ALTERNATIVE TO NOW

PROHIBITED NEHEMIAH

PROGRAM

If you’ve been reading my posts, you are already familiar with the Nehemiah Program. It’s the down payment grant/assistance program many first time buyers attempt to use when buying a home with -0- cash down.

To recap, the Nehemiah program involves getting the seller to pay your down payment, usually around 3-6%, through a loop hole in the law that allows them to indirectly pay by making a donation to a non profit organization, which in turn pays your down payment.

New FHA loan rules prohibit using the Nehemiah program after Oct 1st. However, all is not lost for the would be home buyer looking for a break.

It seems there is another down payment assistance program that is still available. It’s called the California Homebuyer’s Down Payment Assistance Program (CHDAP) and it’s offered by the California Housing Finance Agency.

Some lenders also refer to this as a ’silent second’ . However, since most sellers these days will require proof of funds to cover your down payment, I believe disclosing this loan program during the offer is the most honest way of approaching it. Because if the buyer later gets denied, he/she/they will have alot of explaining to do if it wasn’t disclosed during negotiations.

For more details about the program, visit their site at:

http://www.calhfa.ca.gov/homeownership/programs/chdap.htm

While this program exists, it’s not without it’s pros and cons, much like the Nehemiah program. Many lenders will tell you about the existence of a myriad of programs aimed to benefit you. However, in practice, negotiating a home purchase with too many ‘what if’s’ can make it nearly impossible to get an accepted offer. The more specialized a loan program, the more hoops you need to successfully jump through.

For example, bank sellers in a foreclosure market want to unload the home as soon as possible. They list at near market value and wish to sell as-is. Simple conventional loan based offers will naturally be stronger than an FHA loan with CHDAP program. The more specialized loan programs, the longer it generally takes to close escrow. Since banks want a fast close, they may accept another buyers conventional loan based offer over a CHDAP program.

Likewise, with more people seeking out buyer assistance programs, combined with the uncertainty in the housing and lending markets, the authorities who issue CHDAP approvals will be under more and more scrutiny, and will seek out reasons to reject an application.

After speaking with another mortgage broker colleague about this, they stated “Ahhhh CHDAP we do it as well now….. keep in mind it sometimes takes forever to close if it does we had  a horror story one a month ago they  (chdap) approved it then denied it at the end of the transaction… NOT GOOD  thank God that was not my loan….I’m hearing through the grape vine they are looking for every reason not to approve loans.  Now if these clients are super clean and have good credit  you may not run into any problems just plan for a 45 day or so escrow.’

So, just keep in mind that while this may be an alternative the Nehemiah, it’s no silver bullet either. In many ways, saving up for a down payment may make more sense for many who want a little more leverage during negotiations.

Being in a weak qualifying position generally results in having to settle for homes that are passed over by the majority of buyers, having to offer more for that same home, and generally hoping the bank seller will be willing to go along with everything (including repairs) the lender requires. That makes for a bit of an emotional rollercoaster due to all those uncertainties.

In an era of tightening lending standards, those who qualify least will have to work much harder to get anyone to accept their offers, and to get into a home in a timely manner.

A Combination Of Steep Price

Declines, Vandalism, Provides

Additional Opportunities For

Home Buyers

To many, home price declines are not new news. What is new, is that the amount of the price drops in California have outpaced the median declines country wide 17% vs 8%. A good article that provides detail on the condition of the real estate market can be found at:

http://online.wsj.com/article/SB121872469169840795.html?mod=residential_real_estate

In addition, some homes in the 0-$100,000 range (with long days on market) are also high targets for vandalism. Many banks are seeking to unload these homes, at up to 50% reductions in price, because they are a huge financial & administrative burden.

Specifically, the code enforcement has been on the rise, citing banks and charging them stiff fines to keep these homes in good condition. Some of these lower priced homes have been vandalized, repaired, and then vandalized again.

Since the homes are already not as significant an assset as higher priced homes, banks seek to unload these the quickest.

For those first time buyers or investors looking for exceptional deals on properties, this may represent an additional opportunity to get a great home at a great price.

Certificates

(And How They Benefit You!)

A little known lender secret is the Mortgage Credit Certificate. A seemingly obscure tool but when used properly can have dramatic benefits to the home buyer.

Most home owners already enjoy a tax benefit of owning a home - by taking the mortgage interest paid on their home loan as an itemized deduction on the federal income tax return.

The mortgage credit certificate, if you qualify, goes a step further. The MCC allows you to take a tax credit of 20% x mortgage interest paid on a single family residence.

To fully understand the benefit, you must understand the difference between a deduction and a credit.

A deduction reduces the amount of taxable income whereby the tax is calculated. For example, if you made $110,000 and you had $10,000 mortgage interest deducion, your net income would be $100,000. $100,000 x 30% tax rate = 30,000 tax you have to pay. (this is just a simple example, and excludes exemptions).

However, lets assume your tax is $33,000 ($110,000 x 30%) without the itemized deduction.

You get a credit of 20% of your mortgage interest, and get to take the rest of the mortgage interest as an itemized deduction. 20% x $10,000 = $2000. (The rest of your mortgage interest you can deduct is $8000 x 30% tax rate = $2400. $33,000-$2000-$2400 = $28,600

That’s a net tax savings of $1400 just by using the Mortgage Credit Certificate!!!

So, you might be wondering how this improves your financial situation allowing you to qualify for more home.

Here’s how: Since you know your tax will be less at the end of the year, you can revise your W-4 form (the form you give your employer which states how many exemptions you are taking, which effects how much is withheld from your paycheck).

So, you have less withholding which results in a higher take home pay for you, maybe by as much as a few hundred dollars! You can use that extra money to pay your mortgage and your other bills! It improves your DTI (Debt to income) ratio which allows you to qualify for more home!

The trick is that not everyone qualifies, and only a finite amount of MCC’s are issued annually.

To see the rules regarding who is eligible and who can qualify, please visit the site below:

http://www.shra.org/Content/Housing/HomeBuyer/SacMCC.htm

Tell You…

Is that the method of financing you use has a MAJOR impact on home purchase NEGOTIATIONS!

The weaker your financing, the weaker your position, the MORE you have to offer to entice the seller to take a ‘chance’ with you.

Weak financing means you will have a much tougher time negotiating an accepted offer (you will get turned down many times when making offers on homes), and when you do actually get an acceptance, it’s usually well above asking price (much more than you would have had to offer if you had stronger financing lined up).

That’s because the bank seller will only accept a weak financing offer if they believe it’s worth the risk of waiting to see if your loan will actually fund.

They only do this if your offer has the potential to increase their net proceeds SIGNIFICANTLY.

Keep in mind, if the bank seller wastes 2-3 months because the buyer cannot obtain a loan, the property value may have dropped 20-30K for them. This is why bank sellers are skeptical of weak financing offers!

In a market with tightening lending standards, bank sellers become even more cautious!

The order of strength of your offer goes like this:

STRONG

| 100% Cash Offer

| Large Cash Down Payment W/Conventional Loan

| Small Cash Down Payment W/Conventional Loan

| Small Cash Down Payment W/ FHA Loan

| Nehemiah & FHA Loan - Seller pays buyer’s down pymt (Exp Oct 1, 08)

| Sec 203(K) rehabilitation loan

| Seller Financing/Hard Money Loans

WEAK

Lender’s will often tell you that you are ‘Pre-Approved’, but may fail to tell you of the actual STRENGTH of your pre-approval.

In some respects, your pre-approval COULD be virtually WORTHLESS depending on the market!

In a foreclosure market, banks are selling homes AS-IS. That means they don’t want to pay any concessions.

Concessions are cash discounts on the home sellers generally don’t want to pay:

*Nehemiah programs asking the seller to pay your down payment

*Repairs required to fund loan, includes Pest, Vandalism, HVAC, Electrical, etc.

RED FLAGS: Loans that have a high risk to seller -

(the probability of not funding is high)

*FHA Loans (usually require more seller repairs than conventional loans) and take up to 45 days to close, which is much longer than conventional loans.

*Sec 203(K) rehabilitation loans (take longer to close, repair costs may be in excess of appraised value, causing buyer to fall out of escrow)

*Buyer down payment assistance/Grant Programs

*No down payment - tells seller you may not qualify at the last minute

*No Direct Underwriting report with ‘Pre-Approval’ -

A real pre-approval from any broker or financial institution comes with a DU report. Failure to provide this leads sellers to believe you only have a pre-qualification letter, which is significantly weaker than an actual pre-approval.

*Fixer properties - bank sellers prefer selling to all cash buyers or conventional loan based offers. Most ‘fixers’ will not work for FHA loans

*Mold/Mildew/Major Damage/HVAC not working/Broken Windows/Vandalism - Sellers prefer all cash sales.

So, what this means is this: It’s OK if your financing isn’t perfect. However, you must understand the market and appreciate that the weaker your financing, the more the same home will cost you, and the less likely you will be able to compete against other buyers in the market.

If weak financing is unavoidable, plan on:

• Making above asking price offers

• Seeking out less desireable homes (i.e. near major streets, airports, etc..)

• Seeking out homes with Long Days on Market

• Avoiding ‘fixers’ or homes with problems that makes funding a loan questionable

• Having a pre-approval in hand, along with an approval of any special loan programs like grants

• Keep your same job, don’t increase your debt, work same number of hours (major financial changes will break your pre-approval)

• Avoid homes that are new on market or clearly priced under market value

  • Below market value homes spark bidding wars, a strategy some sellers use

• Avoid homes with multiple offers. Invariably, there will be a conventional loan offer or a high/all cash offer that will beat yours.

• Don’t EXPECT the seller to counter offer you. On homes with 10-15 offers, the Seller usually only counters the best 2 offers.

• Don’t make unreasonable/frivolous offers on a home with the excuse ‘if the seller doesn’t like it they will counter’ - It’s a known fact they will not counter a frivolous offer if there are better offers on the table.

In Summary: Don’t negotiate aggressively on homes you like when there is short days on market, multiple offers, and you have weak financing. Instead, offer more than asking price, try to do a short close (as per your lender’s processing time frame), and realize you are asking for the seller to throw you a bone and help you get into their home.

Wait!

That’s what you have to do to buy a home in this Foreclosure market!

Investor competition requires quick action to get an offer negotiated.

Acceptance, repairs, and closing - on the other hand, takes FOREVER!

Let’s assume you have your ducks lined up, including great credit, a sizable down payment, and pre-approval for the loan.

The banks who own these foreclosed homes will generally take about 10 days to review all offers and then counter offer the best 2. If you are one of the best 2 offers, they will request you to re-bid your offer as the ‘Highest & Best’ offer you can make.

It takes an additional 5 days (on average), to find out if your offer ‘won’.

If someone else won, then you just wasted 2 whole weeks or more for nothing.

Even if you did get a verbal offer acceptance, it could still take 2-3 weeks to get an actual SIGNED acceptance.

Now, you figure you are past the hard part - but oh no you aren’t! The clock has just started ticking…

Once the appraisal comes in, you may have to re-negotiate the price down to the appraised value, or lender required repairs to be made. Expect this to take several weeks waiting for the bank to respond.

Expect repairs to either kill the deal or wait an additional 3-4 weeks while the bank ponders over up to 3 contractor estimates before deciding to actually order the repairs.

Often, the listing agents who represent the bank are also unmotivated - they’ve become accustomed to the bank seller’s routine of not moving forward.

So, you need a good agent representing you who can follow up regularly and put some heat under their kettle so to speak.

If you chose a not-so-motivated lender, he/she can drag this process on for months after the date you were ’supposed to close escrow’.

So, in summary, getting a home in this market may be much cheaper than it was a few years ago. But you will pay dearly with your nerves as you wait, wait, and wait some more, all along feeling a sense of uncertainty at every point along the way, never quite sure if you will actually be moving into the home ever!

The process of buying a home is now taking about 3 times longer than it ever did in a ‘normal’ market. In a normal market, you expect about 1 week to negotiate the purchase contract, then 30 days to close escrow. Often, it can be done in an even shorter time period.

In this market, it’s taking about 3-4 months to close transactions!

So, plan ahead for a long wait, be patient, and try to control your nerves. Know that you aren’t alone and navigating this market is still going to be better than paying high prices.

In the long run, it is going to be well worth the wait if you can successfully purchase the home of your dreams.

Offers Accepted

I know your time is valuable, so I will cut to the chase. This market is unlike ANY home market you have ever seen or heard about.

It’s wrought with heavy investor/speculator activity in the $0-300K range, unmotivated banks, and transactions that can take 3 times as long as normal.

To improve your chances exponentially, here are a few tips:

1. Short Sales - IGNORE THESE!

   • In my experience, these NEVER close escrow.

   • Sure, it’s possible 1 out of 10 do, but the ones that do take about 6 times as long as a normal private owner sale. You will have wasted MANY MONTHS of your life, along with a rollercoaster ride of uncertainty. Skip this and you’ll save yourself alot of grief.

2. Seek out homes with Long Days on Market (DOM)

   • New listings flow through to thousands of email inboxes of investors and home buyers. Newly listed homes are likely to get as many as 15 competitive offers on them in the first week or two. Even if your offer is great, you often have a 1 in 15 chance of getting it accepted!

3. Avoid Competitive Bidding Situations

   • As per #2 above, competitive bidding always ends in the buyer who ‘wins’ making an offer well above asking price, sometimes up to $15,000 higher. In many cases, you cannot avoid it, there may always be an offer or two to compete with. Just avoid those that have more than 5 offers.

4. Someone’s undesireable feature is anothers OPPORTUNITY

   • Life is all about trade-offs. If you are looking to buy a home primarily for shelter, want to keep your mortgage low, and aren’t overly concerned with appreciation or keeping up with the Joneses, then this advice is for you.

   • Look for homes near busy streets, schools, airports, or noise nuisances

5. Seek out homes with superficial issues, like old wallpaper, dirty carpet, etc

   • Paint, carpet, wall plates, etc. are a whole lot cheaper than the difference in price of a move-in ready home. See beyond the superficial as to what the home CAN be with a little TLC.

6. AVOID Homes Listed as ‘Fixers’ or With Many Repairs That Would Be Required To Fund A Loan

   • Don’t think you can get bank sellers to pay for many or ANY repairs.

   • Damage to a property is a RED FLAG - your loan may not fund, so no sense wasting a lot of time trying to buy something you will never get a loan on!

   • Examples of damage to avoid :

     • A/C or Heater Vandalized or not functioning

     • Broken Windows

     • Structural Damage

     • Electrical Issues (faulty wiring, missing light fixtures, etc.)

     • Plumbing Issues (Missing, damaged, or broken fixtures)

     • Roof needs to be replaced

7. Seek out homes with several price reductions, combined with long DOM

   • Banks are more willing to work with a buyer and unload a home after it has sat on the market for 6 months to a year, with many price reductions. The banks understand they have limited options at that point, and are generally easier to work with.

8. Don’t expect to negotiate aggressively with Bank Sellers (Foreclosed Properties)

   • Logically, you as a buyer have the upper hand in a declining market.

   • Banks are not logical, and you will be dealing with their employees.

   • Bank Employees could care less about you getting into their home.

   • Banks list these homes at the net amount they want based on a Broker Price Opinion or Appraisal.

     • They already have a good idea of what the home is worth.

     • You often have to come in above asking price, because you will be asking for a closing cost credit back (which reduces the seller’s net proceeds)

     • Asking Price - Closing Cost = Asking seller for a discount

   • Bank owned homes are sold AS-IS

   • You will be expected to pick up the tab for traditionally seller paid items:

     • Section 1 Pest

     • 100% Title & Escrow

9. Just because this is a foreclosure/declining market, doesn’t mean there are no buyers to compete with you!

   • There is a ton of investor activity at this price range - if you don’t want to write an offer that meets the above terms, be aware that an investor will be happy to buy the property instead of you.

10. Only tour homes you actually plan on making an offer on that day!

    • Things happen quickly in this price range of foreclosed homes, especially in the $0-$300K range.

    • There are thousands of homes on the market and you cannot tour all of them, it’s physically impossible.

      • Do your homework! - First find 10 of the best homes on the MLS, view maps of the areas they are in, and make sure those areas are suitable for you

      • Drive by these 10 homes and view the neighborhood and exteriors in person. Peek in the windows if they are vacant.

      • Widdle this list down to the 3 best homes you want to tour inside with your Realtor, with the intent of writing an offer that day.

      • Tour the homes and write an offer.

    • Touring homes just to get your feet wet isn’t productive. There are many virtual tours on line you can use for that purpose. Instead, set a goal of making an offer and do it. Everyone will be happier as you will actually be making progress.

11. Be HONEST with YOURSELF and your Realtor/Lender

    • About your goals and ACTUAL Financial Situation

      • Surprises after months of work don’t help anyone

    • Don’t write up an offer because you want to make the Realtor happy. That is a waste of time for everyone. If you aren’t happy with any of the properties, speak your mind.

    • Writing an offer just to please the Realtor, with no intention of going through with it, is getting many people involved working on your transaction for no good reason (i.e. The Seller, Listing Agent, Title/Escrow, Lender, etc.).

12. Listen to the Professionals!

    • Just like you wouldn’t drill your own tooth or pilot a 747, you should at least recognize that you are hiring a Realtor & Lender to help you navigate these uncharted waters.

    • Leverage the professional’s experience so you can avoid many headaches and emotional rollercoaster rides.

    • Your goal is to get into a home in a timely manner - not 3 years. So, if you rely more heavily on the professionals advice, you will get there much quicker.

I hope you find these tips help you get up to speed in this turbulent market!

Friend or

Foe?

Ok…so you’re probably intrigued by the title. First, let me explain what an appraisal is for those who may not know.

An appraisal is an independent evaluation of a home’s value as it relates to amenities and as it compares to homes in the general vicinity, usually a 1 mile radius. Lenders rely on this report on which to base their loan funding decisions.

Since real estate loans (mortgages) are collateral loans (they take the home back if you don’t pay), the lender needs to make sure they can resell the home at a later date if you cannot pay, and recoup their investment.

When a seller puts a home on the market, they price it according to their broker’s comparables report, not an appraisal in most cases. Foreclosed (bank owned/REO) homes often use a ‘broker price opinion’. Even if they use an appraisal, by the time they actually sell the home, the price may have fallen.

In a market of declining values, the appraisal can often limit what the seller can get for the home.

That’s because the seller knows it’s unlikely they will find an all cash buyer, and any other buyer will likely have a loan. Since the loans are based on the appraisal, the seller has to comply with reducing the price to the appraised amount if they want to sell the home!

FOE: Many banks are forced to reduce an already agreed upon purchase price to the lower appraisal amount.

FRIEND: What this means is that the appraisal can actually HELP home buyers get a discount on the home.

The flip side of this coin is that there is a lot of investor activity in a foreclosure market. Often, the only way for you to get an offer accepted is to outbid other buyers. This usually requires you to make an above asking price offer.

However, since you read this article, you already know that you MAY be able to reduce the negotiated purchase price IF the appraisal comes in lower.

The reason is simple - the bank knows values are dropping. They look at it as cutting their losses by taking a break on the price now, rather than later. Also, in some cases the appraisal may actually stay with the property for several months, whereby the seller is required to disclose the appraised value to a new potential buyer.

So, remember - to get your foot in the door on a home between $0-200K, you often need to come in high, possibly netting the seller asking price or up to $10,000 more than asking price, but you MAY be able to reduce that amount after the home gets appraised, IF the value of the home is less than you offered (in a declining market).

Your Deposit and Dream

Home?

Choosing the right lender can be difficult. Most people don’t have a clue as to who is good and who is bad.

The only thing you can do is find someone you know and trust, and get a referral for a lender they know and trust.

As both a Realtor & Mortgage Broker, I take care of my clients from start to finish.

But I would rather send you to another Mortgage Broker I know, than have you risk the entire transaction with someone you choose who is untested.

Here is an example of a bad experience one of my clients had with a well known, national bank on an FHA loan:

• 6 Weeks late closing escrow
• Multiple Seller Cancellation Threats
• Risk of losing home and deposit
• Already invested 3 months trying to buy home, on top of ’standard’ 45 day close period
  • Banks who own foreclosed properties are notoriously slow
• Change in loan requirements very late in the game
• Big Bank FHA lender he was using quoted 45 days to close, found out later we could have used a local Mortgage broker/banker who could close in 15 days!
• Loan Originator & Manager did not communicate with client or agents
• Loan Originator would not release buyer source docs to take loan to another lender (their competitor)
• Hundreds of phone calls & emails
• STRESS!!!

Can you believe this happened with a NATIONAL Bank! My client chose the loan originator because he had a positive experience with her on a conventional loan on his other home. FHA loans are different, and in this case past performance was NOT indicative of future results.

Why am I telling you this? To CONVINCE you that the lender is THE most important aspect of your home purchase transaction!!! No loan, NO home!!! Simple as that. Not to mention the unnecessary stress such a rollercoaster involves.

I will tell you the loan requirements up front. If for any reason I cannot do your loan or there is a problem with a wholesale lender we use, I will immediately REFER you to someone who can (such as specialized lenders, i.e. FHA, CAL VET, VA, or other specialized loans).

The reason I’d rather refer you to another lender is simple - I won’t get paid at all if your loan does not fund. So, I have a vested interest in making sure it funds. However, a big part of the process is the pre-approval and running a direct underwriting report. This will tell you if you REALLY can obtain a loan.

Some things to be cautious about after you get pre-approved:

1. Don’t get into debt (buy a car, boat, etc.)
2. Don’t change jobs without first consulting with the lender how the change will affect your pre-approval.
3. Stay current on your existing debts (no late payments!)
4. Work the same number of hours if you are an hourly employee - maintain the same average income.
5. Tell your lender immediately of any change in your financial situation.

I hope you find this information useful and are now better prepared to source the best lender who will take care of your needs.

Investor!

Most people get into real estate investing for one reason only - TO MAKE MONEY!

Some benefits of buying real estate properties are:

1. Buy low so rents cover your costs, then sell high.

   • This keeps your out of pocket costs low while allowing you to profit when the market rebounds

2. Plan long term - for retirement funds

   • Tenants pay off your mortgage so you own property free and clear after 30 years.

3. Flip Properties (this strategy isn’t recommended)

4. Repair delapidated properties for resale (sweat equity) - appealing to contractors

5. Build personal wealth

While the U.S. government classifies real estate rentals as a ‘passive’ activity, talk to any seasoned landlord and they will tell you there is nothing passive about it.

Things you can expect to deal with when being a landlord include:

• Vacancies - eat up your capital reserves!

• Deadbeat tenants - not only don’t they pay but you have to spend money to evict them!

• Tenant damage to the property - Take any new home and rent it out, in a few years you may have thousands of dollars of repairs (kicked in doors, holes punched in the wall, neglect)

• Unpermitted tenant additions or modifications to the property, including hazardous electrical wiring

• Drug dealing in the property - brings a bad element reducing property values

• Methamphetamine production (which effectively destroys the home)

• Animals bought after the tenant signed the lease (use your imagination)

• Bad housing market means you cannot sell at a profit, or have to sell at a loss

• etc…

So, the point I am trying to make is buying and owning investment real estate is going to be significantly more involved than other kinds of investments.

Some people are used to investing in Stocks & Bonds, which are fairly liquid investments (you can pull cash out immediately). Housing is completely different, requires active involvement from the investor, and must be re-sold when the market is ripe, not necessarily when the investor needs to sell.

You’re probably thinking ‘ok Scott, so are you trying to get me to forget all about real estate investing?’

Not exactly - what I am trying to do is get you to start thinking like a landlord well before you become one! Getting you up to speed on the ins and outs of owning investment properties is going to really help you in the long run.

Here’s a few things you can do to prepare yourself:

1. Buy a few books by well know authorities on the subject of being a landlord
2. Make sure those books include the following topics:
   • How to qualify prospective tenants, including background checks
   • Tenant deposits, walk throughs, & your rights to the deposit.
   • Lease contracts, disclosures, and other legal forms
   • Your duties as a landlord
   • How to make sure your property is not being damaged and the tenant is abiding by the lease terms
   • How to maintain your property
   • Legal information on how to navigate the law and deal with unsavory tenants
   • Your legal rights as a landlord
3. Buy yourself a good software - like Quicken rental property manager
   • Learn how to setup the software, use it and prepare reports
   • Use practice company that comes with the software
   • Train yourself to use the software daily
   • Use reports to seek out opportunities to reduce waste and increase profits
4. Constantly evaluate rents
   • Go to www.rent.com every 3-6 months
   • Allow for a cost of living increase annually
   • Set reminders using Outlook or Quicken to re-evaluate rents
   • Provide a financial incentive to retain good, long term tenants
     • If your lease rates are slightly less than the going rate, long term tenants are more inclined to stick around
     • This is a good strategy for reducing vacancies
5. Keep an eye on overall vacancy rates as compared to industry standards.
   • • If home prices are cheap, then rental properties will suffer
     • If home prices rise, rents can go up and tenancy rates will improve
     • If neither of these two factors is present, and your vacancies are still high, consider the area
6. Sell poorly performing properties
   • If vacancies are high compared to your other properties, consider all factors and make an executive decision to dump the property
7. Use 1031 exchanges wisely, to minimize capital gains and defer to a later date
   • Have a 1031 exchange firm in your back pocket, just in case
8. Have dependable contractors lined up to do the work timely at a fair price
   • Plumber
   • Electrician
   • Handyman
   • Appliance repairs tech
   • Roofer
   • Cleaning company - for vacancies
   • Carpet Cleaner
   • Painter (inside & out)
   • Real Estate Broker
   • Mortgage Broker
   • Property management company (if you decide it’s not worth your time and it’s more cost effective to farm out this work)
   • ***Don’t rely too heavily on any one contractor
9. Maintain significant capital reserves
   • This will help you weather any market related storms resulting in high vacancies
   • Don’t over-extend yourself
   • Buy properties using as little cash down as possible - leverage your investments
   • Don’t refinance investment properties unless you’re sure the rents will cover it
10. Keep your property in compliance with all applicable laws
11. Don’t have bills sent to investment properties - don’t rely on your tenants to pay bills you are liable for!

I could go on and on about these things, but I think you get the picture. There’s alot more involved in owning investment properties than meets the eye. Likewise, over-extending yourself is risky business.

Real estate investing requires a long term strategy, capital reserves, and the ability to weather a few storms. It’s also rather involved so if you don’t have the stomach for managing your own properties, find someone who can and understand they will charge a premium for the service.

Being a landlord is effectively being in business for yourself. Treat it with the respect and attention of a business.

Truly understanding your costs, planning for a % of vacancies, repairs, maintainence, etc is going to be the best way to succeed as a Real Estate Investor.

Many People Ask Me The Same

Question Daily

“Has The Market Bottomed Out

Yet?”

First, we have to understand market forces and what bottomed out really means.

Unfortunately, if we just answer that question we aren’t looking at the big picture. Right now, my answer would be misleading.

Realtor: “No, prices continue to drop as there is an excess of inventory and only a mere fraction of homes are selling”

This answer would lead most people to believe they should continue waiting it out, looking for the market to hit rock bottom (preferably where prices stabilize).

Since the only way we know how to determine if the market prices have hit bottom is to look at sales data (which is inherantly months old since transactions take months to close before this data is posted), then we will likely be on the upward swing of prices when we determine the prices have bottomed out.

Likewise, who cares about prices, really? Most people get tied up in the numbers too often to step back and take a look at what matters most to them - monthly cost of ownership!

If you look at the chart above, it points to the fact that monthly cost of ownership is really a function of both price and credit availability (interest rates). The harder it is to get credit, the higher the interest rates, the higher the required down payment, and the more ‘hoops’ you have to jump through.

So, right now the credit market is tightening up. It’s natural because these lenders have started to learn that extending credit to everyone is just too risky. What’s left is an increase in mortgage interest rates.

Rising interest rates generally mean you can afford less home at the same monthly cost of ownership. For example, if you could afford a $200,000 home at 5.5%, you may only be able to keep the payments the same by buying a lower priced home at 6.5%.

With the median home prices still in a free-fall, the net effect of rising interest rates and lower home prices may be negligible.

The graph above gives you a graphical representation of what happens when prices drop. Demand, naturally, increases. At the same time, when interest rates rise, demand at the same median home prices decreases.

Stagnation is when these two economic factors offset eachother - meaning you can buy the same home regardless of falling prices because the interest rate increases basically cancels out that benefit to you.

Recognize the tightening up of lending standards as a sign of the times. Be pro-active and understand market forces well before they are posted on the 5 O’Clock news. When everyone knows about the market ‘bottoming out’, it will generally be too late to benefit, and by that time the market will already be starting it’s upswing.