Your credit score determines your "willingness" to repay a debt. In todays market, lenders place more emphasis on the credit score when considering approving your loan application. I recommend using myFICO.com as it's one of the closest consumer reporting agencies that will generate a credit score close to what lenders use. Get All 3 FICO Scores and Credit Reports! If your middle credit score is not at least a 680 you'll need to do
our assets determine how much money you have available for the Downpayment & Closing Cost of your purchase property. Although you can actually by a property with as little as 5% Down with the bank, I'm suggesting that you have about 20% Down payment and 4% for Closing Cost. so just to make the numbers easy you should have 25% of the Purchase Price of your property in cash. Now, we've learned that it doesnt have to be our "cash" but leveraging someone elses. In this case, our partner for the deal is the bankin forms of unsecured business credit lines. These lines can be credit cards and line of credits as we've discussed in previous sessions. If you've missed those seminars, perhaps you can get the tape or ask someone in the group who has been through the process to be your mentor. If you cannot come up with the 25%, then consider bringing a "money partner" into the deal to contribute the cash you need to close on your deal.
Your income determins your "capacity" to repay a debt. Although we're only purchasing positive cashflow properties, the Lender wants to make sure that you can manage the debt you do have before taking on anymore. What that means is that you should have no more than a 38% debt-to-income ratio. That means take all the minimum payments that are shown on your credit report, add them up, and divide them by your gross monthly income. This is your debt ratio. If you don't make enough income, you may have to find a partner with the W-2/paystubs or tax returns to help you qualify for the mortgage.
You have to know where you are and where you'd like to be in order to map out a plan to get there. Your financial statements help you to do this. You should complete as much as possible of the
Use the foreclosure sites listed on our website. You can also check NY Times, Craiglist, Village Voice, Realtor.com, etc. other sites to find highly motivated sellers. Distressed properties in today's market comes from many sources: pre-foreclosure/short sale, foreclosure, bankruptcy, tax liens, divorce actions, and property has been on the market more than the Seller would care to admit. Therefore, just don't limit yourself to once lead source for finding properties in your area.
Use your Farm Area Spreadsheet to keep track and organize your deals. Use HUD Fair Market Rent System to fill in the Sect. 8 rents for your area. Use websites like Realtor.com, NYTimes.com, or the local newspaper classified to get a sense of what the open market rents are for your farm area. Use the Property Value sites under the Great Resources ---> Evaluating Real Estaate link to help you guestimate the property market value. After keying in your "Market Value" price, you may want to change this number so that the rest of the formulas calcuate until you have at least $100/month positive Cash Flow.
Send an email or fax or call the Seller to submit your offer. I found it always best to disclose your intentions upfront so let the Seller know that you're an Investor looking to purchase a cashflowing property. You have been pre-Approved by your lender and your ready to close when the Seller is. Here is a sample email you can send:
Hi Joe Realtor,
I would like to submit an offer for $XXXX to purchase your property located at 123 Main St Anywhere, USA 12345. I am an Investor pre-Approved by my bank to close in 30 days. Please email me the contract.
Congratulations !!! Every week you've been updating your spreadsheet with new "distressed" properties that you've found. You've emailed the Seller and after a lot of going back and forth you've agreed to a price. During this art of negotiating you've ascertain the Sellers "real motivation" so keep this information in the back of your mind as you may need to use it to get even a lower price as you go through your due diligence phase. As soon as you learn that you have an accepted offer, email email@example.com to spread the good news and get more guidance through the process. Your email should include the following:
As soon as you receive the contract from the Seller, you should begin to verify your numbers and have a Real Estate Attorney review your contract before signing it. Now that you have the actual price of the property, you need to go back and update your Farm Area spreadsheet with the
Also known as the "Good Faith Deposit" is typcially required to make the contract legally binding upon signing. For example, if you're purchasing a HUD foreclosure the gov't requires $500 if price is less than $50k and $1,000 if it's greater. However, there is no set rule when purchasing from other Sellers. Try to negotiate the least amount of deposit as possible. In fact, there's a strategy I've taught where instead of giving actual money as the deposit you give a Promissory Note which states that the deposit will be given at the closing table. Check it out being used in Ryan Smith's Purchase & Sale Agreement.
This contingency allows you to get out of your contract if you cannot secure financing based on the terms outlined in your contract. Depending on the state, some real estate contracts actually state whether the mortgage is conventional financing or not, adjustable or fixed rate, the term, and max. interest rate for your financing. You will negotiate with the Seller how long you'll have to secure financing for your deal. Try to go for 45 days but no less than 30 days to apply and be conditionally approved for your mortgage.
You or your Attorney will order what's called a Title Report (Lien Search if it's a coop). This report gives you insurance that the Seller has the legal right to sale you the property. The report will also highlight any city/county violations, Certificate of Occupancy issues, or unresolved liens, judgements, or unpaid taxes/water bills. The title company will also run a check against the Buyer for any outstanding liens/judgments as these can attach to any personal property you purchase. Remember in Step 2 where I advised you to review your credit report well by now all of these types of issues should be resolved and clear title can be issued. A good title company can have your report ready for you in about 15 days but try to negotiate 30 days for this contingency.
Although no one and I repeat no one should be signing an "All Cash" deal in today's market just in case you are I'll cover this contingency. An appraisal contingency allows you to cancel your purchase contract if the property does not appraise for at least the purchase price. You typically want to negotiate 30 days as well for this contingecny. In today's slow market, an appraisal company shouldn't take more than a week to get your appraisal report done.
Also known as "Close of Escrow" this is the date at which you must close by. If you don't the Seller's Attorney may send you what's called a "Time of Essence" letter stating that if you continue to extend the contract closing period you may be in jeopardy of loosing your Ernest Money Deposit for non-performance of the contract.
If any of these items are not specifically spelled out in the contract you receive from the Seller then your Attorney should create and attach a Rider to the contract. Additionally, the following items should be placed in the Rider for your additional protection:
Your Attorney should definitely be a real estate attorney. And if you're purchasing a coop/condo it should be an Attorney that has experience in these type of transactions. Coop/Condo buildings come along with Offering Plans and coop's have Stock & Lease documents that must be reviewed. The best place to start in finding an Attorney is a referral from a trusted source like a friend or family that has purchased property and can refer a good Attorney to you. Other members on your team may have recommendations as well. Every Attorney operates differently but usually cost from $750 - $1,500 per transaction. Regardless if you close or not they must be paid for their services.
Property Managers are like the captain of your ship. Just think of them as the Chief of Operations. You can partner with an individual or a company. Regardless of entity you choose, the property management fee can range 7% to 10% of the gross rental income. You definitely want to find a property manager that is experienced in your property's neighborhood and property type. However, you don't want a property manager that's too busy and cannot give your property the proper attention it needs especially if it's a value play. Try to check 3 references before deciding on a manager. He/She should have a clear definition of your goal in holding this property in your portfolio. I'll add this disclaimer that since you have at least a Super in a Coop/Condo bldg that I think you can manage the property yourself.
Since you're buying a property that should only need cosmetic repairs/improvements that can be completed within 30 days of closing a home improvement contractor should have the expertise you need. You want to ask your property manager and other team members for a referral as well as friends/family. The key to hiring a contractor is choosing someone that is good at estimating
After closing and depending upon your portfolio size you may have to add a Realtor, Bookkeeper, CPA, Tax Strategist, etc. to your team. But for now at least bringing on board the Attorney, Property Manager, and Contractor should be enough to get you started. Remember, your Property Manager is like your COO so as different things come up the manager should make recommendations to you of who to outsource the task to.