Personal Finance Resources

The typical lease purchase agreement involves a tenant that gets into the property like a normal lease, i.e. they have a security deposit and first month’s rent (if not last month’s rent as well) due and payable up front. They usually pay a slightly higher than market rate of rent, with a portion of the rent being credited to the purchase of the home. The term of the lease and the buyer’s price are determined and negotiated up front, and are all spelled out in the lease.

If the tenant exercises their option to buy at the end of the lease, then all goes as outlined in the lease. But if they fail to buy at the end of the lease, then the owner has the right to cancel their lease, and to retain all rent monies paid during the term of lease, including all monies that were to be credited toward the purchase of the home. Let’s take a look at a quick example:

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Yesterday, I talked about Buying Mortgage Points and the potential money that could be saved using this loan structure. I received a comment basically stating that you would be better served by investing the money you would have spent buying mortgage points into something else that would yield a better return on your money. While this is true, yesterday’s post was geared toward buying the points, and then financing those points back into the loan. This is where the real benefit of buying mortgage points pays off. In this scenario, you are not spending any extra cash up front. You are merely restructuring your loan to provide the lowest possible overall cost.

But not only the comment I received on that post, but I also was researching and found that most people who buy mortgage points (and pay for them up front at the closing table) often do not keep there house long enough to reach the break even point, and therefore don’t justify the cost of buying the points. After seeing that, I felt inclined to extend the example I presented yesterday, and give you a formula to find out just how long it will take to “break even” on the cost of buying points. Here’s a quick recap on the example:

PMT on $100,000 at 6.5% = $632.07 (Principle and interest only, based on a 30 year loan)

PMT on $100,000 at 6% = $599.55 (Principle and interest only, based on a 30 year loan with 2 points)

So that is a difference of $32.52 per month. But the 2 points cost you $2,000 at the closing table. Therefore, we can determine how many months, and the corresponding years it will take to recapture the initial $2,000 investment.

$2,000 / $32.52 per month =  61.5 months / 12 months per year = ~5 years

So what that means is that you will need to own your home for at least 5 years just to get back the $2,000 you invested in your home. So if you are considering buying points up front, make sure you plan to stay in your home longer than the break even point. Otherwise, as I suggested before, ask your lender about financing the points back into the loan, and you will start saving money immediately on the loan (in most cases, be sure to follow my calculations and verify the numbers with your lender). If you are wondering how I came up with the payment calculation, just use the PMT function in a spreadsheet program like Excel to determine the payment. Here are the variables I used:

Rate:  6.5%/12
NPER: 360
PV: -100,000

Stay tuned for more great personal finance help and resources to come.

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If you have followed this personal finance blog very long, you know that real estate investing is near and dear to me. I am a licensed Texas realtor, and have rental properties of my own as well as managing property for others. But how does that benefit you as a residential home buyer? It means that I can provide you sound advice and tips on buying a home. So what are the key things to look for? And what are some ways to minimize the risk of buying a lemon?

First thing first - Location, Location, Location

The old saying is true, location is the most important factor when buying a home. If you are new in town, I recommend driving the neighborhood and talking to some of the potential neighbors scoping out that next home. Also, make sure and find out about the school zone the property is located in, and what specific school your children will be routed to.

Get a Home Inspection

After finding a great place, you need to know if the home has any problems. Sometimes when folks go through a home, they love it, and gloss over the potential problems. A home inspection will level the playing field between you and the seller, and give you some points to negotiate on. You may think that you don’t want to incur the $100-$200 cost of the inspection, but hey - ask the seller to pay for it! Even if you can’t come to terms with the seller, the seller can use the report to help them fix any issues with the home, and give comfort to the next potential buyer.

Find Out what the Tax Value is, and the Tax Amount

Often these can be found online via a city website, otherwise just look up the phone number for the county clerk’s office and inquire about the home. Be sure to ask if your county uses “100% market value assessments” or some other valuation method. You can then use this information to bargain down the price of the home.

Shop Around for Home Owner’s Insurance, and Use a High Deductible

While most of you know that shopping around for insurance is a good idea, you may not agree with obtaining a high deductible. But let me explain. Don’t buy insurance with the intent to use it - insurance is designed for catastrophes, not everyday use. Look at it this way: Would you rather pay $150/month for a $500 deductible, or $100/month for a $2000? This example is fictitious, however the concept is that you will pay for the $1,500 deductible gap in less than 3 years of premium payments. So again I say, think of insurance as a guard against disaster, not as an everyday crutch.

Negotiate the Purchase of the Home

Duh! Right? Well, often people don’t do a good job of this. Let me put it to you this way, I have been on the seller’s side, and I can almost guarantee that the seller built some negotiation into the price, e.g. they have increased the price in order to be able to come down and make a deal that they are happy with. For sale by owner homes are the best for this, as you can speak directly with the home owner and gauge their reactions. When talking to the owner, try to identify things with the home that would merit a lower price. Butter them up, so to speak, but don’t make a verbal offer. Always submit written offers. If they are expecting a lower offer, when they get it they will be less likely to get angry and throw it away.

If the home is listed with a realtor, you will just have to submit an offer. I recommend starting very low, and just see if you can get a response. Don’t get emotionally attached, or you will spend way too much for the home.

Sign up for my RSS feed and get automatic updates as I show you more great methods to make and save more money! Also, if you have any questions or comments, please leave them at the bottom of this page!

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If you are in the market to buy a home today, and have the credit scores to be able to procure a home loan, then you are probably in the best possible time, place, and position to get a phenomenal deal on a house. As more and more people’s credit scores plunge due to foreclosure, then number of available buyers out there is rapidly decreasing. What this means for you is that you have less competition fighting you to buy that house.

Ok, so what does it mean, not having much competition fighting you to buy a house?

Well, what it means is that the seller is not looking at 3 different offers from other potential buyers besides you. Ultimately, this means that you have the opportunity to buy the house at a discount - if you so choose. But if realtors are involved, watch out, because they are trained to get the highest possible price, and they may try to make you believe that the seller won’t go for your low ball offer.

I had to learn this the hard way. The first investment deal I offered on was a 2,600 square foot house in a nice area of Temple, TX. Now, I had a real estate partner (he was a lousy business man) who took the seller’s agent’s swaying and pushed the price up more than I wanted to spend. The seller’s agent said things like “I don’t think she will go for that, but I will put the offer in front of her.” So we ended up spending more than we should have on this property. Well, needless to say, I have closed any dealings with that partner, and I don’t accept any pricing advise from any realtors that are outside of the realty I work for.

So the short of it is this, think about a number, make your offer, and don’t do a lot of negotiation. Set a highest number you are willing to give before you even send the first offer, and then don’t go over your highest number. Let the seller sweat, instead you doing the worrying about the house. You may really, really want the house, but I promise you there are other houses out there, and if the seller says no to your highest offer, there is another seller out there ready to make a deal. Trust me, I have worked several real estate deals in my neck of the woods, and sellers WILL negotiate. Many of the deals I have bought into are $10,000-$30,000 off the original purchase price. No baloney, the house I am living in now - the asking price was about $70,000, I bought it for $40,000, and had the seller pay $1,200 towards my closing costs. It can be done, but you have to focus. (see more on the key to real estate investing)…

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If you are looking to build your own house, and don’t have the cash to finance the construction, you will probably be considering a home construction loan. The following are facts about home construction loans, and the two basic ways that lenders handle this situation:

1. Standalone Home Construction Loan
   A standalone home construction loan is the simplest construction loan you can get. You will probably have a substantial down payment, a heavy interest rate considering the risk involved in building a home and the things that can go wrong, with a balloon payment at the end of construction to pay off the balance.

   In this scenario, there are probably two lenders, and you will need to close two loans, the construction loan with the first lender, and then the permanent loan with the second lender. This is not typically what people want to do, because there are two sets of closing costs, the general headache of dealing with two lenders, getting qualified separately for each, and much more paperwork.

2. Combination Home Construction-to-Permanent Financing
   For most people that want to build their own home, this is the more logical way to go. In this scenario, there is only one lender, and one qualification process. The lender will approve you for the construction loan, and probably will only charge small interest only payments during the construction phase of the project. There will likely be a “draw” process by the particular lender’s policies and procedures to pay the contractor incremental payments during construction. Check with you lender as to how stringent they are with the draws. How often can you draw? Do they have to inspect before releasing funds? Both are good questions to get answered before choosing a lender.

   After the construction phase is complete, there will be an automatic conversion to permanent financing. Usually all that is left after the last draw will be the final closing, where your permanent loan will be put in place. From there, it is just like any other home mortgage, so be sure to get all the details from the lender as to term, interest rate, down payment, etc. Try to ask as many questions as possible before getting involved with a lender to be sure you don’t miss something important.

These are the two typical ways that lenders loan money to people wishing to build there own home. But be careful, as lenders are not construction experts, and do not really help you build your house. You need to be very sure of the contractor you hire to build your house. Spend some time checking references, and looking at other homes that the contractor has built or is in the process of building. Get to know them, because contractors have some of the worst reputations compared to other industries when it comes to getting what you pay for. One last note, you need to make absolutely sure that you do not give the contractor the final check until ALL of the work is complete. Once you have paid them the last bit of money left on the contract, they are gone, and I mean gone for good. Until next time…

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Today, I want to do a follow up on an article I posted awhile back covering Residential Lease Options. If you have been following this blog for any length of time, you will understand that I work in real estate, and have a passion for investing. If you don’t already know the secret to real estate investing, I suggest catching up on those two articles before continuing this one. As a real estate investor, I would consider the following strategy to utilizing a Lease Option to Buy:

1. I would locate a property that is undervalued, or that I can negotiate to well below the market value.
2. I would buy the property using a traditional mortgage or cash out for the seller. I have found that cash or the equivalent to the seller is far more likely to persuade them to sell the property at a lower price. Also, a quick tip, if you are sure of the area a property is located in, then offering more than typical earnest money is a great way to persuade a seller. They know that you are serious and get the impression that you can close the deal, and not get rejected for a loan at the last minute. And it doesn’t hurt you to offer more earnest money, if you are getting a loan that requires money down, you can apply the earnest money toward your loan down payment.
3. Then I would make any necessary repairs.
4. Then I would market the property using the MLS, local paper, real estate flyers, and signs around town (and of course, in front of the house itself). You must get the message out. Use language like bad credit no problem, rent to own, financing help available, etc. This will open up the market to people that would not otherwise consider your property. Many good people these days have black marks on their credit because of a bad divorce, etc. and just cannot get traditional financing. Trust me, I have met many of these kinds of people.
5. Ink a deal. Get a substantial cash option payment before you sign anything. Make the buyer commit to the property. They will take care of it a lot better if they have a significant amount of cash invested.
6. Manage the property until you get to the end of the lease. This can be good or bad. You will have to deal with leaky toilets and electrical outlets not working, but if that is too much for you, hire a property management company.
7. At the end of the lease, finalize the deal. If they are ready to buy, you must sell. If they can’t buy, then you get to keep the option payment and re-sell the property (you can repeat the process, and get another option payment, ). In some circumstances, the buyer may negotiate for more time. This is ok, however it opens up the entire contract for renegotiation, allowing you to reassess the property’s value, and get better terms on the deal.

This is a simple version of how I would invest in a property using the Lease Option to Buy strategy to sell the investment. If you have questions/comments, please leave them at the bottom of the page. And sign up for my RSS feed to stay up to date on all the latest information and tips automatically, and free of charge.

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by guest author Nicholas

I have recently moved to a mid-size Arizona market. This market is rapidly starting to feel the down-turn in the housing market that Jeffry mentioned in his latest post on Smaller Texas Real Estate Markets Doing Well. The houses that are for sale are staying on the market longer and longer. I am planning on being in this area for 6-9 months before moving out of Arizona, so I will discuss two options that are available to me.

Renting

This is the easy choice. No money down, no homeowners insurance, and very few worries (other than making the monthly rent payment). Those are the benefits. You already know the downfall, throwing that cash away every month without gaining any equity. You also have to abide by any rules that the owner of the house decides to impose.

Buying

So I mention to most people that I am considering buying even though I am only going to be here for 6 months, and they are appalled. Why would you do that, especially in a slowing market for such a short time? The answer: Property Management Firms. So the situation would go like this, I would buy a house, live in it for the six months I am here, move out of state, and establish a contract with a property management firm.

These firms will show your house to perspective renters, do credit checks, ensure employment, conduct minor maintenance on the house, and collect the rent money each month. They typically charge 9% to 12% of the monthly check to manage your property. Most times, you as the owner even get to approve potential renters. Hold the property until the market goes back up and sell or just keep it as another potential source of income. This is just another possible way to invest in a buyer’s real estate market. Good luck!

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Should I have a realtor license? Is it expensive? In this edition, I would like to answer these questions, and further illustrate why I have and maintain a realtor license. I remember reading an article stating that 1 in 52 people in the state of California have a realtor’s license. That’s about 2% of the population. Rather unbelievable to some, but to me, seems quite appropriate. Especially in very high housing costs areas, such as California, New York, Florida, Chicago and other areas, the expense of paying a realtor to sell your house is insanely high. A quick bit of math, if you owned a $500,000 house, and hired a realtor for the typical 6% fee, that would be $30,000!

Now let’s take that figure home (bear with me, I live in Texas), where I obtained a realtor license for less than $800. But Jeffry, realtors are professionals, and I don’t know anything about selling a house! Who said the typical realtor knows anything about selling a house?! Many don’t, and furthermore, the ones that do know how to sell a house are the realtors that know the most people.

The realtor game is simple, put a sign in the yard, add the house to the local MLS (multiple listing service), maybe run an ad in the local paper, and wait for a buyer. The good realtors will fax an information sheet to all the other local realtor shops, to fish for another realtor that is under contract to work with a potential buyer. Another thing a good realtor will do, is advertise and run an open house, to get some activity going with the other realtors in the area. Sounds difficult doesn’t it? Not to me.

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Mortgage brokers sometimes speak of an 80/15/5 mortgage, but what is it exactly? In just a moment, I am going to show you exactly what it is, and how you can use it as a tool to leverage your money buying a home, or investing in real estate. There are many folks out there that do not have the appropriate cash to put down 20% on a home to get a conventional mortgage. This created a situation for potential home buyers, and thus the mortgage industry was created.

In recent years, mortgage companies had relaxed their criteria for lending money, and were granting no money down loans to people with bad credit, who had no business owning a home. These were sub-prime loans and carried too much interest expense for the buyer. So recently, there have been many foreclosures and mortgage companies along with banks have been tightening their policies on lending. In short, they want to see some money down before lending. However, with an 80/15/5 mortgage, you can setup a loan at prime rates with only 5% down.

Many mortgage companies even today will lend a straight 95% loan to buyer. So why hassle with the 80/15/5 mortgage? Because by getting two mortgages from the lender, you are able to avoid paying Private Mortgage Insurance (PMI), and you have to opportunity to select a shorter payoff on the second loan. The 15% second mortgage has a much smaller balance than the first mortgage of 80%, and the repayment period can be set to anywhere between 5 and 20 years, typically. So this means that you could select a 5 year payoff on the second mortgage, and your total mortgage payment will decline sharply after the first 5 years of payments. So to sum up, you would save the PMI payment, and in 5 years have a much lower total monthly payment. Let’s look at a quick example:

Now these payment figures do not include taxes and home owner’s insurance, but as you can see, the difference in the payment between an 80/15/5 mortgage and a 95% mortgage is $167.64. Now bear in mind, the 95% mortgage requires PMI, which was not included in this calculation. So if the PMI was say, $35 per month, then the payment difference would go down to $132.64. So after 5 years, the second mortgage would be paid off, and the payment would go down to $452.41 per month. This is the benefit of the 80/15/5 mortgage. On the short term, you are able to bypass PMI, and down the road, you will be able to cut your mortgage payment. Sound good?

Now if the lender does not want to approve the 80/15/5 mortgage, there is another option you can explore. When making your offer to the seller, have him give you a second mortgage to cover the 15%, and you can achieve the same result. You may have to pay a little more in interest on the second mortgage, depending on your negotiating skills, but in the long run, you stand to save a lot of money, without much of a difference in payment at the start.

Creative finance in real estate investing is very necessary if you are looking to get into properties with little or no money down. The 80/15/5 mortgage is just one way to obtain a new property without putting much money down. Questions? Comments? Leave them below in the comment area, and I will answer them ASAP. You may download the xls spreadsheet here:

80/15/5 Mortgage Example.xls

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There are a number of cheap loans available in all banks. Getting such banking loans can be the ideal way to raise capital for a home business. Perhaps starting from a loan is not an ideal beginning, but such fast equity loans had evolved for this purpose basically.

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Previous Articles in this series:
Buying a HUD Home Part 1: How I Acquired 4 Homes in Under 2 Years

On to Buying a HUD Home Part 2: How I Acquired 4 Homes in Under 2 Years:

1. Knowing the HUD Listing System

You must understand that, like most government systems, there is no emotion or logic to the process. HUD has a process for buying a home, and you will not change it. The key advantage for the investor is, HUD doesn’t care about how nice the house looks, or what memories were made there, or any other bologna that most retail sellers use to not sell their house for the price we need to buy it for.

On that note, we understand that it is only a matter of time and market conditions for buying a HUD home at the right price. HUD is systematic in its approach, and uses a timeline for each and every listing:

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