Know the Players Involved in a Real Estate Transaction

Real Estate Investing No Comments »

It has been an interesting day already. We have decided to drop the single family home and just buy the two duplexes. With 4 units, and the total contract price dropping significantly, we will still cash flow very well on this deal. But the interesting part came today, when I heard from my investor that the title company called, asking for release of earnest money on the single family home and the adjoining duplex. This came as a surprise because we are not even out of the option period on this contract. Luckily, my investor called me to ask me about before taking any action.

The escrow agent at the title company has an established relationship with the sellers, and handles all of their transactions. This is why you have to be very cautious when dealing in real estate. You can get stabbed in the back very quickly if you aren’t extremely careful. Question everything. They have no right to release earnest money until the option period expires, which isn’t for another 3 days. So today’s tip is, question everything, trust no one. This policy probably saved us over $3,000 today.

Until next time, sign up for my RSS feed to get automatic updates as this transaction progresses, and all other posts as they become available here at Personal Finance Resources.


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Real Estate Deals: Knowing When to Walk Away

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On my current 5 unit real estate deal, we discovered that the single family home that was a part of the deal had serious structural damage. This is the value that a quality home inspector will bring you. The damage could easy cost $30-40k, and the deal just doesn’t have enough built into it to support that kind of a campaign.

Now, the 1 bedroom apartments that are next door have been locked by the contract. Because of one water meter servicing the 1 bedroom duplex and the single family home, the seller can’t really sell them separately. So since we are still in the option period on this contract, we will have to drop those 3 units. Now, what I will likely be proposing to the seller, is to provide us with a separate water meter, and we will proceed with buying the duplex.

The key take away from this article is that you must not get emotional when dealing in real estate (really any kind of business for that matter). Getting emotional will get you burned. The house is too far out of line with numbers that make the deal work, so we will have to walk away from it. So if we only end up with 4 units out of this deal, that will be perfectly fine, and it will still provide strong cash flow.


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Futures

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“How do you feel about futures options? Have you dabbled in that? I find future to be much more predictable in cyclical studies…”

To answer questions, I have done a few trades in futures. I am using the term futures to define any expiration beyond 4 months. My largest problem with futures is that it seems that I am paying a much higher premium for that possible volatility.

That is the long answer to say that I do not spend much time in futures, and here is why.

If I think that a stock is going to go up or down in the next two months, then I will buy an option (either call or put) to profit from that stock. If I think that a stock has the potential for the price to go up, but I don’t think it is going to happen for about another 6 months, then I will wait for about 4 months and play it as a short term option. Does this limit my opportunities of making a profit? YES; however, there are many short term trades out there that are good enough for me.
Like I said above, my large problem with futures, is that I feel that I am paying a high premium for the time value of that option. The other problem that I have is that it tends to tie up some of my capital for extended periods of time as if I had purchased a stock.

There is only a few reasons that I can think of to invest in futures. The first of these is if you think that a stock will go up a significant amount but in small increments (ie. a stock currently valued at $40 that you think is going to go to $55 by next December. You think that it is going to gain $1 to $1.50 a month. The 12 month out $50 call is probably going to cost you around $3.00 depending on the stock.) In that case you could make money on a futures purchase.

The other time that I would consider playing a future is in the tech industry where the release of some new technology could make their stock go way up, or if a competitor released the new technology first, their stock could go way down. In this case, I would look to buy a futures strangle.

If you are unsure what I strangle is, stay tuned, and I will get to them in my progression of options strategies. Bottom line, there is money to be made either way, I just prefer the short term because it costs less, does not tie up my capital, and I can wait and make the same trade later usually without paying the high premium. Good luck in the strategy that you choose.


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Coordination When Closing Real Estate

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When you are buying or selling real estate, there is often several players involved in the transaction. Home inspectors, termite inspectors, appraisers, surveyors, lenders, real estate agents, buyers, sellers, renters, escrow agents, and lawyers are among some of the parties involved. It is a pretty good situation for almost everyone involved, except for the renter. For the renter, it is nothing but a hassle.

With several of the listed players involved in the transaction, the renter is going to bothered several times prior to closing to get inspections and appraisals completed. The renter has a contract that has to be honored by the new buyer, but the buyer must complete their due-diligence in order to close the property. So careful coordination needs to take place.

In my current deal on 5 units here in Belton, TX, I called the selling agent, and left a message telling him I would like to get into the property for a termite inspection. Well, unfortunately he was away for the weekend, and didn’t get my message until after we did the termite inspection. Of course, one of the renters was very angry, because it was 9 AM, and she didn’t have the place ready for company.

So the moral of this story is, try your best to get a hold of the different parties involved, and let them know what is going on, don’t just rely on one party to relay your message to the others, take personal responsibility for it. The process will go much smoother that way.


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Real Estate Closing Process

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If you own property, you probably know just how hard it is to get a contract closed, especially if you are an agent, and not the buyer. There are so many lender requirements these days that it makes it very difficult to get a property closed. And if time is of the essence in your contract, then you must make sure to push and push on the lender to get the deal closed.

Currently, I am still working the 5 units that we have under contract here in Belton, TX. We have a solid contract, and have just decided on how to structure the financing, and how to convey title. So this morning, I will be taking the loan application back to the lender for approval. I am working with an investor that has some good loose cash, strong income, no debt, and fantastic credit. This type of person is a rare gem out there today. Most people have bad credit, no cash, and no income.

So the process should be quick and painless for us on this deal. We are going to be doing a typical commercial loan, hopefully 20 year amortization, 5 year balloon, 25% down (although I think my investor is going to put down 40%) with an interest rate of around 6-7%. So he is setting himself up for great cash flow on these properties, and if he needs to sell out at some point, he will be able to do so.

So for me, I just need to get the application to the lender, push to get the appraisal in, finish getting the properties inspected, and work with the title company to ensure the correct title work will be done. I have already sent copies of the surveys to the lender, so barring any unforeseen circumstances, we should be able to close this property by the end of the month.

If you have comments or questions, please leave them below.


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Update on My Real Estate Activities

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It has been a hard week, but a good one. As I mentioned in my December Lull for Property Managers, it is a tough time of the year to be marketing properties, however it is an excellent time of year to be buying. I also mentioned there that I had a negotiation going on 5 rental units located here in Belton, TX. My update for you is, we were able to close the negotiation on those properties. These properties will cash flow at about $1,000+ per month combined, which is an excellent deal, considering we are only risking a contract price of $154,000.

So stay up, keep plugging away in your markets, and let me know if you have any questions. While you are waiting, sign up for my RSS Feed to get free, automatic updates on all blog posts here at Personal Finance Resources.


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December Lull for Property Managers

Real Estate Investing 1 Comment »

No doubt about it, December is probably the worst month for real estate. The kids are finishing up their final examinations at school. Christmas is coming, and the family will be heading out of town to go to Grandma’s house to celebrate the season. December is a time to be with your family, and almost nobody wants to be moving in to a new house during this time of year.

The Silver Lining for Real Estate Investors

If you are marketing a piece of property during this time, good luck. I am trying to market a piece of property in my small town of about 100,000+ people. It is a more expensive property, thus making it even more difficult to find a suitable prospect. But on the flip side of the coin, since there aren’t many buyers out there right now, it is a golden opportunity for you to find and negotiate the sale of a house or other property at well below market rate. I am also currently negotiating 5 units on two separate locations during this time.

A fluke happened, and I noticed a pair of duplexes on the MLS that fit my formula for rental property in this area. I drove by the properties and found the realtor/owner in the front yard tending to some tree limbs. I inquired about the property, and he informed me that they were under contract. But he had another piece of property nearby that he wanted to get rid of, and it wasn’t even on the market. So guys it pays to drive areas you want to invest in, and talk to people that are there. Since then, one of the duplexes became available again, and we are negotiating for all 5 units. This will be a great deal and should allow us to gross over $1,000 per month in rental profit.

So bottom line, stay out there. Keep looking, talk to people you know, try to get into others. A good idea is to find out some of the top real estate brokers in the area, and just call them up and invite them to lunch. See if they are working with anyone that might have a property that fits your formula. Networking is key in real estate.

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Put Spreads

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In my last options posting, I talked about call spreads. Put spreads are remarkably similar except that you are expecting a downturn in that underlying security. Put spreads, like call spreads, minimize the risk to the investor, because they allow your initial investment to be reduced. Note here that it is important to always use the same expiration date on both the put that you buy to open and the put that you sell to open.
So the put spread is buying a put close to the money (or in the money) and selling a put further away from the money.
For example:
I have been watching another stock that is currently trading at $82.65, up a $1.50 on Friday. It is somewhat near the high end of it’s 52 week high/low. I am considering buying a put spread on this stock. The JAN $80 put is selling for $2.10. The JAN $75 put is selling for $0.80. So if I were to buy into this trade, it would cost me a total of $1.30 per share. So for my 10 contracts, it would cost me $2,100 ($2.10 x 100 shares per contract x 10 contracts) for the JAN $80s. I would then receive $800 back ($0.80 x 100 x 10) for the JAN $75s. So the total cost to enter the trade would be $2,100 - $800 for a grand total of $1,300 plus commissions. This is also my total risk. In this case as with buying call spreads, the maximum that I can lose is the amount that I invest.
If the stock goes to $77 at expiration:
my $80 put is worth $3 per share x 100 shares x 10 contracts for a total of $3,000. The $75 put expires worthless. You might be asking why the $80 put is worth $3? Again a put allows me to sell the stock at a certain price on or before a certain date. So what is the ability to sell a stock at $80 worth if I can buy the stock on the market at $77? Three dollars. So all in all, I sell the JAN $80s and buy back the JAN $75 for the $3,000. I subtract the $1,300 that I paid to get into the trade, and I am now at my profit of $1,700.
If the stock goes to $72 at expiration:
my $80 put is worth $8,000. I could sell the put for that. However, the put that I sold initially, JAN $75, is now worth $3,000. So my total take is $5,000 - $1,300 to get into the trade, for my profit of $3,700.
If the stock goes to $80 or higher at expiration:
Both puts expire worthless, and I lose my entire $1,300.
So again the bottom line is, I am willing to risk up to $1.50 to make $3.50. In this case, the trade is even better because I am only risking $1.30 to possibly make $3.70.
Why I Like Spreads?
The biggest reason that I recommend spreads is because it allows smart investors like me to invest in closer to the money markets for a reduced amount. The underlying stock does not have to move as much in order for me to make a profit, and if the stock moves the other way, I lose less money.
The Risks?
The stock moving in the other direction and potentially higher commission rates because of more contracts being traded are the two that come to mind. For me, the upsides are better than the downsides, and that is why I trade them.
What is Left?
I could type an article every day for a year and would not cover all there is to know about options, picking stock candidates, and everything else involved. Stay tuned; I do plan on getting into some trades that will make money as long as the stock moves in either direction. If these topics interest you, sign up to receive Jeffry’s RSS feed. Until next time…


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Estimate Car Payments

Car Insurance, Car Finance, Car Shopping No Comments »

If you want to estimate car payments before you buy a new or used car, you’ve found the right page. I have compiled a spreadsheet that you can download and put in the specifics of your situation and calculate a payment that will be very close to what your actual payment might look like. This is a simple spreadsheet that will calculate your payment only. After your payment is calculated, you will then have to add any additional monthly payments for insurance or other protection you may need.

Using the Estimate Car Payments Spreadsheet

This xls file is pretty easy to use. Here are the quick instructions:

  • Input the loan amount that you will be taking out for the car in the Principle Loan Amount cell.
  • Put in your interest rate.
  • Last, input your number of years to repay the loan in the Loan Term in Years cell.

Estimate Car Payments

After you have inputted the information, the Monthly Payment will be calculated automatically for you. In the example, there is a $19,000 loan taken out over a 5 year period with 12% of interest. The monthly payment comes out to $422.64. Sounds pretty high, doesn’t it? Well what the advertisements on TV don’t tell you about the $99 down, $99 per month is that they are probably doing a 7 year note or even longer. So it makes sense to do your own estimation; chances are it will work out a lot closer to the actual number you will be paying than what the commercials will lead you to believe.

Here’s the xls spreadsheet for download: Estimate Car Payments .xls

If you haven’t already, you should sign up for my RSS feed, as it will keep you updated automatically when new information is posted. If you don’t know what an RSS feed is, check out What is an RSS Feed? for details.


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Ramifications of Making Payments on a Car

Car Finance, Car Shopping 3 Comments »

I have a friend, who recently traded in a used car that he owed less than $2,000 on for a newer used car that he is now making payments of $400 per month. The reason behind the decision, as he told me, was that he was in financial trouble, and the car he had needed new tires. Anything sound wrong with this picture?

Working through the numbers, he was going to end up paying the financing company a grand total of around $24,000 at the end of the 5 (yes I said five) year note he took out. This is a mistake, a big mistake. He was looking at about $400 for some nice tires for his other car, and instead of paying for the new tires, he buys another car. Now he is stuck trying to find an extra $400 per month to pay for this new car when he didn’t have the $400 before to pay for the new tires.

Bottom line is, don’t get caught turning a bad situation into a disaster. Stick with low, low cost vehicles that are foreign (I personally like Honda’s the best, but Toyota’s are good too) and that are mechanically sound. You will probably have to buy models that around 10 years old to get a low price, but I promise you, they are worth it. Right now I am driving a 1993 Acura Integra, it gets about 26-30 mpg, I paid $2,500 cash for it, no car payment, low insurance cost (liability only), and the car runs great. Are you going to have more maintenance problems with an older car? Most likely yes, but the maintenance costs, especially on these foreign cars, should be far less than payments would be on a new car.

So don’t act on emotion, take time to think it through. Ask yourself questions like, how much would it take to repair my car, and how much is my car worth? Can I sell the car I have and have enough money to buy another one for cash? And the most important question, Do I really need another vehicle? I mean think hard about it, do you really, really need that new car? Most likely you don’t, so look at it logically, not for the shiny pizzazz of a new car.


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