable with short sales other wise you could miss out on 20% of the homes and some of the best deals.

Jeff Donnellan Re/MAX

http://www.webhomesearcher.com