Step 1: Choosing a Realtor®           

Buying a home is one of the largest purchases and biggest decisions of your life. The first thing to do is to find a REALTOR® you trust.

Ask your friends and relatives who have bought homes recently for their recommendations. Or, you can use the find-a-REALTOR® search to locate one in your area.

Before working with one, you should know that the duties of the REALTOR® depend on whom they represent.

Many REALTOR® specialize as buyer's agents, representing clients who are searching for their next home. These agents can save you time and money by researching properties based on your criteria, helping you secure the best mortgage rates, counseling you on the offer amount and terms most favorable to you, and negotiating on your behalf.

For buyers, there's really no downside to hiring a REALTOR® because the seller generally pays buyer's-agent commissions. Many buyer's agents have earned the Accredited Buyer Representative (ABR®) designation from the National Association of REALTOR® Real Estate BUYER'S AGENT Council.

If you choose not to use a buyer's agent, you could negotiate directly with the listing agent representing the owner.

All brokers must treat you honestly and fairly regardless of whom they represent.

If you choose to have a REALTOR® represent you, you should enter into a written contract that clearly establishes the obligation of both parties and specifies how your REALTOR® will be compensated.

 Step 2: Deciding what you need and want

Needs and wants list
Before you start looking, make a list of what you want and need. Once your list is made, go back over it and decide what is most important--which items are musts and which you are willing to give up. Assign each item a priority so that you will know what to look for as you begin house hunting.

Location
Deciding where you want to live may be the single most important factor in choosing a home. Location to employment centers, shopping centers, schools, major traffic arteries, and other attractions are important and have significant influences on value.  Ask your real estate if you have questions.

Your choice of location may be limited somewhat by the price you can afford. Even so, make sure you consider such things as:

■ prices of properties and property taxes;

■ distance to work, schools, shopping, and entertainment;

■ proposed changes in land use such as commercial shopping centers and roads, and potential hazards such as flooding and noise from a nearby airport or highways.

Type of home and lot
A single-family detached home typically provides more living space and land area than other types of living units and permits you greater freedom (less restrictions) to remodel, expand, paint, and alter the appearance.

If you don't like spending leisure time on yard work, consider a condo or garden (patio) home. Condos and garden homes often offer shared greenbelts and garden areas or membership in private recreational facilities such as swimming, golf, and tennis.

New vs. Resale vs. Fixer Upper homes
Pre-owned homes usually have established yards, and the neighborhood or subdivision is usually built-out. On the other hand, they may require more maintenance.

New homes are not without problems. Although they require less maintenance in the first few years, you may have to put in landscaping and call the builder back to correct faults. And if buildings are still active in the area, you may have to endure nearby construction.

You could already have your dream home in mind. Then again, you might not know what you like until you see it. Either way, your Texas REALTOR® will listen to your preferences and help you find the perfect home.

 Step 3: How much can you afford?

There are typically three major areas of concern when deciding what you can afford: down payment, qualifying for a loan, and closing costs. But, depending on your credit your options might be broader. Contact a mortgage professional.

Down payment
A conventional loan typically requires a down payment. It is not uncommon for buyers to place a down payment of 10% to 20% of the purchase price. For example, on an $80,000 home, a down payment of $8,000 to $16,000 in cash may be warranted.

Government-backed loans, insured by the Federal Housing Administration (FHA) and the Veterans Administration (VA) are particularly useful to first-time buyers and often require 5% or less as a down payment.

Generally, a higher down payment means better loan terms and a lower interest expense on the mortgage.

Qualifying for a loan
A lender will determine how much they think you can afford. But remember, just because the lender says you can afford one price doesn't mean that's what you should spend. Be wise and thoroughly examine how much you should spend on a home.

Be prepared to provide the lender with a two- to five- year financial history that contains the following:

■ Income: gross monthly income as well as employment history, education, and any secondary income such as bonuses, dividends, and child support. The lender may require a letter from your employer, W-2 forms, or, if you are self-employed, recent tax returns.

■ Assets: current checking account balances, savings accounts, stocks and bonds, certificates of deposit, other property, insurance policies, and pension funds.
 

■ Credit: debts on cars and appliances, debts on all credit cards, and history of debt repayment. Your lender may ask for a credit report, so you may want to clear up any known negative terms in advance.
Your Texas REALTOR® can help you determine what price range and monthly payment you can afford. The monthly payment typically consists of principal, interest, taxes and insurance--PITI, for short.

 Step 4: The Offer

What to offer
A REALTOR® can help you find your perfect home, but only you can decide how much you are willing to offer for it. Ask your REALTOR® about the selling prices and marketing time of other houses in the area.

Once you have determined the amount you are willing to spend, your REALTOR® will help you prepare a written offer. In most transactions you will offer to deposit earnest money with the escrow agent, showing your sincerity in making a reasonable offer and abiding by the terms of the written contract.

Contract forms
Your REALTOR® will help you prepare an offer using standard forms. The offer, if accepted, will become a binding contract. This document is the most important paper you will sign because it lays out all the terms of the transaction. It contains:

■ a legal description of the property,
■ any property that will be transferred with the home, (blinds, curtains, fireplace, screens, etc.
■ the price
■ financing conditions and contingencies
■ amount of earnest money deposit
■ name of the escrow agent and title company
■ pro-ration of insurance, taxes, and interest
■ fees to be paid and who pays for which
■ rights to inspect the property and for repairs to be made
■ dates of closing and possession
■ what happens if either party defaults on the contract

Inspections and warranties
Before signing the contract, take precautions to protect yourself against unseen defects in the home. An inspection by a qualified inspector can provide you with unbiased opinions about the condition of the foundation, mechanical systems, plumbing systems, appliances, etc. If you can, accompany the inspector at the time the inspection is conducted.

It's also a good idea to get a termite and other wood-destroying insect inspection.

You may also want to have your REALTOR® request that the seller furnish you with a one-year residential service contract as part of the deal. This is common practice with the purchase of existing homes (after the first year, you'll have the option of renewing coverage at your expense) and ensures that certain items will be repaired by the company if they fail to function after you move in. If you buy a new home, the builder may offer a warranty as well. Whether you get a residential service contract or receive any other warranty, find out how claims will be processed and how any necessary repairs will be made.

Seller's options
The REALTOR® working with you will present the contract to the seller's agent or seller. The seller has three options: accept, reject or make a counteroffer--a rejection of the offer with a simultaneous offer from the seller to the buyer. If the seller makes a counteroffer, you then have the same three options. This process goes on until a suitable price is agreed upon by both parties.

Binding contract
Once you and the seller agree to the written terms and both of you sign, the document becomes a binding contract. Be sure that you pay close attention the terms. Otherwise, you may waive some contractual rights.

The contract may also set out other contingencies that have to be satisfied, so read the contract carefully and comply with its requirements.

If repairs are required, the contract will specify who will bear the cost of the repairs, who will arrange for the repairs, and when the repairs must be made. Before you close, be sure that the condition of the property meets the required condition specified in the contract.

Step 5: Financing

Securing financing
Once a contract becomes binding, you'll need to secure financing. Depending on the terms of the contract, the purchase of the home may be contingent upon you finding the right financing.

Lenders
Most homebuyers get loans through savings institutions and mortgage bankers and, to a lesser extent, from commercial banks, credit unions, other private sources, or even the seller. Sellers often can offer a competitive interest rate and attractive terms. Check on specifics.

Types of loans
In general, three broad categories of loans are available:

1. Private vs. government loans. Most mortgage loans are made by savings institutions, banks and mortgage companies. Generally, a lender will require you to buy mortgage insurance, particularly if you make a low down payment. This insurance may be paid at closing or added to the loan amount. VA loans require no mortgage insurance, but only qualified veterans may apply for them. Mortgage insurance protects the lender, to a degree, in the event of default.

On government (FHA and VA) loans, the government does not actually loan the money but rather guarantees (or insures) to repay the lender if you default for some reason. Government loans have important advantages--they generally require a lower down payment than conventional loans and often have a lower interest rate or points. On the down side, government loans limit the amount you can borrow, often take longer to process, and sometimes have higher closing costs.

2. Fixed rate vs. adjustable rate. On a fixed rate mortgage, the interest rate stays the same over the life of the loan, usually 15 or 30 years. That means your payment will not change except for adjustments on taxes and insurance.

Adjustable rate mortgages (ARMS) have interest rates or monthly payments that can go up or down over time. These mortgages typically start out with a lower interest rate, lower monthly payments, and lower fees and points than fixed rate mortgages and often appeal to first-time homebuyers, younger couples who expect their incomes to grow in the coming years, and people who might not have much cash for down payment and closing costs.

If you consider an adjustable rate mortgage, ask the lender to explain the terms fully. Ask about the interest-rate cap (the maximum rate you will be charged no matter how high rates go in the market), the index that will be used to calculate future interest rates, and how index charges will affect your mortgage.

3. Assumable vs. new loan. Some loans, particularly FHA and VA loans as well as some adjustable rate mortgages, are assumable. That means a buyer can assume an existing loan usually on the same terms as the previous owner.

Assuming a loan may save some costs and time. As the buyer, you would typically pay the lender a fee at closing for processing the assumption.

The true price of financing
When shopping for a loan, don't judge the loan by the interest rate alone. Compare several items in the entire loan package, including:

■ Points on a low-interest-rate loan can be double those for a loan with a higher interest rate, causing you to pay more up front.
■ Total fees charged by the lender. Some lenders will absorb the cost of many services, while others do not, so ask in advance.
■ Term. In general, the longer the life of the loan and the more fixed the payment, the more you can expect to pay over the life of the loan. For example, a 30-year, fixed-rate loan will cost more in interest than a 15-year, fixed-rate loan.
■ Penalties. Ask what penalties will be charged if you pay off the note early. A prepayment clause could require you to pay a penalty if you pay off the loan early, such as refinancing the loan at a later time.

Loan approval process
From the lender's viewpoint, approving the loan, based on your financial standing, is only part of the risk; the other part is the property itself. The lender may require an appraisal to verify that the home is worth the loan as well as a physical survey to discover any encroachments on the property. Repairs may be required. Insurance must be purchased. Verifications of employment, deposits, and other matters must be obtained. Loan documentation and conveyance instruments must be drawn and approved. In addition, the title company must research the title and arrange for paying off any liens, taxes, and other costs. All these conditions and others must be satisfied before a transaction can close.

Hazard insurance
As another protection, the lender may require insurance to protect against fire and storms. (Flood insurance could be required if the house is in a flood plain.) Even if not required by a lender, it's probably a good idea for you to consider all types of insurance.
 

Consult your real estate professional for further details.

Step 6: Closing the deal

The closing is the end of weeks or even months of research and decision making. The closing could last less than an hour but may take longer, depending on the complexity of the transaction. It often occurs at the title company's office. The title company officer will explain each document before you sign. You may real estate agent and/or attorney present.

Two basic kinds of documents
If buying a home were strictly a cash transaction, you would simply hand over the money and receive the deed. More than likely, however, you are borrowing money for the home, which means that you are actually making two transactions--acquiring the loan and buying the home.

As a borrower, you will sign a note promising to repay the loan and a deed of trust (also known as the mortgage) pledging the house (or other collateral) as security for the note. You will also sign numerous other papers including acknowledgments, disclosures, surveys, certificates, etc. Be sure to read each document carefully. Ask questions if you do not understand anything. There are no dumb questions. Seriously consider having your attorney present at closing.

As a homebuyer, you will present a cashier's check (or other good funds) to the seller, sign a document that itemizes closing costs (the lender will have given you an estimate in advance), and pay your share of the closing costs. In return, you will receive a deed, transferring ownership rights to you.

The home is yours
At the end of the meeting, you will likely receive keys to the property. At that moment, the home will be yours. Occasionally, possession of the property will occur after closing. For example, the seller may have negotiated with you for a few extra days after closing, or the loan will not immediately fund, or other concerns. But, in most transactions, you will be the new owner at the end of closing.

Some other points to keep in mind:
■ Buyer/seller agency. It's important to understand who your REALTOR® represents--buyer or seller. The REALTOR® will provide you with information about representation. As a buyer you may sign a buyer representation agreement with a REALTOR® It will discuss the scope of the Realtor's representation.

■ Pre-paids. You should be aware that your closing costs will include prepayment of an

escrow account to cover insurance and taxes.

■ REALTORS® are required to make properties available without regard to race, color, religion, national origin, sex, disability, or familial status.

 
■ Be sure to have a property inspected by licensed inspectors to determine: a) the condition of the property (structural, mechanical, electrical items, etc.); b) any environmental conditions (asbestos, lead-based paint, toxic materials, etc.); c) wood-destroying insects; and d) other matters. Brokers are not qualified to perform such inspections.

 
■ Residential service contracts can offer repair to appliances, electrical, plumbing, heating, cooling, or other systems in the property.

■ Be sure to obtain a policy of title insurance or have an abstract of title reviewed by an attorney of your choice before buying a property.

■ Seek professional advice before entering into a binding agreement.

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How to buy a HUD: Part 1

1999 brought us many changes to the way HUD sells homes as HUD has moved toward privatizing its effort to sell its foreclosed homes in inventory. As a result, you can now find a list of HUD Homes on the internet, pick one out that you like and buy it … right? Well not exactly, but we will give you some specific pointers to getting through the maze and the myths.

First of all, you should know that a home becomes a HUD Home because someone that had an FHA Insured loan, defaulted on that loan and was foreclosed by their lender. The lender in turn collects from FHA (Federal Housing Administration) any losses they incurred from foreclosing. FHA is part of HUD (Housing and Urban Development). HUD in turn eventually gets the deed to the property and offers it for sale to the general public.

The reason lenders can recover their losses is that everyone, yes everyone who gets an FHA Insured loan pays what is called “mortgage insurance”. These insurance premiums show up on your settlement sheet as an initial premium, which is usually added to your loan amount and then an additional monthly premium is added as part of your mortgage payment. These premiums go into a fund to payoff lenders.

Now that you know how a home becomes a HUD Home, you need to know that it takes 6-12 months for HUD to get the deed, so it can try to evaluate and sell the home. It takes the lender 3-6 months to complete the foreclosure process and another 3-6 months to get reimbursed by HUD so HUD can get the home, inspect, appraise the property and put it on the market. All the while the home is usually vacant; this total timeframe could easily be 12-18 months from the date of foreclosure, but 8-12 months is probably the norm. All these and more are reasons that HUD sells homes strictly on an “AS-IS” basis.

HUD Homes typically have been vacant for an extended period of time often without any utilities turned on. HUD is working with its private Marketing and Management contractors (M&M’s) trying to come up with an efficient way of keeping things like sump pumps running and getting utilities turned on before the appraisal is completed. Until recently, appraisers did not necessarily have the benefit of having gas and electric service. How could they give a reasonable determination of value without knowing if the plumbing, electric, heating and air conditioning works? These procedures have been changing and result in better appraisals. However, home inspections should be conducted to see for yourself exactly what the condition is so that you go to the settlement knowing what to expect from the home and what repairs will be needed.

Remember, HUD Homes are sold in As-Is condition. If the repairs needed exceed $5,000 HUD has a program to lend you the money called its FHA 203k rehab loan program (we will cover details of that program in a future article).
 

HUD requires you to use an approved real estate agent to help you use their contracts and forms to submit contracts if your bid is accepted. You can find the HUD property list online at HUD Foreclosures.

Just Foreclosures provides vital real estate foreclosure data. You will also find foreclosure specialist and qualified mortgage professionals to facilitated your next real estate transaction.

For example, you go to Just Foreclosures, select HUD Foreclosures and your state. You are then given the choice to search several ways: by whole cities, zip code or multiple zip codes and a few other options. In fact, if you know the address of a HUD Home because someone told you about it or you happened to see a HUD sign, you can enter the address and Just Foreclosures will tell you if the property is available for bidding! No other web site, including HUD’s can give you that information. You will find it easy to use and very helpful.

In fact, they have a FAQ section that helps you to understand the difference between Insured (IN), Uninsured (UI) and Insured with an escrow (IE). Briefly, Insured means that the property meets HUD’s minimum property standards and has been appraised for the stated value and your lender will not need a new appraisal (which saves you $400.00 on a new FHA appraisal!).

Insured with an escrow means that HUD’s inspections and appraisals indicate that there is less than $5,000 in repairs needed for the property to meet HUD’s minimum property standards. This is important because you need to know that the minimum property standards are in fact very minimum. Do not give up on your right to a home inspection just yet. First, take a look at the HUD minimum property standards. You need to know that HUD expects you to complete the repairs and then get your lender to inspect and approve the repairs before you can get the funds from the repair escrow. This means that you need to get someone to do the repairs who will wait to get paid when you do or you must lay out the money and get reimbursed by your lender.

Uninsured properties require you to pay cash or get some kind of rehab loan. These homes need more than $5,000 in repairs and often need $10,000 to $20,000 or more. HUD offers the FHA 203k rehab loan, which I have done many times for clients and works very well if your “team” helping you knows what they are doing. An experienced real estate agent as well as a lender experienced in the processing of FHA 203k loans will help save you time and money. The interest rates and the amount of loan discount points is usually a little higher than a standard FHA loan, but you can often buy these properties at significant below market prices if you are willing to put up with the higher fees and the time of fixing them up.

How to buy a HUD: Part 2

Once you've understand how a home becomes a HUD Home, you then need to know what obstacles you must overcome to make your purchase and how to manage the "risks" of buying foreclosure real estate.

Anytime you sign on the dotted line to purchase a property "as-is" without even a financing contingency, you had better know what you are doing. This sounds scary, and it should, but there are clear steps you can take that will help make this a better experience for you and make it the best single investment you will ever make in your life!

First of all, find a good real estate agent. Yes, there are thousands of them and yes there are many very good ones. You need a good one. The bottom line is that you need a good real estate agent who has experience dealing with HUD Homes, you can find them at Just Foreclosures.

There some clear differences you and your agent must understand when dealing with HUD. The contract is very different and you must use the HUD contract and HUD Addendums. This is critical because you just cannot buy the home without these forms and your agent should be sure to explain both sides of the contract. The back side of a HUD contract contains all the fine print. HUD also has a fairly new online bidding system and you want an agent familiar with this system.

The agents' Broker must be registered with HUD before any of their agents can even submit bids. This should be discussed with your agent during your very first conversation. Bids can be submitted until midnight each day Monday through Friday (you can submit bids on the weekend, but they count as if done on Monday). In most states new listings are posted each Friday, usually by mid-day, with bids due the following Tuesday for full price Owner-Occupants only. An experienced agent will know this and explain this to you, but remember, the exact days are different in many areas.

The New Listings are made available to Owner-Occupant bidders who are prepared during the initial bid period. If the property is not sold during the first bid period, it will be made available to All Purchasers (including investors). The exact number of days between each change can differ which is yet another reason to be sure and deal with an agent who has experience with HUD. HUD has also been known to change the rules often, particularly in the last year as they have different M&M Contractors handling sales in various states.

In addition to a good agent it is a good idea to speak to a lender familiar with HUD Homes and in particular, find a lender who is knowledgeable about FHA 203k loans. These loans will help you get the money to make the home purchase AND get the funds you will need to fix up the property. It is this program which helps you get the maximum benefit and the maximum "sweat equity" when buying a HUD foreclosure or any foreclosure. Part of the American Dream is to buy a home and fix it up so that it is worth more than you paid for it - the FHA 203k is one of the best ways to achieve this.

The FHA 203k loan helps to protect you from yourself. It requires a HUD approved inspector to thoroughly review the property pointing out the required repairs and discussing with you the repairs you would like to have completed. This is sort of a "wish list" because they will lend you all the money as long as you qualify for the loan amount. The minimum, however, is $5,000.00, but these loans include paint, carpeting, kitchens, baths, windows and even draperies and a whole lot more.

The best part of these loans is that the person who inspects the home for you in the beginning is the same person who inspects the home as the work is completed in order to approve draw requests. You have to complete some work before the repair money is released to you, therefore you have to be prepared to lay out the money or get a contractor willing to wait for the draw inspection.

While you are not required to get a FHA 203k loan and there are many properties that do not need extensive repairs, the program is very helpful in making you think about what you are getting into and providing independent inspectors to try a make sure the work is done properly and that the home is in overall good condition.

If you are purchasing an Insured property (IN), no repairs are required, no appraisal is required, but you should absolutely, positively get a home inspection from a certified home inspection company. Your agent should be able to tell you the procedure for turning utilities on before the inspection; HUD doesn't always get the condition of major systems right. Your agent must make the request to turn on the utilities after HUD accepts your contract. You will then have 15 days in which to conduct the inspection. There is a separate HUD Addendum that covers many specifics regarding this process and why you should get a Home Inspection. A good agent will know this and be very helpful explaining and coordinating the process.

You cannot delegate the responsibility for making a smart home buying decision. A knowledgeable real estate agent can assist you, be sure to get a Home Inspection or a good HUD Inspector for a FHA 203k loan and you will have managed the risks and increased the rewards of buying a HUD Foreclosure property.

How to buy a HUD: Part 3

HOW DO I ACTUALLY BUY A HUD HOME? Now that you know how a home becomes a HUD Home and what an FHA 203k rehab loan can do for you, we need to understand how to actually buy the property. A review of previous articles will give you good background, but the process is straightforward.

Unless you are a Teacher or a Police Officer, you need to find a good real estate agent that is knowledgeable in HUD and FHA procedures and guidelines. I suggest that even Teachers and Police Officers should seek out the assistance of a knowledgeable agent. Teachers and Police Officers are eligible for special programs, the Officer/Teacher Next Door Programs, which will be covered in future articles. Everyone needs a real estate agent to submit a bid to HUD on his or her behalf.

Looking over the HUD List is something you can do on your own, as well.

If your agent cannot find a HUD Home for you, there are tools you can use to find the home yourself on this website. You will still need a real estate agent that is registered with HUD to bid on these properties. It is helpful to know this in advance because there are bidding deadlines to be concerned about. You do not want to find a home only to find out that the bid is due at midnight tonight and your agent is not registered with HUD!

All bids are due at midnight on the bid deadline published on the HUD List. Since the bids are submitted through the Internet, your agent can submit up until midnight. Be sure to ask your agent to PRINT the Bid Confirmation that Hud presents on the computer screen. This is the only way to "find" your bid if it gets "lost".

Most Texas markets list the NEW LISTINGS on Fridays and have a bid deadline the following Sunday. Bids for these properties are available only to Owner-Occupant bidders. HUD tries to give new homeowners a short period of time to bid against other new homeowners (as opposed to experienced investors). If the property is not sold to an Owner-Occupant, the property is made available for bids on a DAILY basis, allowing investors to bid.

The daily bid properties are sometimes allocated to Owner-Occupants again for a short period of time before they move to the final category, daily bids by All Purchasers. Anyone can bid on these properties and you can bid any price; it does not mean that HUD will take the highest offer. After all, this is not an auction; it is a sealed bid process. Each market does have slightly different timeframes for these categories, but now that you know about them, you will be able to determine the rules in your area. Check with your local real estate professional to get the HUD's latest changes.

Let’s review:
■ Owner-Occupants Only – Any Price, within midnight deadline:
■ Daily, All Purchasers – Any buyer, any price acceptable to HUD.

There has always been talk of HUD’s "magic number" in terms of how low they will go. Don’t let anyone tell you they know this bottom line number because the HUD Management and Marketing Contractors (M&M’s) who sell the houses for HUD don’t know and if they did, they certainly are not going to broadcast the information. It's based on a number of factors. I have seen HUD reject one offer on one day and take a slightly higher OR lower offer on another day.

The real point is to do your homework. Before you look for a home you will determine how much house you can afford to buy. This is absolutely critical to do BEFORE you start looking. It’s just too easy to fall in love with a house you cannot afford to buy. Find the house you think you like and (with the help of your real estate agent) determine what the houses sell for in that immediate area. You will find that HUD Homes can be great values, sometimes even great bargains, but they can also sell for market value if they are in condition and in a desirable area.

Once you determined the right home, then you determine how much you want to pay for the property. Anytime you bid real low you risk losing the bid to someone else who really wants the property. My suggestion is to pay what you can afford to pay for the house you will call home. If you only want it if it is a "super bargain", then take your chances and bid whatever you want. However, a word of caution, good HUD Homes in desirable areas come and go very fast. Be prepared to be decisive, but do not rush into anything.

If you do your homework up front you will be better prepared to take advantage of that "great deal" that comes your way and requires you to move quickly in order to get it.

Steps You Should Take:
■ Get yourself pre-qualified before looking ;
■ Look for houses in your price range and in your area of interest;
■ Check the HUD List yourself on a regular basis;
■ Find a knowledgeable real estate agent to work with.

■ Don’t be afraid to bid on what you like;
■ Make sure you get a Home Inspection if you are the successful bidder;

There is no substitute for knowledge and common sense regardless of what you are trying to do, but they are necessary ingredients for you to make the largest single purchase you will ever make.

Just Foreclosures has assembled a network of real estate agents, lenders, home inspectors, title companies and other industry professionals as well, but your real estate agent must be registered with HUD and your bid must be submitted online at HUD’s web site. If your bid is accepted you must get your original Hud contract and forms to HUD within 48 hours of being posted to HUD’s Bi Results section of HUD’s web site.

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FICO & your mortgage: Part 1

If you were lending a couple hundred thousand dollars, who would you want to lend it to?

Part 2: How lenders look at them

Imagine a busy lending office and a loan officer has just ordered a credit report. He hears the whir of the laser printer and he knows the pages of the credit report are going to start spitting out in just a second. There is a moment of tension in the air. He watches the pages stack up in the collection tray, but he waits to pick them up until all of the pages are finished printing. He waits because FICO scores are located at the end of the report. Previously, he would have probably picked them up as they came off. A FICO above 700 will evoke a smile, then a grin, perhaps a shout and a "victory" style arm pump in the air. A score below 600 will definitely result in a frown, a furrowed brow, and concern.

FICO stands for Fair Isaac & Company, and credit scores are reported by each of the three major credit bureaus: TRW (Experian), Equifax, and Trans-Union. The score does not come up exactly the same on each bureau because each bureau places a slightly different emphasis on different items. The number itself can range from 300 to 900. The formula for exactly how the score is calculated is proprietary information and owned by Fair Isaac. Here, however, is an approximate breakdown of how it is determined:

35% of the score is based on your payment history. This makes sense since one of the primary reasons a lender wants to see the score is to find out if (and how timely) you pay your bills. The score is affected by how many bills have been paid late, how many were sent out for collection, any bankruptcies, etc. When these things happened also comes into play. The more recent, the worse it will be for your overall score.
30% of the score is based on outstanding debt. How much do you owe on car or home loans? How many credit cards do you have that are at their credit limits? The more cards you have at their limits, the lower your score will be. The rule of thumb is to keep your card balances at 30% or less of their limits.
15% of the score is based on the length of time you've had credit. The longer you've had established credit, the better it is for your overall credit score. Why? Because more information about your past payment history gives a more accurate prediction of your future actions.
10% of the score is based on the number of inquiries on your report. If you've applied for a lot of credit cards or loans, you will have a lot of inquiries on your credit report. These are bad for your score because they indicate that you may be in some kind of financial trouble or may be taking on a lot of debt (even if you haven't used the cards or gotten the loans). The more recent these inquiries are, the worse for your credit score. FICO scores only count inquiries from the past year.
10% of the score is based on the types of credit you currently have. The number of loans and available credit from credit cards you have makes a difference. There is no magic number or combination of types of accounts that you shouldn't have. These actually come more into play if there isn't as much other information on your credit report on which to base the score.
Sounds confusing, doesn’t it?

The credit score is actually calculated using a "scorecard" where you receive points for certain things. Creditors and lenders who view your credit report do not get to see the scorecard, so they do not know exactly how your score was calculated. They just see the final scores.

Basic guidelines on how to view the FICO scores vary a little from lender to lender. Usually, a score above 680 will require a very basic review of the entire loan package. Scores between 640 and 680 require more thorough underwriting. Once a score gets below 640, an underwriter will look at a loan application with a more cautious approach. Many lenders will not even consider a loan with a FICO score below 600, some as high as 620.

FICO Scores and Interest Rates
Credit scores can affect more than whether your loan gets approved or not. They can also affect how much you pay for your loan, too. Some lenders establish a "base price" and will reduce the points on a loan if the credit score is above a certain level. For example, one major national lender reduces the cost of a loan by a quarter point if the FICO score is greater than 725. If it is between 700 and 724, they will reduce the cost by one-eighth of a point. A point is equal to one percent of the loan amount.

There are other lenders who do it in reverse. They establish their base price, but instead of reducing the cost for good FICO scores, they "add on" costs for lower FICO scores. The results from either method would work out to be approximately the same interest rate. It is just that the second way "looks" better when you are quoting interest rates on a rate sheet or in an advertisement.

Part 3: FICO Scores as Guidelines

FICO scores are only "guidelines" and factors other than FICO scores affect underwriting decisions. Some examples of compensating factors that will make an underwriter more lenient toward lower FICO scores can be a larger down payment, low debt-to-income ratios, an excellent history of saving money, and others. There also may be a reasonable explanation for items on the credit history which negatively impact your credit score.

They Don't Always Make Sense
Even so, sometimes credit scores do not seem to make any sense at all. One borrower with a completely flawless credit history had a FICO score below 600. One borrower with a foreclosure on her credit report had a FICO above 780.

Portfolio & Sub-Prime Lenders
Finally, there are a few "portfolio" lenders who do not even look at credit scoring, at least on their portfolio loans. A portfolio lender is usually a savings & loan institution who originates some adjustable rate mortgages that they intend to keep in their own portfolio instead of selling them in the secondary mortgage market. They may look at home loans differently. Some concentrate on the value of the home. Some may concentrate more on the savings history of the borrower. There are also "sub-prime" lenders, or "B & C paper" lenders, who will provide a home loan, but at a higher interest rate and cost.

Running Credit Reports
One thing to remember when you are shopping for a home loan is that you should not let numerous mortgage lenders run credit reports on you. Wait until you have a reasonable expectation that they are the lender you are going to use to obtain your home loan. Not only will you have to explain any credit inquiries in the last ninety days, but numerous inquiries will lower your FICO score by a small amount. This may not matter if your FICO is 780, but it would matter to you if it is 642.

Don't Buy A Car Just Before Looking for a Home!
In conclusion, a word of advice not directly related to FICO scores. When people begin to think about the possibility of buying a home, they often think about buying other big ticket items, such as cars. Quite often when someone asks a lender to pre-qualify them for a home loan there is a brand new car payment on the credit report. Often, they would have qualified in their anticipated price range except that the new car payment has raised their debt-to-income ratio, lowering their maximum purchase price. Sometimes they have bought the car so recently that the new loan doesn’t even show up on the credit report yet, but with six to eight credit inquiries from car dealers and automobile finance companies it is kind of obvious. Almost every time you sit down in a car dealership, it generates two inquiries into your credit.

Credit History is Important
Nowadays, credit scores are important if you want to get the best interest rate available. Protect your FICO score. Do not open new revolving accounts needlessly. Do not fill out credit applications needlessly. Do not keep your credit cards nearly maxed out. Make sure you do use your credit occasionally. Always make sure every creditor has their payment in their office no later than 29 days past due.

And never ever be more than thirty days late on your mortgage. Ever!

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What are repair escrows?

"My loan officer tells me I need to deposit $1157 into an escrow account at closing to take care of future taxes and hazard insurance payments, but when I asked him where that number came from he said 'it is set by HUD' and was unable to explain it further. Can you shed any more light on this?"

Lenders generally take over responsibility for the payments of taxes and insurance so that they can be sure that the payments are made. They require that an escrow account be established with the borrower's funds, from which the lender makes the payments as they come due. The escrow account is established with a deposit that the borrower provides at closing. To assure themselves that there will always be enough money in the account, lenders ask for more than they actually need as a "cushion".

Since lenders usually get to keep the interest on escrow accounts, in years past, many of them maintained unreasonably large cushions. To deal with that, the Department of Housing and Urban Development (HUD) issued a ruling that placed a ceiling on the size of escrow accounts, which in turn limited the amount the lender could ask the borrower to deposit at closing.

The rule is that the deposit cannot exceed the amount needed to prevent the balance from falling below an amount equal to 2-months worth of tax and insurance payments at its lowest point during the year. While HUD does not do a lot of enforcing, my impression is that all but a handful of lenders follow the HUD rules.

Here is how to calculate the maximum initial deposit yourself.

■ Add the annual taxes and insurance premiums and divide by 12. This is the amount that will be added to your mortgage payment every month.
■ List 12 months running down the page beginning with the month in which your first payment is due.
■ In the column next to the first one, enter the tax and insurance payments next to the month in which they are due.
■ In the third column, show the amount in the escrow account assuming there is no initial deposit. The monthly payments made by you add to the account while the tax and insurance payments made by the lender reduce it.
■ Scroll down to the month that has the largest shortfall. To the shortfall add 2-months of payments (the allowable cushion). The total is the maximum deposit under HUD's rules.
 

Here is an example:
■ The first payment is due in November.
■ Total taxes and insurance are $3468, or $289 a month.
■ Hazard insurance of $618 is due in March.
■ County taxes of $432 are due in April.
■ School taxes of $2418 are due in August.
 

Assuming no upfront deposit, the low point of the escrow account is reached in August when school taxes are due. Through August, total payments from the escrow account are $3468 whereas only 10 payments have been made into the account totaling $2890. The account would therefore be short by two monthly payments, or by $578. The lender is also allowed a cushion of two months, which is $578. Hence, the total required deposit to the escrow account would be $1156.

Borrowers who don't want to be bothered checking the lender's calculation of the required escrow deposit are unlikely to be taken advantage of because lenders can't do it without violating the law. I suggest that you focus your attention on the many legal ways that lenders and mortgage brokers can pick your pocket. I have written about legalized larceny in other columns, all of which are on my web site.

At the same time, unintentional mistakes do occur at the closing table which affect the allocation of costs between sellers and buyers. A recent letter described a $500 mistake of this sort, which the letter-writer discovered by accident. It is a good idea, therefore, to check out every number.

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What is a HUD property?

Benefits of an FHA Foreclosure
■  No Appraisal required
■  Instant equity
■  Flexible Credit requirements
■  Low money down.
■  HUD will pay some closing costs.

Understanding HUD Foreclosures
If the house you are interested in is a Housing and Urban Development (HUD) foreclosure, then it was last purchased with an Federal Housing Administration (FHA) mortgage. The Federal Government insured the loan, making the previous FHA loan possible. By insuring the loan the Federal Government agrees to repay the Lender for all money lost by the lender in case the property is foreclosed on. It’s a good deal for the Lender as their investment is 100% insured. The Federal Government protects itself by collecting on each transaction of a federally financed property a Mortgage Insurance Premium (MIP) at the time of purchase. The MIP is 2.25% of the mortgage amount and is helpful in several ways.

Because the MIP is charged, the FHA can allow a purchaser to reduce their initial out of pocket cash expenditure from 5% to 3% of the purchase price, making it possible for many more Americans to buy homes. HUD reports in their mission statement that home ownership for the majority of Americans is their goal and that has proven to be the driving force behind their decisions and directives since their inception.

The MIP is pooled with all the other premiums and allows the Federal Government to continue helping homebuyers save money on their homes by keeping the costs down for homebuyers.

Most importantly to you, since you’re on Just Foreclosures, the MIP paid by all the prior home owners allows HUD to sell the foreclosed inventory presented on this site at a substantial discount.

Each property has it’s own financing options. For the best information on a purchase strategy for the particular property you are interested in, contact your local real estate professionals.

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REO: Real Estate Owned,

Benefits of buying a Bank foreclosure.
 

Positives:
■ Equity
■ Sometimes the bank will hold the financing and give you a preferred rate.

Negatives:
■ Nonrefundable deposit
■ You need to put in the work.

The most time consuming and most complicated foreclosures to become involved in. Time consuming because no information is easily obtainable. A great deal of research is required and the only way to do it is to spend countless hours in the county courthouse.

Most Bank REO's have a third-party manager who is responsible for the upkeep of the property while the bank owns it, and they are your liaison with the bank. Offers must be made through them, and they will relay counter-offers from the bank. In general, banks do not negotiate much on prices, so if you offer less than asking price be prepared to go through the negotiation process several times for a minimal discount.

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Many new investors want to buy properties directly from the bank. You never hear anyone say, "I want to buy a property from a mortgage company, credit union or savings and loan."

The attraction to bank owned properties is understandable, as it is the bank you borrow money from to buy a home. It is natural to assume that the bank owns the property. Whether a Deed of Trust or Mortgage, the title to your property is either held by a third party or pledged as security for the loan, so in fact the bank does not own the property.

You borrow money from and give a mortgage to the bank. The mortgage is the security instrument utilized to protect the bank from loss should you default on the loan. Unless you bought a bank foreclosure directly from the bank, the bank has never owned the property at all.

The Lenders Profits
The goal of the foreclosing lender is to gain possession of the property. The financial goal is the recovery of the principle loan balance, accrued interest, late fees, penalties, taxes paid on behalf of the property owner, court costs and attorneys' fees. In most states, the laws are written so that the lender can only attempt to recover these widely accepted standard losses.

The lender will add in every legitimate expense when foreclosing. This is what is sued for: the total the lender claims is owed by the property owner. In most states, this is the maximum amount the lender can collect. The laws are written this way to protect home owners from unfair practices.

The commonly held notion that a bank (or any other lender) must sell a repossessed property for the same amount it cost to gain possession and therefore cannot make a profit is false. If the foreclosing lender is the successful bidder at the auction, it will take possession of the property for the very first time. When this happens, all the rules change. The lender, now the legal property owner, can do anything it wants with the property, Rent it, keep it, whatever. It can also sell the property for any amount it so desires.

Condition of Title
Often when purchasing foreclosures buyers are concerned about the quality issued by the lender. A common belief is that there may be liens or judgments clouding the title. This is a myth. The lender will bid at auction only if it wants the property. The lender, typically the senior lien holder, wipes out all junior lien holders or judgments in the process.

If the foreclosing lender does not bid at that sheriff's sale or auction, it probably doesn't want the property. This may be due to excessive superior liens, such as IRS or tax liens. (Tip: If the lender doesn't bid for the property at auction, you probably shouldn't either.)

The lender, in an effort to recoup its losses, will bid on the property, wipe out other lien holders, then pay the balance of outstanding property taxes to secure the property's clear title. No lender will go through the time, effort and expense of foreclosing, only to lose the property for a few thousand in back taxes.

Having absorbed these costs, the lender generally adds them to the asking price and will sell the property with clear title.

If you have heard that the lender must sell the property for what they paid for it at auction, forget it.

Another myth is that all banks are bending over backwards to give away foreclosed homes. It's true that the lenders want to sell their foreclosures. Lenders, banks in particular, are corporations. These corporations are driven to make money, not to lose it. A bank has to answer to its shareholders just like other corporations do.

The business of repossessing properties is not new. Over the years, many lenders have developed effective methods of selling their REO's quickly, with minimal loss.

Property Disposition
Lender practices and procedures vary greatly. Some widely market their inventory of REO's, while others practically hide them.

We know of some banks that advertise foreclosures in daily newspapers, while others demand that you maintain an account with them (or better yet, become a stockholder) just to get their list of properties.

Lenders are in the money business, not the real estate business. This is why most properties are marketed through recognized real estate brokers or agencies. Some agencies specialize in foreclosures and may represent several lenders' properties.

Brokers may have several investors lined up just waiting for a good property to turn up. Brokers can also assist the lender in determining market prices, suggest marketing strategies, recommend appraisers or contractors, etc.

Some lenders establish a set price for the property and will not allow the sales agent to consider offers for less. Many lenders dispose of their own properties. Depending on the size and complexity of its REO inventory, the lender may have one part-time clerk or a staff of special asset managers handling property sales.

Lenders with larger inventories often have a staff dedicated to analyzing and managing the properties, while at the same time coordinating and managing the brokers retained to market the properties. The lender determines the strategy and the broker markets the properties accordingly.

Investing Overview
Purchasing directly from the bank is the most popular way to buy foreclosures. It's fairly easy, and less of a headache than other investing methods because it involves less complications and risks.

Find properties that meet your investing criteria, those that are in your area, price range, size and style. Determine whether you are buying to resell or to secure a residence for yourself. Determine if the property is a bargain by deducting the lender's asking price from the average market price of very similar properties in the immediate area.

Your goal as an investor is to realize a tidy profit. You can buy property at a 15%-20% discount and earn a 35%-40% return. As a home buyer, you want to buy below market value with a low down payment, low interest rate and reduced closing costs.

Contact the lender or the broker and meet him at the property so you can inspect it. Record any damages and deduct the repair estimates from your price. Use a good property inspection checklist.

Investors must deduct all expenses associated with buying, repairing, borrowing, holding and closing again, from the price they think they can get.

Homebuyers should negotiate around the four discount factors: price, down payment, interest rate and closing costs. The bank, being a lender, can negotiate all these items.

If you still like the numbers and the property, proceed with a written offer containing the following:

A statement indicating your intent to purchase the real estate.
The physical address of the property.
The legal description of the property.
Your price.
Your down payment terms.
Your financing terms.
Your desired closing date.
Any contingencies.
Your deposit information.
Your name, address and phone number.

Depending on the property and several other variables, you may want to buy a property at 15%-25% below market value. Start your offers accordingly.

Unrealistic offers will be rejected quickly. Learn to work with the banks. You can negotiate around interest rates, price, down payment, whatever, just stay within reasonable boundaries if you want to succeed.

Some lenders sell thousands of REO's every year. Many sell their properties at or near market price. We know one lender who has sold almost 10,000 properties in the last 3 years, with average sales of 99% of market value.

Not all lenders behave the same way. Try to locate those that are more flexible in their property disposition policies.

When the bank accepts your offer, close as quickly as possible. Avoid delays and complications from competitive offers.

Advantages
The advantages to this buying method are many. There are no liens or judgments to contend with, no homeowners or tenants to evict, no back taxes due, and accessing the property for evaluation or inspections is easy.

The fact that the property has officially changed hands means that all that work has been done by the lender. With all the legal work done, the complications of buying and the associated risks are removed.

Lower down payments, better interest rates, reduced closing costs and a discount off the market value of the property, taken all together, make for a better than average home purchase.

While you may not be able to steal a property from the bank, a properly structured deal will make you the envy of the neighborhood because you will have a low down payment, low monthly payments, and a low total price.
For those looking to save money buying their first home, this is usually the way to go.

Disadvantages
In this industry the rewards follow the risks. Therefore, the payoff from this investing method is typically lower than that of buying pre-foreclosures or buying at the auction.

An REO investor should have no problems achieving 10%-20% discount from the market value of comparable properties. Savings of 25%-35% are harder to find. Savings of 40%-60% are possible, but getting rarer.

Other disadvantages include: the lender that moves at a snail's pace; a lender selling the property "as is," with no cooperation in making reparations or allowances; and the very rare, but always possible problem of evicting a tenant or homeowner.

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 Officer & Teacher next door.

What are the "Officer & Teacher Next Door" programs and initiative?

The "Officer Next Door" program offers HUD-owned, single family homes to law enforcement officers at a 50 percent discount. It helps to prevent crime and promotes neighborhood safety and security by encouraging law enforcement officers to become resident homeowners in economically-distressed communities.

The "Teacher Next Door" (TND) initiative offers HUD-owned, single family homes to public and private school teachers at a 50 discount. The TND program recognizes teachers for the value they bring to community and family life, and provides them with increased homeownership opportunities so that they can serve our most needy communities outside the classroom.
 

Officer Next Door
The U. S. Department of Housing and Urban Development (HUD) wants to make American communities stronger and to build a safer nation. Public safety improves when police officers live in a neighborhood. The Officer Next Door (OND) program helps make this goal a reality by making homeownership faster and more affordable for Law Enforcement Officers.*
 

Who Can Participate?
You must be a full-time, sworn law enforcement officer who is "employed full-time by a Federal, state, county or municipal government; or a public or private college or university." You must be "sworn to uphold, and make arrests for violations of, Federal, state, county, or municipal law." Your employer must certify that you are a full-time police officer with the general power of arrest. You don't have to be a first-time homebuyer to participate. However, you cannot own any other home at the time you close on your OND home. You must agree to live in the HUD home as your only residence for three years after you move into it.
 

How do I participate?
OND property is listed and sold exclusively over the internet. Properties are single family homes located in Revitalization Areas. Properties available through the program are marked with a special Office Next Door button. Bids are awarded once each week. Your bid must be the amount of the list price. Winning bids are randomly selected by computer. The winning bid is posted each week on the web site where you made your bid.

You may also buy a home from a government agency or a nonprofit organization that bought the home from HUD. When an agency or nonprofit buys the house, HUD expects the full discount to be passed on to you.

In all cases, HUD requires that you sign a second mortgage and note for the discount amount. No interest or payments are required on this "silent second" provided that you fulfill the three-year occupancy requirement.
 

What Are the Benefits for the Officer?
The selected bidder may purchase the property at a 50 percent discount from the list price. For example, if a HUD home is listed for $100,000, an officer can buy it for $50,000. To make a HUD home even more affordable, you may apply for an FHA-insured mortgage with a down payment of only $100 and you may finance all closing costs.

If the home you want to purchase needs repairs, you may use FHA's 203(k) mortgage program. This program allows you to finance both the purchase of the home and the cost of needed repairs. You have the benefit of one loan for both costs and one monthly payment.

Discuss these financing options with your lender.

Because homes sold through the OND program are located in Revitalization Areas there may be additional assistance from state or local government sources. Local or state governments want to encourage families and businesses to move into Revitalization Area neighborhoods. Contact your state government housing office or local municipal government and request information on assistance for homebuyers.

Where can I get additional information?


Teacher Next Door
The U. S. Department of Housing and Urban Development (HUD) wants to make American communities stronger. The Teacher Next Door (TND) program is designed to further this goal by encouraging teachers* to buy homes in low and moderate-income neighborhoods.

Who can participate?
The TND program is open to any person "employed full-time by a public school, private school, or federal, state, county, or municipal educational agency as a state-certified classroom teacher or administrator in grades K-12." Participants must certify that they are employed by an educational agency that serves the school district/jurisdiction in which the home they are purchasing is located.

Teachers wishing to purchase a home under the TND program must be in good standing with their employer. Your employer must certify that you are a full-time teacher or school administrator. You don't have to be a first-time homebuyer to participate. However, you cannot own any other home at the time you close on your TND home. You must agree to live in the HUD home as your only residence for 3-years after you move into it.
 

How do I participate?
TND property is listed and sold exclusively over the internet. Properties are single-family homes located in Revitalization Areas. Properties available through the program are marked with a special Teacher Next Door button. Bids are awarded once each week. Your bid must be the amount of the list price. A computer randomly selects the winning bid. The winning bid is posted each week on the web site where you made your bid.

You may also buy a home from a government agency or a nonprofit organization that bought the home from HUD. When an agency or nonprofit buys the house, HUD expects the full discount to be passed on to you.

In all cases, HUD requires that you sign a second mortgage and note for the discount amount. No interest or payments are required on this "silent second" provided you fulfill the three-year occupancy requirement.
 

What are the benefits for the teacher?
The selected bidder may purchase the property at a 50 percent discount from the list price. For example, if a HUD home is listed for $100,000, a teacher can buy it for $50,000. To make a HUD home even more affordable, you can apply for an FHA-insured mortgage with a down payment of only $100 and you may finance all closing costs.

If the home you want to purchase needs repairs, you may use FHA's 203(k) mortgage program. This program allows you to finance both the purchase of the home and the cost of needed repairs. You have the benefit of one loan for both costs and one monthly payment.

Discuss these financing options with your lender.

Because homes sold through the TND program are located in Revitalization Areas there may be additional assistance from state or local government sources. Local or state governments want to encourage families and businesses to move into Revitalization Area neighborhoods. Contact your state government housing office or local municipal government and request information on assistance for homebuyers.
 

Where can I get additional information?

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Why buy a foreclosure?

What is the big deal about government foreclosures?

Foreclosures are a hot topic these days. There are several types of foreclosures and we will explain the process, pros and cons of each throughout our site.

Divorce, loss of employment, loss of life and/or market conditions are the most common reasons for a foreclosure to occur. When one of these three things transpire and the home buyer is not adequately prepared, a foreclosure is most likely to be the end result. Soon after one of the big three occur the homeowner is several months behind and the mortgage holder will not negotiate with the homeowner as special exemptions cannot be made for every home owner going through difficult times. It seems evil and possibly oppressive but very often a foreclosure can be the best thing for the homeowner. Removing the pressure and allowing the homeowner to potentially live in the house for several months free of charges.

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How much do I qualify for?

How much home you can afford is going to affect your home buying decision. Even if you have been pre-qualified you may want to have your information reviewed by Your Lender to determine if there are ways you can be qualified for a better home.

The major factors to determine your pre-qualified amount will be:

■ Your Income
■ Your Monthly Expenses
■ Your Credit Score


By pre-qualifying online, a lender will review your credit report Free of charge, and ask you a few questions about your monthly expenses and income. In some cases you may need to provide information about a co-signer, or clean up your credit to increase the amount of home for which you qualify.

You may not have to gather your past tax information, pay stubs, receipts, or other documentation. Talk with your Lender about what information they will need to get the ball rolling.

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15 Minute Investor Guide:

Investing in foreclosures for Resale is not so different from Investing in foreclosures for Rental income. Many of the same rules apply and many guidelines remain constant. As with any type of investment the point at which you enter will determine how profitably you exit. The single largest distinction between real estate and stocks, bonds, mutual funds or precious metal is that real estate allows the Investor the opportunity to have a more direct and immediate impact on the Investment (the property) through rehab, paint, carpet, etc. This article in this series on Real Estate Investing will demonstrate how to quickly make an assessment of a potential Real Estate investment.

The guide should allow the average investor to make a rapid and well-thought-out decision. An informed investor will not "lose out" because of third-party factors such-as obtaining appraisals or contractor/repair people. An aggressive, proactive approach by the Investor can reduce the time it takes to obtain properties. A passive approach or an offhand attitude does not promote good opportunities. Remember, work with your agent and get pro-active!

How to determine Equity
The old adage about the only three words in business being "Location, Location, Location" is as true as ever. In Real Estate, however, those three words are "Equity, Equity, Equity". The difference between what is owed on a property and its Market Value is called equity. As an investor, the goal is to buy for less than the full value and sell for market value and make a profit in the process. So at what point does caution balance against risk to make a profit?

A strong equity position is generally targeted at 25% after repairs. An equity position less than 25% can work for rental investments, but for resale purposes 25% is a safe figure. In order to determine if 25% after repairs can be achieved there are only three variables that need to be weighed in the mind of an investor.

■ How much can I get it for?
■ How much can I sell it for?
■ How much will it cost to repair it?

It is not difficult to obtain answers to these questions as long as the readily available data can be quickly and accurately distilled into usable information. By using the following guide and examining each property in terms of these three variables it should not take more than fifteen minutes to determine if a particular foreclosure is a wise investment.

How much can I get it for?
First, ask what your agent knows about the particular foreclosure property.

■ How long has it been on the market? (Not vacant, but available for sale)

■ Can Investors bid on it? (Some properties are for owner/occupants only)

■ What does your agent think? (A good agent is worth his/her weight in gold.)

Second, look at the property yourself.
Is it a "fixer upper?" Is it "market-ready?" The cost to make a property ready to sell has to be considered as part of the cost of buying a property. Usually an eyeball will tell you how much of a commitment in funds will be required.

Third, be sure that you are willing to own the property for the duration.
While it is certainly possible to get in and get out without a serious commitment of finances, be ready to own the property until it is sold. Some banks have regulations stating you must take possession of a property before you can sell it again. If, for whatever reason, your buyer is unable to complete his end of the transaction, you need to be prepared to be the owner of the investment property until it eventually sells.

Fourth, Bid quickly and often.
Nothing is more frustrating than investing a lot of effort into a project for nothing. When considering Investments, do not hesitate and risk missing an opportunity. If a deal looks so-so (only a 10% equity position, for instance) BID LOW to achieve that 25% potentiality. It could be a good rental, or even a modest resale. And there is always the chance you might win the bid. In Investing, as in life, "he who hesitates is lost". After submitting a bid, start looking for the next Investment. Don't delay a possible "big dessert" while waiting on the first course.

How much can I sell it for?
As a general rule of thumb most Investors are motivated to purchase with a minimum 25% equity position (after repairs). This requires two separate deductions in order to be sure of a 25% equity position. First the true market value of the subject property (after repairs) and second, the repairs.

In order to determine the true market value without ordering a full-blown appraisal, (both time and financially prohibitive) an Investor must look at comparable sales. "Comps" are available from your agent. While the online services may serve as a general guide the comparables your agent can obtain will take into consideration many more factors. Look at the entire neighborhood in print format. Then consider the most recent sales that reflect the style and neighborhood of the subject property and compare them to your Investment property.

Tip#1: The rewards are greatest when the investor is a knowledgeable, pro-active force in the process. Take an active roll in your investment. (Placing Advertisements and selling your own properties is covered in another article.)

Tip#2: The figure for how many days on market (DOM) a property was available before its eventual sale will be found on the MLS listing. Be sure to ask your Real Estate Agent for these figures specifically so that a determination can be made regarding the desirability of a particular neighborhood, style of home etc…

Tip#3 Along with "Sold" properties a look should be taken (in print) at other properties that are still "available" or "withdrawn" from the market to determine the health of the market.
 

Determining "True Market Value"
The following should offer some quick factors for market value adjustments on properties in the $100,000 range.

DOM (days on market):
No impact on market value under 180 days. Extended periods in excess of 180 days approach with caution. Think laterally, there could be possible rental opportunities.

Sales Price:
"List Price" does not equal "Sales Price".

Bedroom and bathroom count:
add or subtract $3000 for each full bath, $2000 for ˝ baths.

Garage:
add or subtract $4000 per car, divide by half for carport.

Basement:
add or subtract $8000 for a full basement, additional $2000 if finished.

Pools/Tennis Courts:
No Adjustment

Be careful not to come up with an artificially high pre-determined value. Stay open-minded and objective. If the math looks strange, remember to ADD adjustments to the compared property to value it AS IF it had the same features as the subject property.

How much will it cost to repair it?
After looking at the comparable sales the investor need only reduce the repairs to understandable figures in order to calculate if the property can be purchased and repaired for 75% of it's market value (the 25% equity magic number).

To estimate repairs one could have any number of contractors offer bids and submit proposals, however the time required for meeting with three contractors and getting proposals may not be available. A quick-thinking, fast-acting investor can estimate work required by walking through the subject property and tallying the figures without a second appointment.

These figures are not hardcore, written in cement numbers but should allow a quick and easy comparison of value allowing a decision to be made after the estimates of repair have been performed.

The following should offer some averages for the more common repairs to a 1200 square foot rancher without a basement.

■ Paint w/minor drywall repairs: $800.00-$1000.00 per house
■ Carpet (one grade above builders): $1000.00-$1200.00
■ Kitchen and Bath flooring: $300.00-$500.00 per room
■ New Roof (try to repair first): $2,0000.00-$3,000.00 per house
■ New Heating and Air: $1,000.00-$2,500.00
■ Appliances (Save Money-buy used): $250.00 per appliance
■ Miscellaneous Expenses: add 10% to total

Tip: Be sure that you are true to your investigation and do not allow passion or trepidation to sway your decision-making either way. It is more important that you swing than it is you hit a home run. (Bid often!)

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 Investing in foreclosures:

Risks and Rewards

The mortgage foreclosure process creates three sets of real estate investing opportunities: the "Default/Pre-Foreclosure" phase, the "Auction/Sale" phase and the "REO" phase. This article discusses the risks and the rewards of each opportunity.

Buying Pre-Foreclosures:
Buying pre-foreclosures involves working directly with the homeowner and sometimes the lender. Your goal is to create a Win-Win scenario. One win is for the homeowners (they make a sale) and one win is for yourself (you buy the property at a substantial discount).

To accomplish a successful purchase, most experts recommend the following: (1) locate loans in default, (2) evaluate and narrow selections to pursue, (3) inspect the property, (4) evaluate the property owner's needs, (5) determine the market value of the property, fix-up costs, potential sales price and profits, (7) arrange default work out by negotiating with the owner and the lender, (8) close on the property, repair and resell it quickly.

Pros:

This is a great investing opportunity if done correctly. Discounts off market value can range from 20% to 35% on average. A low cash down payment is possible if structured properly. You have ample time to research properties. Unique and flexible sales agreements are possible.

Cons:

It is sometimes difficult to contact the property owner. You will usually have a lot of competition. The court house research can be cumbersome. You may need to negotiate with the lien holders.

Buying At The Auction
Buying on the court house steps at the auction can be the most rewarding way to buy properties and the most dangerous at the same time. The property is publicly auctioned off to the highest bidder, and the process moves very quickly. When bidding at the auction, you compete against the lender and other investors.

Auction buyers (1) research properties prior to the sale date, (2) pursue realistic opportunities, (3) calculate values and potential profits, (4) determine bid price and (6) follow the property to the auction and participate.

Pros:

Very good to excellent discounts. Investors can achieve 35% to 45% savings off market values and earn an excellent return on investment. This is the only investing method where you can really hit the jackpot.

Cons:

Auctions are frequently postponed, wasting your time and effort. It is rarely possible to inspect the property. To be safe, you should have a title search performed, which can be costly. Unusually large cash outlays deter most investors (note that this can also be seen as a benefit). Certified checks for 10% of the purchase amount may be required with the balance due in weeks, days or even hours. Improper research can lead to devastating results.

Buying REOs
Perhaps the easiest way to buy foreclosed property is buying REOs ("real estate owned"). An REO occurs when the lender takes back the property to gain possession and cut its losses. The lender, however, does not want the property because it is not in the real estate business and is therefore usually motivated to move the property quickly.

Pros:

The lender is almost always the senior lien holder, thereby wiping out all other liens at the auction. This means an REO will always have clear title, which saves a lot of time, expense and worries when buying foreclosures. Most likely, the lender will also have paid any property taxes in arrears. The lender may either repair the property to acceptable standards or allow a discount to the buyer to accomplish the repairs.

Cons:

Rewards follow risk. This is a low risk investing method and the rewards can be on the low side as well. Average savings may range from only 5% to 15% off market value, although discounts of 25% or more are possible if you know how.

Investing in foreclosures can provide excellent profits. Each of the three foreclosure opportunities presents both rewards and certain risks. Be sure to do your homework before you start investing.
 

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