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What is an Appraisal?

April 20, 2016 by Lacie Leave a Comment

What is an appraisal

What is an Appraisal?

An appraisal is a document that shows an opinion of how much something is worth. It could be fine jewelry, art, or in our case, a property. The appraisal gives you useful information about the property. It describes what makes it valuable and may show how it compares to other properties in the neighborhood. An appraisal helps assure you and your lender that the value of the property is not just the seller’s (or owner’s in the case of a home equity loan or refinance) opinion, but is based on an expert’s assessment.

Here’s the thing though, appraisals are still based on an opinion, it’s just the opinion of a third party and not the seller. This means that an appraisal can vary widely from one appraiser to another. There are also things that you can do (legally!) that will improve your chances of getting a good appraisal. I’ll be covering that here on the site at length, as most people are not aware of the process and the things that can be done, but first let’s talk about why you might need an appraisal in the first place.

Reasons You Need an Appraisal

Typically, you will need to have an appraisal when you are doing any of the following:

  • Buying a new home
  • Refinancing a home you already have
  • Applying for a home equity line of credit or home equity loan

Who Pays

In my experience, the home buyer will usually have to foot the bill for an appraisal. You are entitled to receive a copy of appraisals, and in my opinion YOU SHOULD ALWAYS GET A COPY FOR YOUR RECORDS. You should receive them soon after they are delivered to the lender in complete form—no later than three days before closing.

You can’t be charged a fee for copies of an appraisal or other valuation. But you can be charged a reasonable fee for the lender’s cost of preparing the appraisal or other valuation.

The average cost of an appraisal is $300-400, but it does vary by state.

In the coming weeks, I’ll be covering the appraisal timeline, and things that you can do to give you the best chance of having a good appraisal!

Filed Under: Featured, Real Estate Basics, Uncategorized, Your First Property Tagged With: appraisal, home equity line of credit, home equity loan, property, purchase, real estate

Anatomy of a Deal: Duff Ave

September 21, 2015 by Lacie

Anatomy of a Deal

We are always on the lookout for property, and all of our close friends know that. So it was nice to get a call last summer from a friend who said that he saw a house for sale in his neighborhood that he thought we might be interested in. Brad went into the local MLS, and could not find the house listed at all.

After some digging we found out that it was not listed in the local MLS. The house was a foreclosure and Wells Fargo, the bank that now owned the property decided to list it with a real estate agent located on the other side of the state. The house would only show up in their listings, which was nice for us. No one else in our town knew this property existed!

It was a large 3 bedroom 1 ½ bathroom brick home. It had a garage in the back with a 1 bedroom garage apartment. The house had been owned by an elderly woman who had passed away 3 years ago, and the kids had inherited the property but lived out of state. I don’t know all of the details, but I think there was some dispute over who would get what, and eventually the property ended up in foreclosure.

IMG_1090

The outside with beautiful maintenance free brick!

The house was brick, with a newer roof. The electric was in good condition, and you could tell the place was well taken care of. It did smell, like it hadn’t been lived in for a while, but there were hardwood floors underneath the carpets that could be refinished. A fresh coat of paint was needed, but other than that and refinishing the floors, there wasn’t much work to do. The apartment in the back had also recently been updated. The carpet in there probably needed redone, as well as fresh paint on the walls. Most appliances were also included with both units. Overall, we estimated $5,000 would get the place in proper working order.

The kitchen included all working appliances.

The kitchen included all working appliances.

It was shocking to us how nice the place was, and how little work it needed, and we knew we immediately wanted to make an offer. The place was listed for $59,000. We calculated that we could rent the house for a minimum of $800 a month (we felt like we could get closer to $900, but are always cautious with our estimation). The apartment would rent for a minimum of $400. That would give us $1200 of rent per month.

Using a mortgage calculator, like mortgagecalculator.org, you can estimate that the payments would be $404.94 a month if you took out a 30 year loan for $63,000 (the price plus our estimated repairs). Even with including taxes and insurance ($1,500 per year) and vacancy rates (.10 of rental income), we would still be making $549.06 a month in income.

IMG_2004

We had no work to do on the living room and dining room.

A strange turn of events

After we submitted our offer for the full listing price, things got a little strange. We were on a train ride in the mountains with our boys when we got a call from our real estate agent that something was wrong with our paperwork, so we needed to submit it again. This happened two more times over the course of several weeks, where the listing agent needed something else from us, and we would always give her the information she requested quickly.

At this point, we weren’t concerned as we had offered the full listing price in cash. However, soon a friend of ours (who also does real estate) let us know that our property was relisted…at $51,000, $8,000 cheaper than our offer on Zillow.com. However, it was listed as under contract in the MLS. Needless to say, we were confused and upset and immediately contacted our agent.

Ultimately this is what happened: with a foreclosure there are quite a few people involved and it can take quite a while for all of them to communicate and accept an offer. There is the real estate agent, the bank contact person, and the bank’s board that have to vote to accept the offer. In this case, our offer had not been submitted to the correct people and in the meantime, the bank had decided to lower the price of the property. A person at the bank relisted the property on Zillow at the lower price without talking to the listing agent. Obviously, communication was lacking on their end.

Upstairs floors that we refinished

Upstairs floors that we refinished

So what ended up happening? The bank decided to accept from us a lower offer of $51,000 as that is what they were listing it on Zillow. We resubmitted paperwork for that and our offer was accepted and we closed on the property. Yes, you are reading that correctly. The bank screwed up and lost out on $8,000 because they couldn’t communicate. Their loss was our gain, and the numbers worked out even better! Here’s the breakdown:

Income Expenses
House: $1050 Mortgage: $381.07 ($58,000 taken out on a 30 year loan)
Apartment: $500 Taxes/Insurance/Miscellaneous: $125
Rental Vacancy Rate: $155(10% of rental rate, which is $1860 per year)
Total Income $1550

 

Total Expenses $661.07

 

Total Rental Profit per Month $888.93

Now I will tell you that this is probably the best deal that we have ever done. It’s not that there aren’t deals out there like this; they are just very hard to find. But, hopefully this will give you a little inspiration and show you what is possible!

Filed Under: Deals, Real Estate Basics Tagged With: property deal, property investor, real estate deal, real estate investing, real estate investor

The Biggest Mistake That New Landlords Make

September 14, 2015 by Lacie

the biggest mistake new landlords make

The biggest mistake is probably surprising, but I see it all the time. It’s under renting your property.

What do I mean by under renting?

Under renting is where you are asking way less in rent than the typical market rate. For example, I have some friends who I just recently found out that they have a rental house. The house is in the most desirable school district in our area. It is a three bedroom two bathroom house with a large garage and a fenced in yard. They have been renting it out for $350 a month. Yes, that’s right, $350 a month. I hope that makes you cringe. It should, because I wouldn’t rent that house for less than $1000!

Why do people under rent?

I think that people under rent their property for a couple of reasons. First, they don’t treat it like a business. They don’t take it seriously, and don’t realize the enormous opportunity for building wealth with minimal work that is property investment. Second, they think that by offering their place for rent way under what others are charging that they are going to beat the competition. They think that people will see their property listed next to someone else’s for hundreds of dollars less and will naturally chose the lower amount.

Why is it so bad?

Here’s the truth: I’ve never see it turn out well. Remember my friends that were renting out their house for $350? Well, they have had bad renters back to back. Their place has been sitting empty for the past two months because they need to repair the damage from the last renters and they have been wanting to quit. They just wanted to sell their place and cut their losses (sound familiar to anyone?). Luckily, I found out about the situation and we will be helping them get their place fixed up and rented to good people.

The psychology of renters

Let’s say that you need a new pair of dress shoes. You would have a ton of options to choose from to purchase your shoes. You can go to a high end shoe store, like a Nordstrom’s. You know that you will pay more than other places, but that you will get a high quality item. You can also go to Payless. At Payless, you are guaranteed a cheap price, but you also know that the shoes will be cheaply made and very low quality.

The same can apply to rental property. When a good person sees a property listed for significantly less than the other places on the market, they tend to think it’s a negative. They will probably assume that the place is a dump and not even bother calling on it. Think of the adage, you get what you pay for. The same typically applies here.

How it can lead to more problems

So if good quality renters are not going to be interested in your property because of the price, who will be calling? The bad renters! Typically in these scenarios, bad renters will be the ones that are interested in your place. They couldn’t usually afford a property as nice as yours, but at your cheap price they can. It’s seen as a pair of Payless shoes, and not the Nordstrom’s.

It comes down to respect and worth. By putting such a cheap price on a place that is worth much more, you are telling renters that you do not value your property much, and neither should they. You are sending a subconscious message that they can mistreat your property, because you do not care much about it anyway. Does that make sense? I hope it does.

How do you properly estimate your rental rate?

So, I hope by now we’ve established why you shouldn’t rent your property for a very low amount, but how do you know what the correct amount is? Do some market research! Check your local classified ads in the newspaper and see what people are renting their properties for. If you see that three bedroom houses in your neighborhood are renting for $600 then charge $600, if they are renting for $1,000, then charge $1,000. Not only will you be making more money in rent each month, you will typically avoid problems like evictions and having your property damaged. Happy renting!

Filed Under: landlord, Real Estate Basics, Your First Property Tagged With: bad renters, first property, landlord, landlord mistakes, property investment, property investments, real estate investing, real estate investor, renter, renting, under renting

The 6 Types of Real Estate Investments

September 7, 2015 by Lacie

6 types of real estate investments

Before knowing anything about real estate, the information can be overwhelming. I’ve tried to put together a simplified explanation of the six main types of real estate investments.

Residential Real Estate

When you think of real estate investing, this is probably most likely what comes to mind. This is probably the simplest and most common type of real estate investment. In this situation, you would invest in residential property, such as single family homes, vacation houses, town houses and apartment buildings. Then, you can rent the property to a person or family that will pay rent money every month to live in that property. The duration of their stay is decided in a rental agreement. Residential real estate is also the type of investment that is also “flipped”. A flipped property is one that was bought at a low price, repaired, and sold at a higher price in a short amount of time.

Commercial Real Estate

As the name suggests, this investment consists of office buildings. You can use your savings to purchase or construct a building with individual offices and earn a rent by leasing them out to small business owners and companies. This is usually too expensive for most investors to get into, at least as a first property.

Industrial Real Estate

This investment could be a car wash, storage units, or other special purpose properties that generate income from those who temporarily use these facilities. For example, these investments generate cash from fee and service income streams, such as placing coin-operated vacuum cleaners at a car wash garage to increase the return on real estate investments. Storage units can be a great investment for someone who has a large piece of land located near a busy area.

Retail Real Estate

Retail real estate investments are properties such as strip malls, shopping complexes, and other retail outlets where you earn by receiving rent from tenants of the store. In some cases, you can also choose to receive a percentage of sales made by the tenant in addition to the base rent so that a property can be kept in a good condition. Just like commercial real estate, retail is usually too cost prohibitive for most first time investors.

Real Estate Investment Trusts (REITS)

A REIT is a trust, corporation, or association that acts as an agent in a real estate investment or real estate mortgages. They trade like bonds and stock in the market and have a well-diversified portfolio of underlying real estate mortgages and real estate property investments. I don’t have a lot of experience with these, but I have heard from others who have invested in them with really good success.

Property Tax Liens

Property tax liens are probably the least known of all the real estate investment options. State, county, and city governments raise money to provide benefits and services by taxes. One type of taxation is a tax on real property. According to the law, the owner of a parcel of real property is assessed a dollar amount to pay based on the value of that real property. The assessed value is almost always much lower than the fair market value. In our area, for instance, the county is required to assess property at no more than 60% of its fair market value.

This assessed tax, in virtually all cases, is collected by the county where the property is located. If the owner of the property fails to pay the tax, the amount of the tax becomes a lien against the property. Governments don’t like property liens, as they don’t help the county and local governments pay for the services and benefits they have promised to provide for their citizens.

The county wants the money as soon as they can get it. It needs that money in order to fulfill its budgetary obligations. By state statute, each county is authorized to collect the taxes due that remain unpaid by selling at public auction, either a Tax Lien Certificate or a Tax Deed.

Most counties have a real estate tax lien auction once a year. Bidding per tax lien begins at a high interest rate (18% where we live) and decreases per bid.  The investor who bids the lowest interest rate before the time expires gets the lien. The property owner then owes the new tax lien owner the amount of the lien plus the interest. If the property owner continues to default on their real estate taxes, the original tax lien owner is given first priority on the purchase of the subsequent liens.  After a set amount of time (between 18 months and 3 years for most counties) if the property owner has still failed to pay their taxes, the tax lien owner has the right to foreclose and obtain the property. This amounts to almost no risk for the tax lien owner. If their tax lien is paid, they make all of the interest money. If the tax lien remains unpaid, then the tax lien owner will get the property. This is great for those who are hesitant to invest in real estate. However, it can be difficult to find all of the information you need to invest in tax liens. Check with your local county tax office to find out more information.

Filed Under: Real Estate Basics, Your First Property Tagged With: first property, property investment, property investments, real estate investing, real estate investor, types of real estate

About Us

Howdy and welcome! We are a husband and wife team of real life real estate investors. We started with one property almost eleven years ago when we were broke college students, and have built our way to over 30 rental units; adding more all of the time. We love property investment and the incredible way that it has financially helped our family and love to share our knowledge with … read more

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