Week 11 – Real Estate Investing

Real Estate Investing

Like the old joke goes, “buy land; it’s not like they’re making more of it!”

I’m a firm believer in real estate. Even my most hare-brained investments have eventually paid off. It may not have been in the timeline I had in mind, but it almost always worked out. Knowing that, though, you can save yourself a lot of heartache by sticking to a few rules.

Don’t overdo it. Just because something is worth the investment doesn’t mean it has to be yours. It’s tough to pass up a good deal, but it may be worth settling for something less if it is going to stretch your budget. Properties come on the market constantly; wait for the right time for you.

Don’t fall in love at first sight. You always have to be willing to walk away from a property that isn’t right for you. If it becomes too hard – inspections don’t go well, you have to concede where you don’t want to, bank loans get difficult – walk away. Regroup and start looking again. If it’s not meant to be, there is something better waiting for you.

Buyer beware. While the seller has an obligation to disclose what they know in most states, they may have specifically chosen not to investigate so they don’t know it all – you can’t reveal what you are never aware of. Assume there is something wrong with the property. Assume you will need to make repairs. It’s a given with real estate; even the most recently built homes will present a challenge to you. Stuff breaks; be prepared.

 

Now for some practical tips – if you are a first-time homebuyer, you might have some questions – here’s a list of the steps to expect. Different parts of the country have other actions or parties completing them – interchange title company for attorney anywhere east of the Mississippi, but in general, this is the standard. I spent 23 years in the real estate industry from the title and escrow side, audited thousands of files; this is second nature to me.  

Some things may be out of order – for example, if you are actively seeking a home, you will want to get pre-approved for a mortgage. If you are paying cash for a property, you may want to move the money around to facilitate the closing. If you are titling the property in a name other than your own, you will want to be sure you have the authoritative documents that grant that right. But, in general, this is how it will happen.

Buying a house is an investment in your future. In almost all cases, the value of a home increases over time. That means you build equity.  

The steps in a typical home purchase look like this:

  • Seller lists home with a real estate agent
  • Buyer makes an offer to purchase the home through a real estate agent
    • Buyer places earnest money on deposit
  • Buyer makes an application with a bank to obtain a mortgage
  • Seller accepts offer from buyer
  • Bank approves mortgage
  • Bank orders appraisal
  • Bank orders title insurance from Title Company
  • Real estate agents coordinate closing at title company
  • At closing
    • Title company prepares all escrow documents
    • Buyer brings in money to close that includes
      • Down payment
      • Insurance
      • Portion of real estate taxes
      • Closing fees
    • Buyer signs closing documents and bank’s mortgage documents
    • Seller signs closing documents
    • Bank sends mortgage money to title company
    • Seller receives payment for price of the house less any costs necessary to close
      • Title insurance
      • Real estate commission
      • Closing fees
      • Prior mortgages and real estate taxes
    • Documents are recorded with the local courthouse showing Buyer as owner, bank as having a first lien on the property for the mortgage
  • Seller moves out, buyer moves in.
  • Buyer makes monthly payments to the bank (mortgage holder) including principal, interest, 1/12 of taxes, 1/12 of homeowners insurance for next 30 years (or less.)
  • If buyer fails to make payments, the bank can foreclose on the property and take it away from the buyer. Buyer would be evicted and lose all payments they had previously made to either the seller or the bank for the house.
  • If buyer continues to make payments, the principal of the loan reduces and eventually, no mortgage payment is due.
  • At any time, the buyer could re-finance the house to 1) take some equity out of the house or 2) lower their interest rate, time to pay, or payment amount.
  • The Buyer can also choose to sell the house, at the sale of the house, the Bank would be paid in full for the mortgage still owing, balance would pay any outstanding taxes then go to the buyer as equity.

All of the above works well for a primary residence. There are lots of other types of real estate to purchase.

Each comes with caveats.  

If purchasing a property to flip – buy in your neighborhood. Make sure you can afford the repairs, and the repairs will add value. 

Keep it close so you’ll keep working on it and can keep an eye on it. Buying out-of-state or out-of-town is not recommended. Flipping is hard work; you’ll be less motivated the further away you are.

If purchasing property to rent – the same rules apply. Keep it close, or plan to hire a property manager to be your eyes. Nothing is more effective when someone’s rent isn’t paid on time than knocking on their door.

If purchasing commercial real estate, know your local economy. I’ve never been so thankful not to be in office space as this year. I can’t imagine what that market will look like over the next five years as people readjust how much space they need.

If purchasing bare land, look at it in all kinds of weather. Does it flood? Is it buildable? Are there deed restrictions? Can you get water and power?

I have a ton of real estate agent friends all across the country who can guide your way. While I have bought real estate at auction, direct from the seller, and many other ways, I still recommend buying through an agent. They’ll have your back.

Right now, there are lots of other ways to invest in real estate, do your homework, and make sure it’s legit. Real Estate Investment Trusts (REITs) have been around for a long time, but there are many new models on the market. Like any investment, if it sounds too good to be true, it probably is.

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