by Investmark Mortgage | Sep 28, 2017 | Blog
You may have heard of the over-under in sports gambling. That’s where you bet on whether the combined score of both teams will be either higher or lower than that number. But did you know there is an over-under in real estate investing? That’s where an investor overestimates the ARV, underestimates the scope of work required, and basically pays too much for the property.
You might be asking what’s the similarity here? The answer: Whether you are gambling on football or gambling on your deal, you can lose money doing both. And with real estate, the losses can be much greater than some insignificant football wager. Still, many investors don’t even realize they are doing this, let alone think they are gambling. Let’s break down how this happens so we can understand how to avoid it.
Overestimating the ARV
Here are the most common things that contribute to inaccurate ARV’s:
- Taking the wholesaler’s word for the value without doing any due diligence.
- Looking at the comps and picking the highest one.
- Using the tax assessed value for the ARV.
- Thinking the appraisal is “too conservative” and this deal will actually sell for more.
If these sound familiar, beware that there are huge risks associated with these approaches that involve losing money.
Underestimating the Scope of Work
Even more than ARV, the scope of work required often falls short due to the following three reasons:
- Prior to purchase, major items were overlooked or unforeseen due to improper assessments. Things such as foundation work, roofing, HVAC, and plumbing, are the most common and have the most significant impact on increasing the overall costs.
- The investor believes they can get the work done for a much lower cost than is actually possible.
- Believing the wholesaler’s rehab estimate without doing your own due diligence.
Avoiding These Pitfalls
An accurate assessment of the value of the property starts with getting an appraisal. Using any other approach will only lead to problems. If you have been on the I.M. Blog section of our website, you know that this is something that has been emphasized since the beginning. The appraisers we use are experienced with investor deals and know how to evaluate a property that needs to be rehabbed. Also, they are never told to be conservative with their assessments.
If you are not experienced in determining the overall scope of work required to reach the ARV needed, get with an experienced contractor to help you understand the true cost of the project, so there are no expensive surprises. There’s always going to be something that pops up unexpectedly, but missing major items can be avoided. Be realistic and don’t gamble with your investment.
Have a Real Estate deal and want a hard money loan to flip? We are a 3-time award-winning hard money lender, with offices in Dallas, Austin, San Antonio, and Houston.
by Investmark Mortgage | Aug 10, 2017 | Real Estate
On more than one occasion, I have seen investors have to clean up a mess after closing that could have been prevented had they ordered a land survey. Unfortunately, most Real Estate investors avoid getting surveys. Why? They don’t want the added cost in doing their deal, they don’t believe surveys are that important, and land surveys can take time to get, potentially holding up their closing. In this blog, I discuss when you should consider getting one. But let’s cover some basics first.
What Is a Property Survey?
For those of you new to real estate, a survey is a graphical diagram used to depict the boundaries of a property and illustrate the exact amount of land that is owned. Surveys will show any easements or encroachments on a property. For example, if the neighbor’s fence is encroaching on your property or sewer lines run through it, a survey is going to reveal that. These issues can range from being insignificant, where nothing needs to be addressed, to serious and need to be resolved before closing.
What Issues Can You Experience?
Maybe your neighbor’s shed is inside your property line, or the in-ground pool was installed over the utility easement, or your driveway starts on your neighbor’s property, before connecting back to your property. All of these can present problems after closing.
What problems can you have? – Problems with your neighbors, problems making any improvements to the property, incorrect or skewed appraisal values – are just some of the things that could be avoided by ordering a survey prior to closing. While you don’t necessarily need to order a survey on every deal, you probably want to take note on when you might want to order one so you don’t experience any of these issues with your deal.
Top Five Things to Consider for Ordering a Land Survey
- The property is located outside a metro area or what we would refer to as “in the country.” This also applies to properties, not in platted subdivisions. If you are buying a property like this, you want to make sure that the boundaries are accurate and the amount of land included is what you are expecting. Also, you want to be sure there are no encroachments or easements that need to be corrected before you close.
- The property is on an old site or the existing survey on file is old. “Old” is subjective, but probably anything built before 1940 should automatically warrant getting a survey. It’s worth noting that even if the seller has the original survey from their purchase if the survey is older than seven years, the title company may require a new one in order to issue any additional survey coverage.
- The improvement is oversized for the existing subdivision (i.e., a McMansion). You may have seen these houses in some older, more established neighborhoods where original homes are being torn down, and new houses that take up a larger portion of the lot are being built. If you are buying a deal like this, be sure to get a survey to make sure any improvement is within the boundaries.
- The legal description is metes and bounds as opposed to lot and block. This is typically seen on older properties and/or properties outside a metro area. Metes and bounds can be very lengthy and contain reference points to mark the boundaries. If you see this in the title commitment, definitely get a survey.
- Utility easements don’t always warrant getting a survey. However, if there is a sewer line easement, you should get a survey to determine where the line runs on your property.
In addition to these five points, the fact is you may be required to get a survey if you are refinancing or selling and a traditional lender is involved. However, if the seller has a survey when you close on your purchase, you may not have to get a new one if the title company will accept it. Always ask the seller if they have one when you are contracting the house, but don’t make it a deal-breaker if they don’t have it. Just order one at the time of purchase and get the additional coverage (for a nominal fee) from the title company.
by Investmark Mortgage | Jun 1, 2017 | Blog
New (and even some experienced) real estate investors often think there is more money in a deal than there actually is because they are focusing on gross profit and incorrectly calculating their net profit.
For example, a house with a $100,000 ARV that needs $20,000 in repairs and purchased at $50,000, yields an average net profit of around $13,500. While the net profit may appear to be higher, as it looks like there is much more equity in the deal, let’s discuss why this is not the case.
There are five costs incurred at the sale of a property that goes into a formula we will use to calculate the net profit. These costs are:
- Seller’s Closing Costs: This includes the title company escrow fees, title insurance, recording fees, and any other title company costs.
- Carrying Costs: This would include utility expenses such as water, gas, and electric, as well as any interest expense if you borrowed money to purchase the property.
- Seller Concessions: If your buyer doesn’t have enough money to bring to closing, they can ask you, the seller, for some assistance. This assistance means they want you to pay for some of their closing costs and/or lender costs. Many lending products allow for up to six percent in seller concessions. Although a buyer will seldom ask for this high of an amount, just know that they can.
- Commissions: If you are listing the house on the MLS (which you should be doing), you are going to have to pay your agent or broker a commission. In most markets, six percent is the norm.
- Pro-rated Property Taxes: As a seller, you will have to credit the property taxes to the buyer for the current year up to the date of closing on the sale. So if you sold the property on May 31, you would have to credit exactly five months’ worth of property taxes to the buyer at the sale closing.
Keep these costs in mind when you are making your decision to buy a deal you are planning on flipping, and use them to determine what you are going to net at closing. Remember, your costs will vary based on the value of your deal, as well as how long you own it before it sells.
If you have Real Estate deal in mind and looking for an experienced hard money lender in Dallas, TX, contact us today or call us at 214.219.0360.
by Investmark Mortgage | May 24, 2017 | Blog
A realtor friend of mine once told me, “As soon as a house is listed on the MLS, it’s the belle of the ball.” If it looks good online, agents in the area will want to show it to their prospective buyers. As the saying goes, “you never get a second chance to make a first impression.”
To make sure your house is ready to go, be sure to consider the following Dos and Don’ts to get your house sold as fast as possible:
- Do make sure that there are no punch list items remaining, the property has been cleaned and staged if necessary, and all of the landscaping looks great. Don’t list it early or ahead of it is 100% complete.
- Do a thorough review of the comps with an appraiser or experienced broker that knows the area, to determine what the property can be sold for based on the current market value with the improvements you have made. Don’t overprice the property! Doing this can have a negative impact on activity.
- Do hire an experienced agent that understands the market in your area, and meets the following criteria stated in this blog here.
- Do make sure your agent uses CSS (Centralized Showing Service) so the showings can be automated and tracked. This makes your property easy to show. Don’t hire an agent that has to be called directly to set up a showing at a specific time. This makes it difficult to show the property and receive offers.
- Do follow up with your agent within a few days after your house goes live on the MLS to see how many showings you received. Showings indicate that you are priced correctly. If you have no showings, you are probably priced too high.
- Do follow up with your agent to hear what the feedback is from the showings (i.e., everyone liked the house and said they were submitting offers, bedrooms were too small, etc.).
- Don’t drop the price by a large percentage of you are not getting showings or offers. Large price drops can give the impression that something is wrong with the property, and not just that you are priced too high. You and your agent should determine the process ahead of time regarding price reductions. Use an experienced agent to help you with this.
- Do try to make that first offer work.
If you follow these steps, rest assured that you’re bound to get the highest possible offer in the shortest possible time in your market.
If you are in Texas looking for an experience Hard Money Lender Near You, contact us today!
by Investmark Mortgage | Apr 25, 2017 | Blog
Over time hard money lenders come and go. Which ones stay? The lenders who survive in this business are the ones that understand they must charge enough to operate, service loans, and most importantly, service customers who are in most cases, making one of their largest investments ever. They understand that they are not loaning the money over a 30-year time period, where there is long term cash flow, and so they must price their product accordingly. Without boring you with any other details, let’s skip to what’s important for you to know.
As the real estate market remains strong, more lenders are entering the space and want to put their money to work as quickly as they can. In order to do this, many of them advertise what appears to be a lower cost hard money loan, when in fact, it is a much more expensive product.
While this may seem innocuous, the reality is the consequences this brings to the investor. Failure to disclose the other fees and/or structure of the loan puts borrowers at risk of not knowing their true costs and is absolutely deceptive on the part of the lender.
Many of these lenders are not real estate investors and do not understand flipping, buying a rental property, or even wholesaling, putting themselves and their customers at risk of losing money.
Recently, rates have been advertised from 2.99% – 10.99%. When you see anyone advertising rates below 12%, read the fine print, and look for the “catch.” What’s the catch? Any attempt to trick someone with a bait and switch loan. Here are eight examples to keep in mind:
- The borrower needs the maximum FICO score of 850 (which is very unattainable) with $100K cash in the bank to qualify.
- The borrower must do a “specified” number of loans with the lender to qualify for the lower rate.
- Interest is charged on the full note amount when the repairs have not been borrowed yet is a lending practice by most lenders, but is not advertised upfront. Also, if the repair holdback is a large amount, the borrower is paying additional interest on funds they haven’t used yet!
- The lower advertised rate is for a short initial period in the loan (i.e., 30 days) and then it increases to a normal rate. Of course, the borrower is also being charged on the full note amount, even though the repair funds have not been drawn.
- The loan term is for 90 days with expensive extension fees built into the note.
- Junk fees that make up the difference in the lower points and/or interest being advertised (underwriting fee, admin fee, evaluation fee, etc.).
- An offer of 100% financing, or anything that is not based on the ARV in the offer. This is designed to make the borrower think that no matter what their purchase price + repairs are, they are going to get all of it financed, irrespective of the ARV.
- A lender who advertises no application, no credit check, no appraisal, etc. Be suspect anytime there is no due diligence being offered on the part of the lender. It is for the benefit of the buyer and the lender that all the numbers are verified on a property.
As a member of the Ethics Advisory Committee for the American Association of Private Lenders (AAPL), I helped create the guidelines for what all lenders must follow as members of this organization. AAPL bans bait and switch lending practices as well as false advertising.
So, just as you would perform due diligence on your investment property, be sure to do the same for your lender. We disclose everything regarding our hard money programs on the website. If you are looking for a hard money lender within your area, contact us today!
Mike Hanna is a real estate investor, mentor, author, and public speaker. He has been an active real estate investor since 2002 in both single family and multi-family properties, and has been in the hard money business since 2005.