Closing Costs and Tutus

 Would you pay someone $150 to send an email?

Whether you’re buying a duplex, condo, house, etc. the lender is always going to charge fees for giving you a loan.  Not all fees are given to the real estate agent.  The lender is going to make some money on the deal.  They charge fees as well.

What’s involved with real estate closing costs?

• Processing Fees
• Attorney’s Fees
• Appraiser Fees
• Underwriting Fees
• Application Fees
• etc etc etc

 Generally, anyone not directly working for the lender is going to be firm on their price.  The Appraiser, for instance, charges a flat fee for their work.  OK, fine.

But what exactly is an "Application Fee" and why do they want to charge $100 for it?  If the lender says that its to process the application, why are they charging a Processing Fee of $400?

Why do they do this?

The Loan Officer-to-Lender relationship is similar to a Car Salesmen-to-Dealership relationship.  Car salesmen make their money when the car is sold.  Dealerships make their money by financing the car.  The same applies with Loan Officers: their money is made when the deal closes.  Lenders make their money by financing your investment.

To maximize their payout, Loan Officers charge for everything.  Emailing documents, reading your application, grooming their dog, etc.  Then they charge a fee for that.

What can I do to protect myself?

1. Question everything.
2. Negotiate everything.

The lender may be singing you praises about the great loan he got you and super low monthly payment.  But nothing is for free.  What is involved in getting this great deal?

Ask them.

If your lender begins to babble, talking about his tutu wearing pet monkey and yet cannot provide a clear cut definition of what each expense is and why each costs as much as it does, then you should probably avoid that lender.  If you’re dealing in good faith, is it too much to ask that the lender deal in good faith as well?

Once you understand what everything is, start the negotiation process.  Ask your loan officer if it really costs $150 to send an email.  They may concede and knock $25 off the price.  Twenty five dollars may not seem worth the effort.  But once they start knocking $25 off from every fee, this can quickly add up to a few hundred dollars.

Is that worth your time?

If you want to be sneaky, tell your lender that you’ve been talking to a different lender and their closing costs are significantly less.  You might get lucky and see some hoop jumping.

Once you have negotiated, get everything in writing.  Then when you have your closing statement in front of you, compare the numbers.  Did they live up to their agreement?

In the end, it has the potential to save you a few hundred dollars.  This may not seem like much, considering you’re going after at $150,000 loan.  But in the scramble to come up with funds, wouldn’t it be nice if the money you needed was suddenly just a little bit less?

Impound fees with Mortgage

You say to your friend, "Friend, let’s go out tonight."

"I can’t," Friend says.  "My property tax bill came.  I have to save all my money."

For the next month, Friend eats only ramen noodles.  Before long, Friend starts looking a little ripe from not doing laundry.  "Have to save money to pay the tax bill!" Friend says.  After 30 days, Friend stumbles into work "I paid the tax bill!  I had to donate bone marrow for money to come up with the rest of the bill but it’s paid!"

Don’t be like Friend.

When buying that duplex, condo or other investment property, the lender may ask you if you want your property taxes, insurance, etc. impounded as part of your mortgage payment.  What exactly does this mean?

By "impounding", the lender adds a dollar amount to every mortgage payment for taxes and insurance.  This extra money is stored in an escrow account.  Once the taxes and insurance come due, the lender pays them.

Example:  Your purchased a property and your monthly mortgage payment is $1000.  Property taxes are $2,400 per year, that becomes $200 per month.  The insurance, which is $480 per year, is now $40 per  month. Instead of paying $1000 per month to your lender, your new monthly payment would be:

Unlike your friend, who has to go on a ramen noodle diet and forsake doing laundry to pay his property tax bill, your bill is paid.

Caveats

Some states require that taxes and insurance are impounded.  If the state laws don’t specifically state, the lender may require impounding these fees if the Loan to Value (LTV) is greater than 90%.  Impound fees may be required if the residence is non-owner occupied (ie rental property).  Some lenders may even offer 1/4 of a point reduction if you agree to have your fees impounded.

You should ask your lender.

Summary

If your state doesn’t require impounding, then the decision rests with you.  Here are some things to think about when making the decision.

Pros:

• Property Taxes and Insurance will always be paid.
• Two less bills will clutter your desk.
• Ramen Noodle Diet is optional, not mandatory.

Cons:

• You can’t be a control freak.  Some people like to control everything; paying the property taxes certainly qualifies.
• Some people argue that giving up that $200 per month means you can’t put it into an interest bearing account.  You would be tossing away $10 in interest every six months.
• Your monthly payment will be higher.  But you planned for that, right?

Property Analysis Oct 2008

 Towards the end of the month, I’m going to pick a property at random off of Craigslist and analyze it using the methodology in the book and the tools on this site.  My approach is that of an out of state investor, looking to expand my empire.

In Tulsa, OK I found this duplex on Craigslist.

Here are the highlights of the ad (in case it was removed).

• Asking Price:  $110,000
• Gross Rent:  $900 (Could be more)
• Taxes and Insurance:  $1300/year
• Current owners live out of state.  Want to sell ASAP.  Welcome all offers.

First Step:  Define my model.

My investment property should provide at least $100/month in cashflow.

Second Step:  Use the online Business Modeler to analyze the cashflow.

Using the application, I enter the negotiated price and rent.  Since taxes and insurance are grouped into a yearly payment, I’m going to assume $65 per month each.  This should equal out to about $1300.  Ten percent down ($11,000) financing seems about right.

My first analysis (click to view) shows immediately a negative cashflow of $263 per month.  Ouch.

Can we make this property work?

Everything is negotiable.  Rerun the application and knock of $20,000 from the asking price.  Then we could put down 20%.  The ad says that rents could be raised so let’s see what happens with a $50 increase per unit.  The seller emailed, saying the  tenants pay all utilities.  He budgets $25 per month for maintenance.

The second analysis (click to view) shows a positive cashflow of $104.  Barely fits my model.  This only happens however if three conditions are met.

• $20,000 reduction in the asking price
• $50 increase in rents per tenant
• $18,000 down payment

Question:  Do you think you could get all three?

It seems the only way for this to work for an out of state investor is a "pie in the sky" scenario.  Don’t become obsessed with trying to make an investment work.  It either does or it doesn’t.

Summary

My model tells me this property doesn’t work.  If the seller raised the rents to market rate and would accept a lower asking price, I’d still have to come up with a hefty down payment.  If I lived locally and could manage the property myself, this would probably work.  

Other opportunities await.

Real Estate Investing Clubs

What are REI Clubs?

Definition of the word "club".

1. Group of people, organized for a common purpose and meets regularly.
2. Preferred dating tool used by Cavemen.

For REI Clubs, a group of real estate investors getting together.  Unlike REI Networks, Clubs won’t drill you with "buy buy buy" speeches.  It’s probably a safe bet that their kool-aid isn’t spiked either.

Why find an REI Club?

REI Clubs allow you to network with seasoned investors in your area.  These people know the ins and outs of investing, probably offer some guidance and advice.  Ideally they could point you to good Real Estate Agents or Lenders.  Legal affairs, such as evictions, is something they should know about.  They could probably recommend a good hamburger joint too.

Maybe a potential mentor or partner could be running around.  Yes, do some networking.

What do they offer?

Advice.  Usually these clubs have experts that come in and give presentations about various topics.  Tax planning, tax strategies, lending opportunities, other methods of making money in real estate . . . the list is endless.

How do I find an REI Club?

I’m glad you asked.

1. Most of the time, Landlord Associations and REI Clubs go hand in hand.  Check out this page for a listing in your state.
2. Check out the ultimate club site http://www.meetup.com.  Meetup.com has the largest collection of clubs and they allow anyone to start a new one.  Are you a business woman, not interested in REI Clubbing?  Search for "Woman Entrepreneurs" and get bombarded with clubs.
3. Type REI Club into Google and you’ll find http://www.reiclubdirectory.com/
4. OK so if you’re completely xenophobic, check out the Rich Dad Forums.  Membership is free.  Just remember that these groups are international and you may not find a specific answer to your specific area.

One of the key benefits of these clubs is so that you never find yourself totally alone.  If you have questions, seek out answers from people who know.  So unless you’re vampire, allergic to sunlight and garlic, it may be well worth it to venture outside and check out one of these clubs.

.  .  .

Shaun wrote a great review for BTD Lite on his blog.  Check it out!

Real Estate Networks and Kool Aid

Real Estate Networks are here to help you.  Yeah, I don’t believe that either.

The REI Networks advertise that they are around to help new investors build their real estate portfolio.  Quickly.  They hold free seminars, give you kool-aid and cookies, and then pound you into submission with a two hour infomercial with no bathroom breaks.

What goes on behind the scenes of these Networks?

These Networks provide everything to start investing.  Real Estate Agents, Lenders, and Property Management companies.  Guess how the Network makes money?  By charging the Real Estate Agents, Lenders, and Property Management companies.  That kool-aid you drank costs money.  So it’s in the best interest of the Network that you buy something.  Anything.  But through their network.

They promise cashflow and a new house!

First, their calculation of cashflow is off base.  Sorry but Rent minus Mortgage is not considered cashflow.  Second the new house they are offering?  It’s one of 50 new homes in a subdivision, all sold to new members of the Network.  Do you think the Property Management company is going to be able to rent all 50 homes?

But they offer partners since I have no money.

Yes, they do.  You and your partner sign an agreement, drafted by lawyers of the Network, and the rental property is yours.  But who gets what in the deal?  The partner gets 50% of the sales when the property is sold.  They also claim the tax write-offs of the property.

What do you get?

You get to make the mortgage payment when the house sits empty, next to the other 50 empty houses.  You get to scream at the answering machine of the Property Management company because they won’t pick up.  You also get free kool-aid at the next Network seminar. In other words, the partner gets all the benefits and you assume all the risks.

Are Networks evil?

Not necessarily.  Look, people should expand their investment portfolios.  If Networks can help, use them.  But make sure to ask the tough questions.  Don’t buy the "sales pitch" they give you.  Put the kool-aid down and perform your own analysis.  Use the Business Modeler to analyze what the cash flow would really be.  Also I would never buy "site unseen".  If the Network won’t allow you to do your own investigating, then seek help elsewhere.

Real Estate Clubs are a different story . . .

. . .

BTD Lite is now available in iTunes.  Get it now!

Tight Credit Market

How do banks make money?  By lending.  Is the current lending freeze going to continue?  Doubtful.

Zero percent down programs still liter the information super highway.  Traipsing over to Google’s site shows many lenders are still alright with zero percent down, three percent and five percent programs.  Of course the difference between these programs and the zero-down programs of yesteryear: 30-year fixed, full-doc* loans.  In other words, you have to prove you can make the payment.

At this moment, many lenders are taking a pause while waiting for the $700 billion to kick into the lending programs.  Once banks have the "bad" loans off their books, they can do what they are supposed to do: lend money.

What does this have to do with you?

Anyone going after mortgages is now going to have to face the scrutiny of proving not only income but also credit worthiness. Fannie Mae and Freddie Mac are ensuring loans that check both of those items. Nearly all lenders are only doing loans covered by the lending twins.

Even if you have no plans to buy that this moment, getting your credit affairs in order would be the next best thing.  Continue reducing your DI Ratio.  If that’s already done, put money away to help out with the expenses of purchasing that investment property.  Either way, it’s time to take advantage of the market.

* – full-doc is short for full-documentation. Lender slang.

The Launch

Buy That Duplex is launching right in the middle of one of the most precarious moments in US and indeed, world history.  Markets are uncertain, credit is tight.

All of the content for this blog will revolve around one of the steps necessary to purchase that first duplex.

• Prepare
• Define
• Assemble
• Acquire
• Manage

In addition, these articles will augment the BuyThatDuplex ebook by providing information on how investors can move forward in this economic environment.  The big investors all say the same thing “Prepare for the boom times when things are bust.  Prepare for the bust when things are booming.”

Things are definitely in bust mode now.

Time to prepare for the boom.