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10 Must-Do Diligence Tasks

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  1. to-do-listKnow the demographics for the area. Is the area in general decline or it is marked for growth? County offices provide information regarding permits that developers have pulled indicating market expansion for both commercial and residential projects. New permits indicate growth.
  2. Other investors can present a pro-forma indicating annual income and expenses. While this may be close to accurate it’s really only a generalization. You need real numbers and rely on your own estimates as well as reviewing the seller’s detailed reports. If the property is professionally managed, you can obtain the property’s maintenance history by request. Monthly rents are relatively easy to verify and your bank can provide monthly financing costs, taxes and insurance payments.
  3. Have your attorney or title insurance company order a preliminary title report. This will indicate any current liens that may not have been satisfied and will need to be before the property can be transferred. Existing mortgages will have to be settled but there may also be property taxes, delinquent income taxes, mechanic’s liens and past due child support payments.
  4. In addition to liens on title, look for any easements. Easements allow access to your property by third parties. Most easements include the right of the utility company to access your property to make repairs or maintenance issues but can also give the right of adjoining neighbors to traverse your property in order to get to theirs.
  5. Review past utility costs such as electrical, water and sewer. If you’re paying these charges and not your tenant, this can have significant impact on cash flow.
  6. If the property is a foreclosure, you may not be able to physically inspect the unit from the inside until after you’ve bought it at an auction. This isn’t advisable unless you’re experienced real estate investor who regularly buys and sells real estate at foreclosure auctions.
  7. After you’ve received an accepted offer, immediately order a property inspection. The seller is required to provide a Seller’s Disclosure Statement identifying any known issues with the property such as defective equipment, appliances or leaky pipes. The property inspection will identify any and all matters that need attention. Don’t do this yourself unless you’re a licensed inspector.
  8. Review the potential purchase with your team getting input for all major facets of the transaction. Your real estate agent will confirm valuation, your attorney or title agent can provide preliminary legal work and opinion. Your lender can prepare a spreadsheet regarding closing costs, rates and monthly payments.
  9. The appraisal should arrive within 5-10 days after your lender has placed the appraisal order. Pay close attention to the appraiser’s notes regarding the market. Are property values rising? Declining? Also look for any “deferred maintenance” found by the appraiser. Deferred maintenance on an appraisal means something needs to be fixed and will most often delay a closing as well as not being able to obtain financing.
  10. Any potential major issues require closer inspection. For example, if the property shows signs of potential foundation problems, a property inspector isn’t enough. You need to find a structural engineer who will “sight” the house to find out if the home has settled and needs repair.

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10 Cheap Ways to Boost Value

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  1. Start scrubbing. A clean house will appeal both to potential buyers as well as impress the appraiser. A professional cleaning company will give your property a thorough cleaning, leaving the home free of dust and stains. You want your kitchen and baths to absolutely sparkle.
  2. Power wash the exterior. Just as you want a clean interior, you want a nice exterior, too. Rent a power washer and clean the exterior walls, sidewalk and drive way as well as porches, decks and wooden fence.
  3. Paint is perhaps the most cost effective thing you can do to boost value. New paint covers marks on the walls and gives the entire house a brand new aroma. Does the outside need painting? Put on a new coat of paint on the outside as well.
  4. Take care of curb appeal. Painting the exterior will brighten up your property but you need to take care of the rest of the outside as well. When a potential buyer first pulls up to the home, they want to see a well-cared for home. Mow the lawn, get rid of debris, leaves and sticks. Don’t go overboard with shrubs and rows of flowers. What might seem pretty to you might translate into outdoor maintenance to a buyer.
  5. Switch out the hardware in the kitchen. Installing new knobs and pulls that shine give new life to older cabinetry. Take a look at your faucets in the kitchen and baths as well.
  6. If there are spots on the carpet, you can try and have them professionally removed but for a bit more you can replace the carpet entirely. You know how fresh a house feels with new carpet and new paint, right?
  7. As you make upgrades, repairs and renovations, keep a list of what you’ve done. Real estate agents will tell their buyers what you paid for the property. If you bought it way under market due to its condition, you’ll need to document why you’re selling for more than what you paid.
  8. Pay for your own property inspection before listing. That way you’ll know what the buyer will see. If there are minor repairs that need to be made, make them. Don’t be surprised when the buyer counters with a new, lower offer because something was discovered you didn’t know about.
  9. Get rid of clutter and make for extra space. A property divided up with cabinets, furniture and other décor will make the home appear smaller.
  10. Change out all the light bulbs with brighter ones. New energy-efficient LED bulbs cost a little more but they reduce heat, the light is more appealing and brightens up the home. For larger rooms and entryways, consider a 100-150 watt equivalent.

Top 10 “Gotchas” for Buy and Hold Properties

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  1. Guy_deskFinding out later that your rent won’t cover your financing costs. Not only do you need to cover your mortgage payment but property taxes, insurance and maintenance costs as well. If the property is currently rented, income will be listed in the multiple listing service. If not, work with your agent. If it doesn’t cash flow, it’s not an investment.
  2. Know how much cash you’ll need at the closing table. Including your down payment there will also be closing costs associated with your new mortgage. Coming up short will leave you scrambling for dough. Your bank or mortgage company can give you a good idea how much you’ll need.
  3. Speaking of banks, know in advance you’re qualified for financing. Your purchase is for the long haul and the best type of financing is with a conventional loan underwritten to Fannie Mae or Freddie Mac guidelines.
  4. Lock in a fixed rate and avoid hybrids or ARMs. That way you can always forecast holding costs and raise rent over time. The longer you hold onto a property, the higher your rent will ultimately be. That means more cash flow when you’re closer to retirement compared to just starting out. There’s no gamble with fixed rates.
  5. Who’s going to collect the rents? Mow the lawns? Fix the busted hot water heater? If you’re just starting out, you’re employed elsewhere. You’ll need to find someone to handle those daily duties for you while you’re out looking for more deals. Hire a professional property manager.
  6. Renting to relatives or friends isn’t a very good idea. Bad things can happen over time and if your nephew falls behind on the rent will you really evict him? Keep family and friends at bay and keep your rentals strictly a business relationship, not a family one.
  7. Don’t worry about making a lowball offer. You’re not buying a property to make sure you don’t insult the buyers. Make the lowest reasonable offer you can. Don’t walk away from the closing table wondering whether or not you could have gotten a better deal.
  8. Review your deals with your insurance agent. Don’t be caught on the wrong end of a liability claim. Your tenants and their guests could slip and fall and it might be your fault. Beyond insurance to cover damages to the unit, make sure you’re protected from a legal perspective.
  9. Take advantage of other people’s money. An all cash transaction freezes liquid assets. The only way to get those funds back is to sell the property or obtain a more expensive equity loan.
  10. Speaking of cash, make sure you have plenty on hand. If a new deal hits your radar you’ll need funds to finance the deal and you’ll also need cash on hand for maintenance costs. There are legal obligations as a landlord and one of the most important is to provide a safe, habitable environment for your tenants. Don’t put off needed repairs.

Top 10 mistakes made by House Flippers

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  1. Lead with your mind, not with your heart. Don’t let emotion blind your logic. If you find a property and you absolutely fall in love with it, that’s fine. Just don’t try to make something work if it clearly won’t.
  2. Know in advance what you’re going to do with the property. If it’s a flip, search your database for potential buyers. Always know how to get out from under a purchase before you make an offer.
  3. The more you remodel or repair, the less you’ll make when selling. Work with your contractor to find out what must be fixed and what might be fixed. Certain upgrades can be left for your buyers, no need to renovate the entire house knowing you won’t get 100% of your money back when sold.
  4. Flying solo is a disaster in waiting. Surround yourself with professionals who will profit from your investments as well as drive new business to you. When you win, they win. You’re talking about attorneys, contractors and banks. You can’t be an expert in everything but you can put them on your team.
  5. Speaking of teams, don’t flip around, be loyal. Establish solid working relationships and nurture them. Doing so, team members will be out there looking for deals for you. If you constantly move your business around, you won’t have that type of commitment.
  6. Don’t be a chicken. If the math works and your team members agree with you go ahead and make the offer. If it’s a good deal, someone else can find it and bid it out from under you. Early on you’ll be hesitant but as time goes by you’ll gain the confidence you need to strike when the iron is hot.
  7. Your profit is sales price less expenses. When evaluating a potential investment, get a realistic selling price from an agent along with a days-on-market calculation. The higher your asking price, the longer it will take to sell.
  8. Speaking of value, forget online valuation tools that are popular today. Don’t rely on assessed values from the county, either.
  9. Using your own walk-through as your property inspection will cost you. Some investors not only hire one professional property inspector but get another for a second opinion, especially for bigger deals. Real estate is an asset you can’t return to the seller after you close. Know what’s ahead.
  10. While it’s good to be familiar with an area, don’t limit your prospects to your own backyard. There are always areas that are ideal for investors beyond your own zip code.

10 Things You Absolutely Must Know About Hard Money

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  1. fixer upper“Hard” money doesn’t mean “stupid” money. The hard money lender wants to be paid back on time and doesn’t want to foreclose. Hard money lenders are no different than any other lender in that regard.
  2. Hard money is an important player in the real estate industry. Hard money is used to acquire and renovate properties that traditional banks won’t touch in the property’s existing condition. Once the property is renovated and brought into proper condition, buyers can find financing anywhere.
  3. Hard money loans require more down payment, higher interest rates and closing costs. You might expect to put anywhere from 30-50 percent down, pay three to five points in addition to traditional closing costs. These costs must be considered when evaluating a potential acquisition.
  4. A clear exit strategy is a must for both you and the hard money lender. The lender needs to understand how the loan will be paid back. Will you obtain a conventional loan to replace the hard money or sell the property to pay back the investor?
  5. Hard money loans are for a very short term, some as short as 90 days. The hard money lender will extend the loan for as long as needed to buy, renovate and flip the property. If renovations are taking longer than expected, hard money lenders can write up a loan extension, for a fee.
  6. Different hard money lenders will have different preferences for property types. Some hard money lenders may only like to finance single family residential rehabs while others will finance a strip mall or an apartment building.
  7. Don’t start shopping for a hard money lender once you’ve found a property. Plan way ahead. Before making an offer on any property that needs a hard money loan, review the prospect with at least one hard money lender to see if it’s a viable deal.
  8. Because hard money lenders can go after particular properties, if one hard money lender declines your proposal, keep going. If the deal makes sense and you can back it up with documentation, you’ll find a hard money lender.
  9. Hard money lenders get their money in three primary ways: solicit investment funds from individuals to finance a lending pool, solicit funds from individuals as each potential project arises and obtaining short term funds from a conventional bank. Sometimes hard money lenders want to make a loan but the funds aren’t readily available.
  10. When hard money lenders solicit individual investors for a project, the individual investors can decide on their own whether or not to invest. They’re not obligated to finance anything they don’t like and use their own due diligence to review a project even after the hard money lender has approved the project.