As a real estate agent, what do you think is the most important thing to find in a lender?
A lender is his or her own brand. The moment I see a pre-approval letter, I know many things in one instance: Whether or not the deal will close; whether or not the deal will close on time; and whether it will close without hiccups—all because of the person behind the letter. It’s about trust and doing what it takes to get the job done and going above and beyond to be sure it happens!
To do what you say you are going to do is a very important aspect in a lender, especially in this economy where at times it’s hard to get a loan through. It’s about calls, emails, follow up, action- communicating the status of the loan to all parties in the transaction is very important! Also, always be loyal to your lender!
I’m preparing to sell a home, what do inspectors look for during their inspection?
For home sales, meaning listings, typically there are two inspections done concurrently. One is the Home Inspection by a licensed contractor and the second is the Wood Destroying “Pest” Inspection which is done by a termite company. Both reports complement each other.
The property inspection provides the seller with a punch list of items that are in need of repair and items to look forward to dealing with in the future. The pest report also shows the amount of dry rot and any wood destroying organisms in the structure. Typically, many lenders actually require the Section 1 items to be clear prior to close of escrow.
I encourage my sellers to do the reports upfront because often times many repairs are done prior to getting the house on the market. In fact, the home’s condition, and thus the reports, can affect the actual value of the home. Reports ahead save time and money. In fact ALL home owners should get both a contractors and pest inspection even when they do not plan to sell. It’s a good way to keep your home in tip-top condition.
What should one consider when placing an offer on a short sale property?
Short Sales have come a long way, especially with so many on the market right now, the process has refined as the number has grown. One of the first items to consider with a short sale is how many banks are involved. There may be up to 3 different banks on any one home! Obviously the more banks there are, the more challenging it can be to close escrow. Also consider which bank(s) are involved is important as well. Each bank has its own criteria which can be a moving target during the process of trying to close the home. Always ask if the listing agent is a trained short sale specialist. There is an art to handling short sales and having a great listing agent who is qualified makes all the difference in the world. If you happen to be first time buyers, my best advice is to stay away from short sales. It’s better to go for a regular sale or perhaps a bank owned property for your first home buying experience!
What exactly is a short sale and how do I know if it’s right for me?
Short sales happen when the loans that are existing on a property do not add up to the current value of the home. When the values in the housing market dropped dramatically many people found that they owed more on their property than it was worth, which is why there are so many short sales on the market currently.
Fortunately, short sales are slowing down; however, it will still take some more time to cycle through as the market recovers. We are very lucky on the Peninsula to not have a high percentage of inventory that are short sales!
What are three things buyers or sellers can do to make the transaction smoother?
1) Choose a Realtor and be loyal to that Realtor. The relationship between the buyer and seller and their realtor is one of trust. That’s why choosing the right Realtor to work with is important. You need to be able to be honest with your agent and know that the agent understands what you’re looking for and trust that they have your best interests in mind!
2) Pre-Approval is actually the first step to home ownership. So, get pre-approved! To do this, contact your lender of choice and answer a few simple questions. This sets it up so that when you’re ready to make an offer on a home you can add a letter of pre-approval to the offer and look more attractive to a seller!
3) Accept the fact that things will change in this process. I cannot tell you how many times people have told me “I do not want a ranch home,” and guess what they end up buying…..a ranch home!! A few months ago I had active buyers who wanted a town home only and to not be in the hills. Guess what they ended up buying: An adorable home in the hills because it reminded her of her mother’s neighborhood. Things change, all the time!!
How is the housing market in San Bruno these days?
The housing market in San Bruno is recovering in the same manner as the rest of the peninsula, thankfully! It’s still strong for selling homes that are in good condition with competitive prices. There are also still homes that need some cosmetic upgrades, if you’re looking for a mild fixer upper!
Essentially these homes have become “stale” on the market due to faulty marketing techniques which gives a buyer the opportunity to find some really attractive deals! It helps when you work with a local agent who knows the area and inventory and is willing to dig a little to find these deals!
Is a Condominium Better than a Single Family Home?
The answer is it depends mostly on your needs. But, with condominiums, one must do more research and understand what is being bought (a community of multiple residences that share common area spaces) to determine if it really is better.
So, what’s important to look at when it comes to a condominium? First and foremost is to make sure that the Home Owners’ Association (HOA) is strong financially and management wise. The key is to read the HOA documents package from cover to cover and get some additional feedback from your real estate agent. Do a deep title search on the property to see if there are any liens or lawsuits.
Interview the property management company to see what they do, if there are many issues with late home owner dues, how much money is in the reserve fund, when was the last time they did a
reserve study, and what kind of insurance they having including liability, workman’s compensation, earthquake, etc.
Next, make sure you read the “Covenants and Conditions and Restrictions” package (CC+Rs) that is prepared and provided by law by the HOA. This package will reinforce your research. Additionally, it includes bylaws, Articles of Incorporation, the operating budget, reserve funding and schedule, insurance information, the minutes of the meetings and newsletters, memos, etc. You also might want to have an attorney that specializes in reviewing these documents read them and give you an opinion. It will be well worth the fee.
From first time homebuyers attracted to the affordability of a condo to the empty nester that is looking for hassle free living, a condominium is exactly the right answer. Additionally, some condominiums have amenities like 24-hour doorman service, pools, spas, gym facilities, etc. that provide extra benefits. Just make sure that you do your homework. You want to buy in a strong, well run, and adequately financed condominium.
I’ve just inherited a loved one’s estate. How can a financial adviser help me?
When one inherits money from a loved one, often the emotions are mixed. When the need to deal with the inheritance arises, many people are still dealing with extreme grief. This makes it even more difficult to determine how to deal with the transfer of funds and/or property, especially when there are usually different parties—with often very different perspectives and financial goals—involved in this decision. This can be a very emotionally draining time for all.
Moving away from the emotional issues, let’s talk about the financial considerations in terms of the inherited investments.
When a parent, or other family member, dies, one of the biggest mistakes that the beneficiaries make is leaving the investments as they are, without doing any research into how they are allocated or considering alternative options. Why could this be a mistake? Because the portfolio was set up for someone typically 20 to 30 years older than the individuals who inherit the funds, and it may not fit well with their own financial goals. Also, the beneficiaries may not realize that there is a real opportunity with many investment for them to receive a “step up in basis” if they decide to sell, which means they can sell them at the value upon death with NO TAXES. This gives them a good opportunity to reposition the assets to be in line with their investment goals and risk tolerance. If the original investments are held for too long, the fear of capital gains could once more be an issue and repositioning to the “appropriate” positions may never be done.
Furthermore, it is absolutely critical to establish one’s own financial plan prior to deciding how to invest the inheritance because some companies offer different settlement options. And if you get talked into a settlement option that is not in your best interest, it may be impossible to change.
One of the biggest mistakes people make with investment inheritances is that they accept the death benefits without planning. Why is this a problem?
For example, let’s look at four million dollar estate that was left by generation 1 after already paying estate taxes (which could be as high as 48 percent on everything inherited over $2,000,000). Let’s say that the beneficiary (generation 2) is a 62-year-old man who has planned and invested well enough that he does not need the inheritance for his own financial security, but takes it anyways (because that’s what over 90 percent of Americans do). If he takes it, and then dies a year later, for example, the 48 percent estate tax will again deplete the inheritance his beneficiaries (generation 3). Estate taxes could deplete the original inheritance by another $2,000,000; however, with the proper planning in place, all $4,000,000 could have remained, avoiding both the first and second taxation.*
Troy V. Collins, RFC.**
President, McKinley Financial Group
Phone: (650) 551-8900
CA Insurance Lic. No. 0B96613
www.mkfinancial.com
* This material has been prepared for informational purposes only; it is not intended to provide and should not be relied upon for financial, legal, or tax advice.
** Registered Representative offering securities through First Allied Securities, Inc., a Registered Broker/Dealer Member FINRA/SIPC.
Investment Advisor Representative offering services through First Allied Advisory Services.
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Real Estate: What is it for? Part 4
One of the things that I have found over the years in working with clients that own real estate portfolios is that people love buying real estate, but they constantly make fundamental mistakes when doing so. The starting point in deciding what to buy and how to buy it should begin with the answer to this question: What is it for?
This may seem like a silly question, but as a financial advisor I need to know the time frame, expectations, and, most importantly, whether the property will be used to create income, for growth, or for growth and income (both).
This is the fourth and final piece in our discussions on the appropriate investment strategy for buying real estate.*
Liquidity for Real Estate Opportunities
So, we have established that one of the biggest mistakes that investors make when buying real estate is leveraging incorrectly, or not at all. But often times, people are somewhat reserved about having a mortgage payment to make. Let me remind you of a couple of basic premises.
A $1M property that appreciates by 5 percent has a 5 percent rate of return (ROR).
A $1M property that appreciates by 5 percent that is half leveraged has a 10 percent ROR.
A $1M property that appreciates by 5 percent that is 75 percent leveraged has a 20 percent ROR.
Most people who start investing in real estate know this and start out their investment strategy using this concept to their advantage. However, as the years roll on and people get comfortable, they start to make the mistake of paying it off. Doing this may be the right thing to do, but often it done by accident. By paying a property off, you may lose many of the great things about real estate: the tax benefits. You may have depreciated a building down all the way which takes away a deduction. By having expenses such as a mortgage, you have a way to offset income. These should not be overlooked.
Using up one’s liquidity to invest in real estate can be tremendously detrimental. Look at everyone you know who fell into the trap of buying multiple properties in Arizona, Las Vegas, and Texas over the past 10 years. Many of them are underwater; that is, they owe more to the bank than what the properties are worth. If there is no cash left behind and all properties are leveraged to the hilt, then there is significant risk.
In instances like this, paying cash for properties can really be a savior. If properties such as these were owned outright, though the value may be down, the likelihood of losing them is small. In fact, they would likely be cash flow positive. However, it may be argued that if there were a time to buy in Arizona it is NOW! With prices deflated like a porcupine’s balloon, there may be some great opportunities. For those who paid cash for properties, those opportunities may not exist. Getting cash out of a building is far more difficult than never having put it in. So, perhaps there is a middle ground.
I believe that having the cash to pay them off is a GOOD thing, but to actually do it is the last thing to do, (or last resort). For that reason, we have helped many clients use an insurance based program to create liquidity for opportunities in real estate.** In this program, your capital cannot lose value due to market fluctuations, but can obtain growth type returns and cause a positive “arbitrage” opportunity if used correctly (that is, it can keep pace with or beat the “cost of capital” ). This capital may be accessed tax free under current tax law. What is the advantage of this program? For one, all of your eggs are not in one basket. On top of that, consider the idea that you will have cash available at any time for any reason at all! And while it sits there, growing tax free, you could pay off the property that you choose to leverage instead, and it could grow at 7 percent or more while you are borrowing money at 5.5 percent or so, on a tax-deductible basis. You do the math!
Troy V. Collins, RFC.
President, McKinley Financial Group
Phone: (650) 551-8900
CA Insurance Lic. No. 0B96613
www.mkfinancial.com
Registered Representative offering securities through First Allied Securities, Inc., a registered Broker/Dealer Member FINRA/SIPC.
Investment Advisor Representative offering services through First Allied Advisory Services.
* Investing in real estate and real estate investment trust (REITS) may not be suitable for all investors and involves special risks, such as limited liquidity and demand for real property, changes in supply and demand for real property, changes in law, tenant turnover or defaults, loss of investment, competition, casualty losses, and use of leverage. Real estate values may fluctuate based on economic, environmental, and other factors. There is no assurance that the investment objectives of any real estate program will be obtained.
** Most people do not know that one of the most tax efficient investments in our country is an insurance contract issued by Life Insurance Companies. There are risk factors other than market volatility that could cause loss of principle. Not everyone will qualify for insurance through this strategy. Consult your tax advisor for any tax related strategies.
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Real Estate: What is it for? Part 3
One of the things that I have found over the years in working with clients that own real estate portfolios is that people love buying real estate, but they constantly make fundamental mistakes when doing so. The starting point in deciding what to buy and how to buy it should begin with the answer to this question: What is it for?
This may seem like a silly question, but as a financial advisor I need to know the time frame, expectations, and, most importantly, whether the property will be used to create income, for growth, or for growth and income (both).
This is the third in a series of four discussions on the appropriate investment strategy for each.
Real Estate for Growth and Income
In Parts 1 and 2, we separated out the distinctly different reasons for investing in real estate: growth or Income. In this article, my purpose is to try and make sense in blending the two. How can you do both? It may be that you need two different properties? It may be that one can do it.
Let’s say that a client came to me with a rental property that was worth one million dollars and had net rents (before tax) of $25,000 per year. His property was paid up, and Bob is content with his increase in income each year of about 4 percent (based on rent increases, if not rent controlled). I might look at this rental property and identify a few weaknesses. The first would be that the rents give Bob a 2.5 percent yield, which is not great for income. The second would be that he has virtually NO TAX BENEFITS. A third would be that he is not using his capital wisely to use what I would consider THE major reason for buying real estate, LEVERAGE!
If this is for income only, I could find individual bonds that might pay 4 to 5 percent, which would give more income than the property.* If it is for growth, then leverage might be a key. Bob wants both Income and growth. What do we do?
I might suggest that Bob look for replacement properties, two or more of them. It may be possible to find a property that has a 6 percent cap rate. If so, he could invest $500,000 into this property (all cash) and create $30,000 of income from just half as much money. Then he could find another property for growth in which he could put down, say, $500,000 on a $1M property (or four for $250,000 each).
What is the outcome of doing this? We still have $30,000 in cash flow. But now we have $1.5M of real estate appreciating for us instead of $1M. At a 5 percent growth rate, this is $25,000 more in year one alone. What is the risk? If you owned a $1M property outright and the tenant vacated, you would have no income. If that happens in our scenario, you have no income and you have a mortgage payment. So what you could gain on the top end can be at some risk. This is why for the income producing properties we often look to nonpublicly traded real estate investment trusts (REITs) or something with LONG term leases.** Having a company such as Home Depot or Walmart as a tenant with a signed 20-year lease can often eliminate much of the vacancy concerns. Thus, if the other property were vacant, you would still be able to cover the debt putting you in a similar situation as if you owned just one building outright.
It is important to consider all options when investing in any kind of real estate, but the more you know, the better.***
Troy Collins
* Bonds are subject to a variety of risk, the most visible of which is interest rate risk. If a bond is sold prior to maturity, the investor may receive back more or less than the original amount invested.
** Investing in real estate and real estate investment trust (REITS) may not be suitable for all investors and involves special risks, such as limited liquidity and demand for real property, changes in supply and demand for real property, changes in law, tenant turnover or defaults, loss of investment, competition, casualty losses, and use of leverage. Real estate values may fluctuate based on economic, environmental, and other factors. There is no assurance that the investment objectives of any real estate program will be obtained.
***Note/disclaimer: this article is over-simplified in many ways and is for illustrative purposes only. McKinley Financial is not recommending any specific product, nor are we recommending that you purchase real estate.
Troy V. Collins, RFC.
President, McKinley Financial Group
Phone: (650) 551-8900
CA Insurance Lic. No. 0B96613
www.mkfinancial.com
Registered Representative offering securities through First Allied Securities, Inc., a registered Broker/Dealer Member FINRA/SIPC.
Investment Advisor Representative offering services through First Allied Advisory Services.
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