Millennial Markets

Your Investment Property Shopping Criteria

It's time to start looking for a property. Before you do you need to define your selection criteria. This section will focus on what your criteria is, why it matters, and how to define it.Imagine that you want to use a new recipe in making your dinner tonight . You take out a cookbook to find a recipe that looks good, discover a great baked chicken meal, and make your shopping list of ingredients in order to make the meal for your family. You head to the store and begin picking up the items on your list. Chicken, basil, olive oil, and other items begin to fill your cart. Suddenly - you see the spaghetti and remember another recipe that you once wanted to try with spaghetti. You begin to reach for the spaghetti but then remember your shopping list. Spaghetti isn't on the list for tonight's dinner, so you put back the distraction and continue on your way home to make a perfect dinner for your family.

Real estate is no different. Your selection criteria list is just like your ingredient list in the example above. It is designed to keep you focused on shopping for the things you need, and not waste money on other good looking things along the way. Real estate is an exciting field with a lot of different niches and strategies - so it is easy to get distracted by the next big thing or trend. Having a clearly defined selection criteria can help you stay focused, avoid "analysis paralysis" and keep you on track to buy a great investment property. By defining your criteria, you will be able to narrow down the choices in the market, and you will then eliminate the vast majority of deals that are only distractions.  Instead, you'll focus on finding just the kind of deals that you are interested in buying.

Creating Your Selection Criteria

In chapter three, we looked at a number of different niches you could invest in, as well as multiple strategies you can use to invest. It's now time to choose the niche and strategy and come up with a list of criteria to narrow down your selection further.
There are a number of different items you will want to consider to add to your "criteria list." These could include:

• Neighborhood
• Property Size (Square Ft)
• Lot Size
• Property Conditions
• Number of Units
• Cap Rate
• Cashflow
• Appreciation Potential

No one can tell you exactly what your investment property criteria should or should not include. Some of it will come down to personal preference, such as "I only want to buy in Seattle" or "I only want houses with basements," but most of your chosen criteria will revolve around the kind of investment you are getting into. For example, if you are looking to become a "buy and hold" investor of small multifamily units, your criteria is going to include small multifamily properties and will exclude old commercial buildings.
By specifying, ahead of time, what criteria you are willing to look at, your search becomes much more manageable. In the same way, you are able to more effectively communicate your desires to others who may help you buy property. If you simply told people "I am looking for real estate," the most likely response would be "good for you..." However, if you instead mentioned that you were looking "to buy a small single family house in the Rockford neighborhood for under $150,000," you enable others to think of properties that might match that description and get you connected with the deal.

Understanding "The Rules" of Investment Property

Perhaps the most important part of the criteria you put together is the financial component. If a deal doesn't make sense financially, it's not going to be a strong investment for you. In chapter two we looked at some of the basic math surrounding real estate investing, such as income, cashflow, and return on investment. However, generally speaking, a listing is not going to tell you the important information you want to know about the financials of a property. Yes, you can generally determine the amount of income the property makes - but you won't know immediately how much monthly cashflow the property produces, how overpriced the property is, or what you should offer. Additionally - it's not going to make sense to get out your spreadsheet and do a full property evaluation on every single deal you glance at. This is when "rules" come into play.
A "rule" is short for "rule of thumb." Rules can help give you a quick way to evaluate a property's financials on the fly. As with any "rule of thumb" using rules is not an exact science and should never be relied on entirely to decide if a property is a good investment. However - they can help you quickly filter a property and decide if it's worth further evaluation. Let's take a look at a few of these rules:

The 2% rule states that your monthly rent should be approximately 2% of the purchase price. 

In other words, a $100,000 home should rent for $2,000 per month; a $50,000 home should rent for $1,000 per month. This is a very conservative estimate that is very simplistic but can help in deciding if a property warrants a deeper look. In most parts of the country, the 2% is very difficult to achieve, but the closer you can get to that, the better cashflow you'll receive.
Real World Example: An average three bedroom home rents for $800 per month in your neighborhood. According to the 2% rule - you should be looking to spend around $40,000 for that property ($800 / .02 = $40,000)

The 50% rule is a great rule-of-thumb that helps you to fairly-accurately predict how much your expenses are going to cost you each month for a property. 

The 50% rule simply states that 50% of your income will be spent on expenses -- not including the mortgage payment. 

As mentioned above - most real estate listings will let you know what the monthly income of a property is. By dividing that number in half, you are able to easily see how much you'll have left to pay the monthly mortgage (principle and interest). Any income left over, after the 50% of expenses and the mortgage payment are taken out, is your cashflow. The 50% of expenses includes all expenses, including repairs, vacancies, utilities, taxes, insurance, management, turnover costs, and the occasional "big ticket" repairs that must be saved up for -- aka. CapEx or Capital Expenses like roofs, parking lots, furnaces.
Real World Example: An apartment building brings in $8,000 per month in income. Using the 50% rule, we are left with $4,000 to make the mortgage payment. If the monthly mortgage payment on the property was $3,500 per month, you can reasonably assume a monthly cashflow of $500 per month.
The 50% rule is especially helpful in teaching that expenses are almost always more than one might think. One common mistake that new investors make is under-estimating how much the expenses are going to cost. The 50% rule helps to show that there are always costs that are unexpected, so plan for them.

The 70% rule is used by investors to quickly determine the maximum price one should pay for a property based on the after repair value (ARV). Though most-often used by house flippers, the 70% rule can actually be used for any strategy when you want to find a good deal. 

The 70% rule says that you should only pay 70% of what the after repair value is, less the repair costs.


Real World Example: A home which, after being fixed up, should sell for approximately $200,000, needs approximately $35,000 worth of work. Using the 70% rule, a person should multiply $200,000 by 70% to get $140,000 - and then subtract the $35,000 in repairs. The most a person should pay for this property, therefore, should be $105,000.
Remember, a rule of thumb like the ones above are used only to quickly and efficiently screen a property and decide if it's worth further investigation. Never use a "rule of thumb" to decide exactly how much to pay or if you should invest or not. If a property passes the above rules (or gets close) it may be worth a more detailed analysis on paper or via a computer spreadsheet. Don't confuse a rule of thumb for a license to skip doing your homework.

California Foreclosures Lowest Since 2005

The number of California homes entering the formal foreclosure process last quarter dropped to the lowest level since late 2005, the result of a stronger economy and higher home values, a real estate information service reported.

A total of 17,524 Notices of Default (NoDs) were recorded at county recorders offices during the April-through-June period. That was down 8.8 percent from 19,215 in the prior quarter, and down 31.9 percent from 25,747 in second-quarter 2013, according to DataQuick, which is owned by Irvine-based CoreLogic, a leading global property information, analytics and data-enabled services provider.

Last quarter's NoD tally was the lowest since fourth-quarter 2005, when 15,337 NoDs were recorded. NoD filings peaked in first-quarter 2009 at 135,431. DataQuick's NoD statistics go back to 1992.

"It looks like the mortgage servicers doing the foreclosure paperwork are systematically working through a backlog. While their pile is getting smaller, they're working at a steady pace. With one exception, the number of NoDs we've seen filed each quarter over the last year-and-a-half hasn't changed much, and probably just reflects staffing and workload logistics," said John Karevoll, DataQuick analyst.

In first quarter 2013 California saw 18,568 NoDs filed. In last year's second quarter the number was 25,747. In third quarter 2013 it was 20,314. Fourth quarter was 18,120. In first quarter 2014 the tally was 19,215, and last quarter it was 17,524.

"The relatively high NoD tally in second quarter last year reflected a one-time bump because of deferred activity and policy change. Otherwise the quarterly flow of NoDs since early last year has been remarkably flat, and probably doesn't reflect any meaningful changes in trends. The overall trend is that homeowner distress continues to decline because of a stronger economy and rising home prices," Karevoll said.

Most of the loans going into default are still from the 2005-2007 period. The median origination quarter for defaulted loans is still third-quarter 2006. That has been the case for more than five years, indicating that weak underwriting standards peaked then.

On primary mortgages, California homeowners were a median 12.0 months behind on their payments when the lender filed the Notice of Default. The borrowers owed a median $27,601 on a median $309,083 mortgage.

On home equity loans and lines of credit in default, borrowers owed a median $6,992 on a median $66,150 credit line. The amount of the credit line that was actually in use cannot be determined from public records.

The most active "beneficiaries" in the formal foreclosure process last quarter were Wells Fargo (2,195), Bank of America (1,763) and Nationstar (1,047).

The trustees who pursued the highest number of defaults last quarter were Quality Loan Service Corp (for Wells Fargo and others), MTC Financial (Bank of America, Greentree, JP Morgan Chase) and Sage Point Lender Services (Nationstar, Bank of New York, US Bank and OneWest Bank).

San Diego-based DataQuick monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts. CoreLogic acquired DataQuick in March. Notices of Default are recorded at county recorders offices and mark the first step of the formal foreclosure process.

Although 17,524 default notices were filed last quarter, they involved 17,105 homes because some borrowers were in default on multiple loans (e.g. a primary mortgage and a line of credit).

Among the state's larger counties, loans were least likely to go into default last quarter in San Francisco, Marin and San Mateo counties. The probability was highest in Madera, Tulare and Fresno counties.

Trustees Deeds recorded (TDs), or the final loss of a home to the foreclosure process, totaled 7,392 last quarter - the lowest level for any quarter since 6,078 TDs were filed in fourth-quarter 2006. The all-time peak was 79,511 foreclosures in third-quarter 2008. The state's all-time low was 637 in second-quarter 2005, DataQuick reported.

On average, homes foreclosed on last quarter took 8.7 months to wind their way through the formal foreclosure process, beginning with an NoD. That's down from an average of 9.5 months the prior quarter and down from 9.1 months a year earlier.

At formal foreclosure auctions held statewide last quarter, an estimated 41.0 percent of the foreclosed properties were bought by investors or others that don't appear to be lender or government entities. That was up from an estimated 39.4 percent the previous quarter and down from 54.1 percent a year earlier, DataQuick reported.

Foreclosure resales - properties foreclosed on in the prior 12 months - accounted for 6.1 percent of all California resale activity last quarter. That was down from a revised 7.6 percent the prior quarter and down from 11.5 percent a year ago. Foreclosure resales peaked at 57.8 percent in first-quarter 2009. Among the state's larger counties last quarter, foreclosure resales varied from 0.9 percent in San Francisco County to 16.3 percent in Madera County.

Short sales - transactions where the sale price fell short of what was owed on the property - made up an estimated 5.8 percent of the state's resale market last quarter. That was down from an estimated 7.5 percent the prior quarter and 13.7 percent a year earlier.

Just Sold!

4 Types Of Home Renovation: Which Ones Boost Value?

"Fix it and flip it" is a phrase often associated with real estate investing. The idea behind the concept is that the completion of a few choice remodeling projects will add significant value to the price of a home. 

With this in mind, many homeowners undertake major renovation projects before putting their homes up for sale with the idea that sprucing up the place will result in big bucks. More often than not, these upgrades fail to pay for themselves. Read on to find out how to renovate strategically and which renovations really add value to your property.

The Difference between Investors and OwnersUpdating an investment property is generally a sound strategy because successful advocates of the fix-it-and-flip-it philosophy buy run-down homes at bargain prices and save money on the repairs by doing most of the work themselves. A little sweat equity goes a long way toward making a real estate investment profitable.Investors carefully choose their remodeling projects, focusing on those that will result in the most value for the least amount of effort and cost. Part of the process includes paying attention to the other homes in the neighborhood to avoid over-improving the property. If none of the other houses in the area have crown moldings and Corian counter tops, adding these amenities is unlikely to result in a significantly higher selling price.

Owners, on the other hand, often take a less strategic approach to remodeling when sprucing up their homes prior to putting them on the market. As a result, they can end up putting significantly more money into the project than they will get back out of it when they sell.

To make the most of your remodeling projects, it pays to keep four types of projects in mind : basics, curb appeal, value added and personal preference.

The BasicsThe basic are the things that buyers expect when they purchase a home. This includes a roof that doesn't leak, functioning gutters and downspouts, a dry basement, a good furnace, solid floors, walls that are in good repair, retaining walls that work and all of the other common-sense items that you expect to find in a home.

In upscale properties, this includes air conditioning, a certain number of bedrooms, bathrooms and garages, and any other amenities that are common to the neighborhood, such as a swimming pool.

Adding these items to a home that lacks them doesn't add value, it merely brings the property up to the standard level of the rest of the homes in the area. Money spent on these items is unlikely to be fully recovered, but should at least result in ensuring that the home sells for a price that is comparable to other homes in the area.

Curb AppealItems that add curb appeal help the property to look good when prospective buyers arrive. While these projects may not add a considerable amount of monetary value, they will help the place sell faster. Curb appeal items include a nice green lawn, attractive landscaping, fresh paint inside and out, new carpet and new appliances. If you know that a prospective buyer is due to arrive at a certain time, baking an apple pie just before the arrival is an easy way to set the stage, make your house smell good and create a warm, inviting atmosphere. 

Adds ValueThe projects that add considerable value are big favorites of fix-it-and-flip it advocates. While most of these efforts will not recoup their costs, some will come close. Projects that offer the most bang for the buck include new siding, kitchen remodeling, bathroom remodeling, new windows, decks and the addition of living space. The National Association of Realtors cites siding, kitchens and windows as some of the most beneficial projects, often recouping 80% or more of their costs during resale.

Personal PreferencePersonal preference projects are nifty items that you want but that other people may not like or be willing to pay to get. In most areas of the country, these include amenities such as swimming pools, tennis courts, hot tubs, wine cellars, basement game rooms and ponds. There's certainly no harm in adding these items to your house, but don't expect potential buyers to be willing to pay a premium to get them when you are ready to sell.

House and HomeRegardless of the project that you are considering, remember that your primary residence is not just a house, it's your home. If you plan to live there for many years to come, add amenities that you want to have regardless of their impact on resale. When it's time to sell, do the basics to get the property up to par for the neighborhood and add some curb appeal, but don't bother undertaking an extensive array of projects strictly in an effort to increase the value of the property. Even with the projects that are known to add value, the chances are good that you will spend far more money than you will get back in return.

5 Ways to Beat Out the Competition

As the real estate market starts to pick up in many parts of the country, real estate agents from small towns to the big cities are blogging, tweeting, ranting and raving about multiple-offer situations.
A seller’s asking price is just that: an asking price. The seller may choose to price their home above, at or well below what the actual market will bear. Then, with luck, come the offers from buyers. Sometimes, there are multiple offers all under the asking price. Other times, all offers come in right around the asking price.
But in some situations, there are more than six offers coming in over asking price. Depending on where you live, you, as a potential buyer, may be forced to compete with other buyers in a bidding war. Here are five steps you can take to beat the competition in a multiple-offer situation.

Hire a good local agent

In most communities, 80 percent of the business is done by 20 percent of the agents. These agents are experienced in the local market and have relationships with other agents as well as inspectors, contractors, mortgage brokers and appraisers. More than anything, these 20 percent of agents “get” it.
A seller is looking for a sure thing and a smooth, clean escrow. With stakes high, who wouldn’t want a sure thing? In fact, the last thing the seller (or their agent) wants is to enter into escrow with an inexperienced or out-of-the-area agent.
That’s why, when faced with multiple offers, a seller, guided by their agent, may choose to work with a lower-priced offer because that buyer has a good agent. Many times, a lower priced offer will be countered up to match the price of a buyer with an unknown agent.

Get your financial ducks in a row before making an offer

Before you can make a strong and winning offer, you need to have your finances in order. This means being pre-approved for a loan and staying in regular contact with your lender or mortgage broker. Have an auto email alert set up from your real estate agent’s MLS. Know the new listings as they hit the market and be prepared to visit them right away. Be ready to make a move when the right house comes along.
An informed buyer has been in the market for some time. They’ve seen multiple properties, either at open houses or private appointments. They come to the multiple-offer situation fully prepared, knowledgeable of the market and ready to present themselves as a strong, motivated buyer. The seller and their agent will appreciate that.

Don’t wait

Many times, a new listing is sold before the first open house. If a desirable property hits the MLS on a Tuesday, you need to see it Tuesday night or Wednesday morning. As agents tell sellers all the time, your first buyer is likely your best buyer. The buyers who don’t rest on their laurels get the home. They show that they are on it, they’re motivated and they really want the property. This often translates into a successful deal or smooth escrow for the seller and the listing agent.
If you’re serious about buying and have your financial ducks in a row, don’t wait for the open house. As soon as you see the listing, let your agent know you’re interested or have them start doing the research.

Make a ‘clean’ offer

There’s an assumption that the successful bidder simply pays the most money. But this isn’t usually the case. While price is a huge factor, the terms and conditions are as important, if not more so.
To make your bid the most compelling, be as flexible as possible to the seller’s needs. If you know the seller needs a quick escrow because they just bought a place, give it to them. If they just had a baby and need some extra time, go with a longer close or offer to close quickly but give them a “rent-back.” If you’re going to have inspections, check with the inspector and see if you can get an appointment soon after getting your offer accepted. That way you can remove your inspection contingency quicker.
The same holds true with an appraisal. If your lender is able to pre-schedule an appraisal or at least check their schedule, it can only help. The last thing a seller wants is to accept an offer, only to wait 14 or 21 days to discover the buyer can’t get a loan or the leaky roof scared them away. Make your offer clean with swift timeframes for contingencies. There have been times when a seller leaves 2 to 3 percent on the table; just to be sure the deal will close “cleanly.”

Present yourself in the best possible light

Presentation can’t be emphasized enough. Make sure your agent presents your offer to the seller in a professional way. The offer should, when possible, be presented in person. A contract should be typed, not handwritten. Without a doubt, a pre-approval letter from your bank or broker should be attached to the offer. A cover letter from you or your agent presenting you, as buyers, to the sellers should always accompany your offer. If there are disclosures presented to you prior to your making an offer, sign off on them. Make it clear to the seller that you’re serious, motivated and ready to move ahead should they choose to work with you.

Strong and clean is the way to go

It’s the common sense stuff that will help differentiate you from the pack. Be up front, show that you’re motivated and look at the big picture of your offer — not just the dollar amount.
Of course, many times the highest bidder wins. But every day, there are dozens of buyers who kick themselves because they would have paid the price that it took to win the bidding war. Presenting yourself and your offer in the strongest and most clean way will go a long way to assuring you come out on top.

Why it pays to use a Realtor

November Newsletter

 

 

Your Investment Property Shopping Criteria

It's time to start looking for a property. Before you do you need to define your selection criteria. This section will focus on what your criteria is, why it matters, and how to define it.
Imagine that you want to use a new recipe in making your dinner tonight . You take out a cookbook to find a recipe that looks good, discover a great baked chicken meal, and make your shopping list of ingredients in order to make the meal for your family. You head to the store and begin picking up the items on your list. Chicken, basil, olive oil, and other items begin to fill your cart. Suddenly - you see the spaghetti and remember another recipe that you once wanted to try with spaghetti. You begin to reach for the spaghetti but then remember your shopping list. Spaghetti isn't on the list for tonight's dinner, so you put back the distraction and continue on your way home to make a perfect dinner for your family.
Real estate is no different. Your selection criteria list is just like your ingredient list in the example above. It is designed to keep you focused on shopping for the things you need, and not waste money on other good looking things along the way. Real estate is an exciting field with a lot of different niches and strategies - so it is easy to get distracted by the next big thing or trend. Having a clearly defined selection criteria can help you stay focused, avoid "analysis paralysis" and keep you on track to buy a great investment property. By defining your criteria, you will be able to narrow down the choices in the market, and you will then eliminate the vast majority of deals that are only distractions. Instead, you'll focus on finding just the kind of deals that you are interested in buying.

Creating Your Selection Criteria

In chapter three, we looked at a number of different niches you could invest in, as well as multiple strategies you can use to invest. It's now time to choose the niche and strategy and come up with a list of criteria to narrow down your selection further.
There are a number of different items you will want to consider to add to your "criteria list." These could include:

• Town
• Neighborhood
• Property Size (Square Ft)
• Lot Size
• Property Conditions
• Number of Units
• Cap Rate
• Cashflow
• Appreciation Potential

No one can tell you exactly what your investment property criteria should or should not include. Some of it will come down to personal preference, such as "I only want to buy in Seattle" or "I only want houses with basements," but most of your chosen criteria will revolve around the kind of investment you are getting into. For example, if you are looking to become a "buy and hold" investor of small multifamily units, your criteria is going to include small multifamily properties and will exclude old commercial buildings.
By specifying, ahead of time, what criteria you are willing to look at, your search becomes much more manageable. In the same way, you are able to more effectively communicate your desires to others who may help you buy property. If you simply told people "I am looking for real estate," the most likely response would be "good for you..." However, if you instead mentioned that you were looking "to buy a small single family house in the Rockford neighborhood for under $150,000," you enable others to think of properties that might match that description and get you connected with the deal.

Understanding "The Rules" of Investment Property

Perhaps the most important part of the criteria you put together is the financial component. If a deal doesn't make sense financially, it's not going to be a strong investment for you. In chapter two we looked at some of the basic math surrounding real estate investing, such as income, cashflow, and return on investment. However, generally speaking, a listing is not going to tell you the important information you want to know about the financials of a property. Yes, you can generally determine the amount of income the property makes - but you won't know immediately how much monthly cashflow the property produces, how overpriced the property is, or what you should offer. Additionally - it's not going to make sense to get out your spreadsheet and do a full property evaluation on every single deal you glance at. This is when "rules" come into play.
A "rule" is short for "rule of thumb." Rules can help give you a quick way to evaluate a property's financials on the fly. As with any "rule of thumb" using rules is not an exact science and should never be relied on entirely to decide if a property is a good investment. However - they can help you quickly filter a property and decide if it's worth further evaluation. Let's take a look at a few of these rules:

The 2% rule states that your monthly rent should be approximately 2% of the purchase price. In other words, a $100,000 home should rent for $2,000 per month; a $50,000 home should rent for $1,000 per month. This is a very conservative estimate that is very simplistic but can help in deciding if a property warrants a deeper look. In most parts of the country, the 2% is very difficult to achieve, but the closer you can get to that, the better cashflow you'll receive.
Real World Example: An average three bedroom home rents for $800 per month in your neighborhood. According to the 2% rule - you should be looking to spend around $40,000 for that property ($800 / .02 = $40,000)

The 50% rule is a great rule-of-thumb that helps you to fairly-accurately predict how much your expenses are going to cost you each month for a property. The 50% rule simply states that 50% of your income will be spent on expenses -- not including the mortgage payment. As mentioned above - most real estate listings will let you know what the monthly income of a property is. By dividing that number in half, you are able to easily see how much you'll have left to pay the monthly mortgage (principle and interest). Any income left over, after the 50% of expenses and the mortgage payment are taken out, is your cashflow. The 50% of expenses includes all expenses, including repairs, vacancies, utilities, taxes, insurance, management, turnover costs, and the occasional "big ticket" repairs that must be saved up for -- aka. CapEx or Capital Expenses like roofs, parking lots, furnaces.
Real World Example: An apartment building brings in $8,000 per month in income. Using the 50% rule, we are left with $4,000 to make the mortgage payment. If the monthly mortgage payment on the property was $3,500 per month, you can reasonably assume a monthly cashflow of $500 per month.
The 50% rule is especially helpful in teaching that expenses are almost always more than one might think. One common mistake that new investors make is under-estimating how much the expenses are going to cost. The 50% rule helps to show that there are always costs that are unexpected, so plan for them.

The 70% rule is used by investors to quickly determine the maximum price one should pay for a property based on the after repair value (ARV). Though most-often used by house flippers, the 70% rule can actually be used for any strategy when you want to find a good deal. The 70% rule says that you should only pay 70% of what the after repair value is, less the repair costs.
Real World Example: A home which, after being fixed up, should sell for approximately $200,000, needs approximately $35,000 worth of work. Using the 70% rule, a person should multiply $200,000 by 70% to get $140,000 - and then subtract the $35,000 in repairs. The most a person should pay for this property, therefore, should be $105,000.
Remember, a rule of thumb like the ones above are used only to quickly and efficiently screen a property and decide if it's worth further investigation. Never use a "rule of thumb" to decide exactly how much to pay or if you should invest or not. If a property passes the above rules (or gets close) it may be worth a more detailed analysis on paper or via a computer spreadsheet. Don't confuse a rule of thumb for a license to skip doing your homework.