How to Negotiate Lower Rent With a Potential Landlord

It starts with determining your leverage.

By Alex Starace for MyFirstApartment.com

When you’re looking for an apartment, you might be under the impression that the list price is the only price. In some cases, that’s true. But if you’re a bit savvier, you could end up negotiating your way into a great deal. Before you approach the landlord, however, make sure you’ve done your homework.

Determine your leverage     

Are you in a tight or loose rental market? In tight markets — where there are more renters than available apartments — it’s unlikely a potential landlord will negotiate. Why? If three or four other people are willing to pay list price for the apartment, a landlord has little motivation to lower the price for you.

A good way to determine whether you’re in a tight rental market is to browse apartment listings for a few days. How many open units are in each building? How quickly do listings disappear? The longer the listings are on the market and the more listings per building, the looser the market. Another way to tell: Have you had any apartment showings canceled because the place was suddenly rented? If not, this again points to a looser market.

In loose markets, landlords will be anxious to rent their place, even at a rate lower than list price. After all, an empty unit is a money-sink for landlords. If you’re offering to fill the vacancy, the landlord might be happy to lower the price, especially if the choice is between renting to you or letting the apartment sit on the market a month longer.

Can you demonstrate that you are a responsible person? Even in a tight market you can have personal leverage. Landlords want security and predictability. In the long run, these things save a landlord a lot of money. If you can demonstrate that you have these qualities — the primary attributes landlords look for are a steady job and good credit — you may get a landlord to knock a bit off your rent or to make other concessions.

Can you show commitment to staying? If you’re planning on staying in the apartment for two or three years or longer, that’s a big benefit in a landlord’s eyes. When a landlord has to rent an apartment to a new tenant every year, he or she loses a lot in transaction costs (repainting, brokers fees, professional cleaning fees), as well as in the simple effort of finding a new tenant. So if you’re planning on staying a while, highlight this when discussing what makes you a great potential renter.

Negotiate from strength

After you have determined where your points of leverage are, it’s time to make your move. When approaching the landlord, the key is to be confident and calm. Avoid hyper-aggressiveness or a mouse-like timidity. A good way to strike the right balance and show confidence is to know your stuff. Know what an average apartment rents for in the neighborhood. Compare the amenities in the apartment to those available in nearby complexes. Have in mind a price you think is fair for your potential place, and have reasons why — whether it’s because the kitchen is too small, or it doesn’t provide parking, or it’s simply too expense relative to comparable places in the neighborhood. And emphasize your points of leverage — that you’ll be a responsible, long-term tenant.

When negotiating, ask for an even lower price than you’re hoping to pay. Do this for two reasons: First, you might end up getting it. Second, if the landlord is at all interested in bargaining, you’ll likely need to meet halfway between your initial offer and the list price. If you give a low (but not unreasonable) initial offer, meeting somewhere in the middle will be a win for you, and both you and the landlord will feel like you’ve made a good deal.

In the end, successful negotiating is all about knowing the market, doing research about the specific apartment in your sights and negotiating calmly and rationally. If you do all this, you have a good chance of paying lower monthly rent. Good luck!

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Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

Source: zillow.com

Understanding Single-Family Home HOAs

Before you buy a home in an HOA-governed community, make sure you review the rules thoroughly.

What does HOA mean?

HOA means homeowners association. It can also be referred to as HOD or Home Owners Dues. HOAs can exist in planned housing developments, town homes, and condos. It is generally billed on a monthly basis.

Most people think of homeowners associations (HOAs), legally known as Common Interest Developments, as related to attached housing structures like condominiums or town homes. But this is not always the case.

Around the 1980s, developers started building communities of single-family homes that were actually Common Interest Developments. These communities came with their own sets of rules, regulations and HOA fees.

The reason builders starting developing communities in the HOAs structure was to maintain order and the aesthetics of a community. Their rules keep home paint colors and front yards in harmony, restrict building additions that don’t fit into the neighborhood, and stop owners from parking broken-down vehicles in their driveways or front yards. Such regulations assure new and existing owners that a neighbor’s behavior and choices will not diminish property values.

But they also mean that you must follow the rules yourself, and typically contribute monthly fees to manage and run the HOA for the benefit of all owners. When residents violate these rules — which can cause stress for other owners and hurt property values– the HOA will typically step in and enforce them with violation notices, fines and possibly litigation, if the issue gets that far.

The root of the issue

Often, the problem is not the rules, it’s that people don’t read the rules and regulations before they buy into a community, and then they violate the rules. But ignorance is no excuse — those rules are recorded on the property title, and likely given to every buyer to review before they purchase a home in a standard transaction. Owners are still bound by those rules whether they received and read them or not.

If you are buying into an HOA-governed community, be sure to read the rules and regulations before you buy. Once you’ve read them, if you don’t like them, then you should avoid buying a property in that community.

What if you already own in an HOA, and don’t like the rules or how the elected HOA board of directors interprets and enforces them? Luckily, an HOA is a democracy and the owners can vote out the board of directors and change the rules!

Any member-owner can try to get elected to the board and change the regulations. They just have to get enough other community members to support their opinion and vision for the community.

Unfortunately, most community members never go to a board meeting and never get involved. They just complain about the board — who are all volunteers, by the way — and complain about HOA fees, rules, and special assessments, etc.

If you are one of those owners who doesn’t like the rules, then get involved and take the time to campaign in your community, get on the board, and change the regulations.

Do Renters Pay HOA Dues?

“The landlord cannot force you to pay the HOA unless that is what is required in the lease. If it is part of the lease, then you have to pay. If not, you don’t, but the owner may decide to find another tenant when the lease is up.

If the HOA is not doing their job in clearing snow, I would write them a letter and send copy to the landlord. You are not the owner so they may not listen, but it gives you proof of the issue and may prompt the owner to act.”

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Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

Source: zillow.com

What is Rent Control?

Did you ever wonder how Monica and Rachel in “Friends” could afford rent in a two-bedroom New York City apartment on a waitress and chef’s salary? Well, the answer is rent control.

Rent control is a rare policy that fixes the price of rent indefinitely and falls under the umbrella term “rent regulations.”

It sounds great, right? Before you get too excited, you need to understand exactly what is rent control.

We’ll talk about the difference between rent control vs. rent stabilization, explain how it really works and give you a few advantages and disadvantages of living in a rent-controlled apartment.

Rent control vs. rent stabilization

Both rent control and rent stabilization are concepts centered around the idea of protecting tenants from major increases in the price of rent. The goal is to keep housing affordable while also enabling landlords to increase rent.

While people often confuse the two, there is a big difference between them.

Rent stabilization

Rent stabilization is the more common practice and means that landlords or property owners can only increase rent by a specific percentage year-over-year. In areas that have rent stabilization in place, the state sets the rate at which landlords can increase rent. Because this is a state issue, not a federal issue, it can vary drastically state-by-state. For example, Oregon limits yearly rent increases to 9.2 percent while Los Angeles County in California limits yearly rent increases to a mere 3 percent.

This is a more common practice and you’ll likely have an easier time finding a rent-stabilized apartment than a rent-controlled apartment.

Rent control

Rent control is a policy that means landlords cannot increase a tenant’s rent. Effectively, rental rates remain set and won’t increase. Rent-controlled apartments have a set price for rent that will not increase whereas rent-stabilized apartments will see price increases but there is a cap on how much the rate can increase each year.

Rent-controlled apartments are incredibly rare, so if you live in or can find a rent-controlled apartment, you’re very lucky.

Friends apartment in NYC.

In fact, there are only 22,000 rent-controlled apartments out there. Even if you can find a rent-controlled apartment on the market, you have to meet a specific set of criteria to qualify for one. This includes:

  • You cannot make more than $200,000 for two years in a row
  • The building must have been built before 1947
  • The apartment must have been lived in by the same family since at least 1971
  • The apartment must be passed from family member to family member
  • The person who inherits the rent-controlled apartment must have lived in it for two years straight before officially inheriting it

Now, it makes sense how Monica had such a great apartment in New York — she lived in the apartment with her grandmother for two years prior to inheriting it from her. This allowed her to take over the rent-controlled apartment and keep it in the family.

Where is rent control most common?

Out of the 50 states, only five have specific rent control policies in place. The other 45 exempt rent control or have no active policies in place.

The five states that have some rent-controlled apartments are California, Maryland, New Jersey, New York and Oregon.

Map of rent control.

Photo source: National Multifamily Housing Council

Pros and cons of rent control

As with everything, there are pros and cons to rent control depending on your perspective and situation.

Pro: Cheaper for tenants

Because rent-controlled apartments have a fixed price for rent, they are very affordable. You will pay the same price for rent year after year, even as your neighbors experience price increases. Rent-controlled apartments are cheap.

Pro: Affordable even when wages don’t increase

It’s common knowledge that rent prices are rising faster than wages are. So, you can live in the same apartment at the same price and still afford it, even if you don’t see a pay bump on your paycheck very often.

Pro: Foster safe neighborhoods

Rent-controlled apartments offer renters financial stability because they know that they can live on a fixed income. When there is financial stability, people will stay in the same location, develop relationships with neighbors and decrease renter turnover. All of these factors contribute to a safer neighborhood and environment.

Pro: Automatic lease renewals

When you live in a rent-controlled apartment, you automatically get the first right of renewal on your lease. Basically, you always have a place to live and can always re-sign your lease at the same rate.

Con: Not always well-maintained

Because of the fixed rent price in a rent-controlled apartment, landlords don’t maintain, update or refurbish them as often because it isn’t profitable for them. At times, rent-controlled apartments have outdated appliances because no one invests in them.

Con: Hard to come by

As we mentioned earlier, there are roughly 22,000 rent-controlled apartments in the wild, so they are incredibly rare and hard to come by. As such, you’ll be frustrated looking for one as the supply is so low.

Con: Landlords often lose money on rent-controlled apartments

If you’re a landlord of a rent-controlled apartment, you’re likely losing money compared to other landlords who can increase the price of rent each year. If you’re a tenant, this is great. But, it’s a con for the property owner.

Reviewing and signing a lease.

How to find a rent-controlled apartment

Rent-controlled apartments are a unicorn in the real estate world. When you have one, hold onto it as they are very rare and you likely won’t have a better deal anywhere, especially in an expensive metro like New York City.

If you want a rent-controlled apartment, you have two ways to find one.

  1. You can inherit a rent-controlled apartment
  2. Research the city or state’s database of rent-controlled apartments

If you can’t find or qualify for a rent-controlled apartment, don’t fret. Rent.com has thousands of affordable apartments all across the country that would be perfect for you. Start your search today!

The information contained in this article is for educational purposes only and does not, and is not intended to, constitute legal or financial advice. Readers are encouraged to seek professional legal or financial advice as they may deem it necessary.

Source: rent.com

How to Get Rid of Your Roommate (Legally!)

As tempting as it may be, you can’t just kick him to the curb.

He’s messy, his rent is always late, and now he “lost” his pet scorpions somewhere on the premises. In other words, it’s high time for your roommate to hit the road.

But how to get him out? Legally speaking, can one tenant kick the other to the curb based on a few common lease violations? And, if so, what is the least-stressful way to accomplish this feat? Below, we discuss several tips and techniques for lawful roommate eviction, as well as conduct to avoid at all costs — or you may find yourself on the curb.

Communication is key

As in any relationship, lack of clear communication between roommates could be the downfall of an otherwise promising cohabitation situation. When a problem first arises, talk it out. Perhaps your roommate is under unusual stress, isn’t aware of the rules or just needs a little coaxing to meet obligations. Hopefully, this tactic will calm the waters.

But if not, it may be time to bring your landlord in on the conversation. If your roommate is engaging in clear violations of the lease agreement, your landlord should be notified immediately, and the violations should be clearly documented through pictures and descriptions. Assuming your roommate is a tenant of record (more on that below), he or she maintains a distinct legal relationship with the property owner or landlord and must abide by the terms of the lease. While general messiness is not usually cause for eviction, late rent payments and unapproved pets likely are, so alert your landlord. He or she can start the eviction process under your state’s landlord-tenant laws.

Off-the-record roommates

This issue can become much more acrimonious if your roommate is not a tenant of record (i.e., an inhabitant who has not signed a lease agreement). In essence, this person has no legal duty or obligation to the property, its owner, or its lessee (you), so state landlord-tenant laws do not apply. Accordingly, it may be time to seek an alternative legal remedy. However — and this is key — you cannot physically force a roommate out the door by pushing them or throwing belongings on the sidewalk.

Most states have enacted a more civilized approach that provides the unwanted guest the right to notice and due process. In many states, a roommate must first be put on notice that he or she is no longer welcome. To accomplish this, a simple one-page statement declaring that the roommate arrangement has ended should suffice. Further, provide the roommate with a deadline for leaving, which usually must be at least 15-30 days from the date of the notice. Lastly, as much as you might like to avoid actual interaction, be sure the roommate actually receives the document.

See you in court!

Hopefully, the roommate will take a hint and exit gracefully. If this does not happen, however, it will be necessary to file a petition for eviction in your local court, which is likely the same court that handles formal landlord-tenant matters. By allowing the roommate to remain on the property sans lease, you actually created a month-to-month oral tenancy agreement, which must be undone using proper legal channels.

The court staff will give you a date and time for an eviction hearing. At the hearing, be prepared to present the eviction notice mentioned above, as well as evidence to show that the roommate was never included on the lease and — at most — had a month-to-month tenancy as an off-the-record roommate.

The court will likely grant the petition, and your roommate will have no choice but to vacate the premises immediately.

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

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Source: zillow.com

Understanding a Rental Lease Agreement

Make sure you understand what you’re signing.

You love it. You want it. You’re ready to sign on the dotted line, but stop and take a deep breath first. This is everything you need to know before signing that rental lease agreement.

What is a rental lease agreement?

A rental lease agreement is a legal document that sets out the terms for you to rent a residence from a landlord, apartment community or property management company.

The agreement protects you and the prospective landlord. Both of you need to abide by the rental lease agreement’s terms.

It’s smart to get a second set of eyes on the lease before you sign it. Colleen Wightman, a licensed Realtor and a leasing specialist based in Rochester, NY says, “Have a licensed real estate agent or, better yet, an attorney look at the lease agreement. You are legally bound once you put your signature on it…Let the landlord or property manager know at the time of signing that you’ve had it reviewed by an attorney. That will make the landlord pay attention; you are someone who knows what you’re doing.”

Reviewing a lease.

What’s in this agreement?

The rental lease agreement starts off with the basics: your name, the date, the name of the person or entity who will be leasing the property to you and the property’s physical and address.

While each lease is different, they will all cover the following information:

  • Arrangement to lease: There’s an acknowledgment from both parties that you and the prospective landlord agree to the arrangement. The rental lease agreement will name the length of time, i.e., the number of months you will be renting for and when that begins and ends. This is either for a long-term or short-term duration.
  • Rent: It will state the rent amount, to whom you’ll pay the rent; how you’ll pay it (debit or credit card, some other electronic system, personal check) and when it’s due. The lease agreement will state the day rent is due each month and what happens if you fail to pay the rent — such as late charges.
  • Additional monies: This section would discuss situations in which you might pay extra money in addition to the monthly rent. “These would be things like a non-refundable pet deposit or perhaps an additional month’s rent in lieu of you having a perfect credit score,” said Wightman.
  • Property use: This part clarifies who will be living in this rental — you alone? with a roommate? spouse? pet? — and it states that the apartment is only for residential purposes with no illegal activities permitted.
  • Apartment possession: You are not liable for the rent if the landlord or management company doesn’t let you move in on the date promised. Your rent will then be pro-rated.
  • Security deposit: By signing the agreement you acknowledge that you will pay the landlord a specified amount of security deposit (usually equal to one month’s rent). This money will cover any property damages that you incur. The landlord must notify you in writing when and how much of the security deposit they keep. Keep in mind, the security deposit is different from “last month’s rent,” money you pay upfront to cover the final month you will live in the apartment. In some states, the security deposit pays for that final month. Check your state laws regarding the use of security deposits. Also, check your state’s laws regarding how your landlord holds your security deposit.
  • Addendums, provisions and disclosures, and amendments: This section lets you know that if you or the landlord/property management company want to modify this rental lease agreement in any way, it must be done in a written agreement signed by you (the tenant) and the landlord/property management company. What might you need to modify? Let’s say the apartment comes with one parking space, but you’ve got a motorcycle and a car and you want to park your motorcycle on the side of the building if that’s possible. “If you’re augmenting what’s offered — have it put into the lease because both parties have to agree to it,” shared Wightman.

Is the rental agreement lease term flexible?

Yes! You might sign a short- or long-term lease.

Leases come in all sorts of durations. Maybe you can sign a lease that’s longer than 12 months and can get a more favorable monthly rate. Or perhaps you need the apartment for less than 12 months. Maybe the landlord will agree to a six-month or even month-to-month lease, in which you actually rent one month at a time (this will likely be more expensive).

The bottom line is that anything like this needs discussing upfront, documented on the lease agreement and signed by both parties.

A couple reviewing a lease.

What if I need to break my lease agreement?

The short answer is, “Yes, you can…but.”

There will be information on your lease agreement about the rules on “early release” — likely resulting in penalties for breaking your lease. You may have to give a certain amount of notice if you choose to do this. You may have to find another renter to take your place. Or, you might have a buyout clause.

Check your lease agreement upfront so that you can prepare in case this happens. And, always be honest and open with your landlord. You don’t want to incur financial penalties or land in court.

What about working from home?

The coronavirus pandemic sent many of us into our bedrooms with our laptops. But if your rental contract says you’re only using your apartment for residential purposes, will you get in hot water for working from home? As long as you’re not inviting a third party into your home to conduct business, you’re all right.

Fair housing and discrimination

Before you sign the lease, make sure to read through the fair housing laws. It’s important to make sure that the person renting the apartment is in compliance with all fair housing laws.

Service animals can be a hot-button issue. Even if there’s a no-pet rule, Wightman says “As long as you have all your paperwork in order, a landlord cannot deny renting to you because you have a service animal.”

But make sure you get it into the lease that you have a service animal and that you’re in compliance with any and all appropriate paperwork you may need to provide. Also, it’s important to know that the landlord will likely ask for a non-refundable pet fee. It’s best to prepare for that miscellaneous cost.

Sign of the times

Read through any sort of documentation that you’re going to sign and be held accountable to. So often, people don’t think about “the legal ramifications of signing something they’re not thoroughly reading,” said Wightman.

You may feel the urgency from this rental market, but take the time to go through the rental lease agreement. “Being aware upfront and being thorough is always in the renter’s best interest,” Wightman shared.

The information contained in this article is for educational purposes only and does not, and is not intended to, constitute legal or financial advice. Readers are encouraged to seek professional legal or financial advice as they may deem it necessary.

Source: rent.com

Real Estate Crowdfunding – How These Investments Work, Pros & Cons

Real estate offers a fantastic counterbalance to stocks in your investment portfolio, especially in an era of low interest rates and bond yields. But not all of us have $300,000 just sitting around to start snapping up properties.

Enter: crowdfunded real estate investments. A relatively recent addition to the arsenal of investment options, crowdfunding allows thousands of investors to pool their funds, so each investor can invest a small amount of money in larger projects.

Like all investments, real estate crowdfunding has its own pros and cons, and comes in many flavors and varieties. Before you invest a cent in any asset, you must first understand the risks, rewards, and the role the investment plays in your portfolio.

How Does Real Estate Crowdfunding Work?

On the simplest level, real estate crowdfunding involves many people each contributing a small portion of the greater cost of a real estate-related investment.

But “real estate-related investment” can carry many meanings. Keep the following variations in mind as you explore real estate crowdfunding investment options.

Equity vs. Debt

When you invest money through a crowdfunding platform, does the money go toward the direct purchase of new properties, or toward loans servicing other people’s properties?

If you know publicly traded REITs, you understand the difference between equity REITs and mortgage REITs. The former buys and manages real estate; the latter lends money secured against real estate.

Crowdfunding works similarly. In fact, many real estate crowdfunding investments are REITs — they’re simply sold privately rather than on public stock exchanges subject to traditional SEC regulation (more on regulation differences shortly).

Many private crowdfunded REITs offer both equity and debt REIT options. As a general rule, debt REITs generate more immediate dividend income, while equity REITs include an element of long-term appreciation in addition to income. For example, Fundrise offers several broad basket portfolios weighted more heavily toward either real estate equity or debt investments.

Not all real estate crowdfunded debt investments come in the form of REITs, however.

Peer-to-Peer vs. Fund Investments

In the case of private debt REITs, you invest money with a pooled fund, and the fund lends money to real estate investors as it sees fit. The alternative model for crowdfunded real estate debt involves lending directly to the borrower.

Crowdfunding platforms that follow this model allow you to browse individual loans, so you can pick and choose which loans you want to put money toward. For example, Groundfloor caters to real estate investors — mostly house flippers — lending them money to buy and renovate fixer-uppers. As a financial investor, you can log into your account and review available loans, including details about the project and borrower, and then put varying amounts of money toward as many or as few loans as you like.

Your loan is secured by a lien against the property. If the borrower defaults, Groundfloor forecloses to recover all investors’ money.

Property Type

Some real estate crowdfunding platforms specialize in residential real estate, while others focus on commercial.

Within each of those wide umbrellas, there’s plenty of variation as well. Residential properties could mean single-family rentals, or it could mean 200-unit apartment complexes. Commercial real estate could mean office buildings, or industrial parks, or retail space.

Before investing, make sure you understand exactly what you’re investing in — and more importantly, why.

Availability to Non-Accredited Investors

Some crowdfunding services like FarmTogether only allow accredited investors to participate. Others are open to everyone.

To qualify as an accredited investor, you must have either a net worth over $1 million (not including equity in your home) or have earned at least $200,000 for each of the last two years ($300,000 for married couples), with the expectation to earn similarly this year. So, most Americans can only invest with crowdfunding platforms that allow non-accredited investors.

Before doing any further due diligence, check to see whether prospective crowdfunding platforms even allow you to invest. Otherwise, no other details matter.


Advantages of Real Estate Crowdfunding

These relatively novel investments come with plenty of perks, especially for everyday people with few other paths to invest in large real estate projects. I myself invest in several real estate crowdfunding platforms.

As you compare crowdfunding investments to other types of real estate investments, keep the following pros in mind.

1. Low Cash Requirements

Through crowdfunded real estate investing, investors gain access to expensive investments like hotels, office parks, and apartment complexes that would otherwise remain unavailable to them. I don’t have $5 million to buy an apartment building. But I do have $500 that I’m happy to invest in a private fund that owns apartment buildings.

Although every crowdfunding platform imposes its own minimum investment, some of those minimums remain quite low. Groundfloor, for example, allows investments as low as $10.

Other platforms impose minimums of $500 or $1,000, keeping the minimums within reach of middle-class earners. It marks an enormous advantage to investing in real estate indirectly: you don’t need a full down payment plus closing costs in order to diversify your investments to include real estate.

2. Easy Diversification

With crowdfunding investments, you can easily include real estate in your asset allocation.

And not just through publicly traded REITs, which often move in greater sync with the stock market than with real estate markets because they trade on public stock exchanges. You can invest money toward any type of real estate, residential or commercial, in any grade of neighborhood, spread across many cities in the U.S. or even around the world.

For example, I have a little money invested in commercial office space through Streitwise, and a little invested in residential real estate (equity and debt) through Fundrise’s REITs. I also have money spread among a range of individual loans through Groundfloor. All in all, these investments expose me to real estate in 15 states.

Imagine how much harder that exposure would be if I had to go out and buy individual properties in 15 states?

3. Strong Income Yields

Crowdfunded real estate investments tend to pay reasonably high income yields. Which is always welcome, whether you’re pursuing financial independence at a young age, looking to build more retirement income, or simply enjoy earning more passive income each month. Because when you have enough passive income to cover your living expenses, work becomes optional.

I’ve consistently earned income yields in the 8% to 9% range on my investments with Streitwise and Groundfloor. With Fundrise, I earn around 5% in dividend yield, plus long-term appreciation.

Not many stocks or ETFs offer those kinds of yields.

4. No Labor and Little Skill Required to Invest

As a direct real estate investor, I can tell you firsthand how much skill and labor it takes to find good deals, analyze cash flow numbers, renovate properties, hire and manage contractors, and so forth.

With crowdfunded real estate investments, you outsource all of that to someone else. You just click a button to invest your funds, and sit back and collect the returns.

Don’t get me wrong, direct real estate investment comes with many of its own perks, such as the potential for higher returns, greater control, and real estate-related tax advantages. But you have to earn those advantages with sweat and knowledge, much of it required before you even buy your first property.

This ease of investing through crowdfunding platforms comes with a side benefit: you can automate your investments. Set up monthly or biweekly investments to avoid emotional investing and build wealth and passive income on autopilot.

5. No Property Management Required

It takes an effort not to laugh out loud when tenants call you complaining that a light bulb burned out, and ask you to come over to replace it. Unless the call comes at 3 a.m. — that’s less funny.

Few landlords enjoy managing rental properties, between chasing down nonpaying tenants, hassling with constant repairs and maintenance issues, and all-too-frequent complaints from tenants and neighbors — “this person plays their music too loud,” “that one smells like weed when they pass in the hallway,” ad nauseum. It’s why so many landlords end up hiring a property manager to take the headaches off their plate.

You don’t have to worry about any of that when you invest in crowdfunded real estate investments.

6. Protection Against Inflation

“Real” assets such as commodities, precious metals, and, of course, real estate all have inherent demand. Regardless of the currency you pay with or its value, you pay the going rate based on the underlying value of these physical assets.

That makes these assets an excellent hedge against inflation. If rents drive inflation higher, rental properties only become more valuable, with higher revenues. If the dollar loses value, people pay more for housing and commercial space.

In contrast, investors actually lose money — in terms of real value — on a bond paying 2% interest when inflation runs at 3%.


Disadvantages of Real Estate Crowdfunding

No investment is perfect, without risks or downsides. Thoroughly review these drawbacks and risks before parting with your hard-earned money.

1. Poor Liquidity

It takes a few clicks to sell a stock or ETF. Investors can liquidate their holdings instantaneously, leaving them with cold hard cash.

Real estate is inherently illiquid. It takes months to market and sell properties, and for large commercial properties it can involve hundreds of thousands of dollars in costs. So investors usually hold them for at least five years, and when these investments are funded through a crowd of financial investors, that means individuals can’t easily pull their money back out of the deal.

Most crowdfunded real estate investments advise prospective investors to plan on leaving their money in place for at least five years. Some do offer early redemption to sell their shares, but not instantaneously, and usually at some sort of discount or penalty.

Don’t invest anything you might need back within the next five years.

One notable exception includes short-term peer-to-peer loans secured by real estate, such as those offered by Groundfloor. These loans usually repay within nine to 12 months. Even so, you still can’t easily pull your money back out before the borrower repays the loan in full.

2. Complex Regulation and Performance Transparency

The regulation on crowdfunded investments can quickly make the average investor’s eyes cross. For a quick taste, investors have to navigate between Regulation D investments that fall under either 506(b) or 506(c), and Regulation A and Title III investments — also known as Regulation Crowdfunding or Reg CF.

Regardless, investors can’t use the familiar brokerage account tools that they’re already familiar with to research these investments. The SEC does require crowdfunding platforms to disclose a wide range of information, but it will look and feel unfamiliar for many retail investors.

There is one huge advantage that crowdfunded private REITs have over publicly traded REITs: the flexibility to reinvest profits to buy more properties. Publicly traded REITs must distribute at least 90% of all profits to investors in the form of dividends. That leaves them with high dividend yields but poor prospects for appreciation and asset growth. Private REITs like DiversyFund can employ far more flexibility to build their portfolios.

3. Limits on Participation

The SEC puts limits on how much money non-accredited investors can put into crowdfunded investments each year. Those limits are as follows:

“If either your annual income or your net worth is less than $107,000, then during any 12-month period, you can invest up to the greater of either $2,200 or 5% of the lesser of your annual income or net worth.

“If both your annual income and your net worth are equal to or more than $107,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is lesser, but not to exceed $107,000.”

They provide a table by way of example:

Annual Income Net Worth Calculation 12-month Limit
$30,000 $105,000 greater of $2,200 or 5% of $30,000 ($1,500) $2,200
$150,000 $80,000 greater of $2,200 or 5% of $80,000 ($4,000) $4,000
$150,000 $107,000 10% of $107,000 ($10,000) $10,700
$200,000 $900,000 10% of $200,000 ($20,000) $20,000
$1.2 million $2 million 10% of $1.2 million ($120,000), subject to cap $107,000

Still, these speedbumps serve as reasonable cautions and protections for the average investor. These investments do come with an element of risk, and shouldn’t make up 70% of your retirement portfolio.

4. Less Protection from Default Than Other Real Estate Investments

When you own a rental property and your tenants stop paying the rent, you can evict them. You own the property, you can insure it against damage, and it comes with a certain amount of inherent value.

Real estate crowdfunding investments don’t come with these protections. You typically own paper shares of a fund, not all or part of a physical asset. Your investments aren’t even secured against the underlying properties with a lien in most cases.

Exceptions do exist, however. For example, when you invest fractionally in loans on Groundfloor, those loans are secured by a lien against real property. If the borrower defaults, Groundfloor forecloses in order to recover most or all of your money.

5. Lack of Control

Although stock investors have little control over the performance of their share prices, direct real estate investors do enjoy control over their returns and management. They can make renovations to boost the rents and property values, can tighten their tenant screening criteria to avoid deadbeats, can even insure against rent defaults.

But when you invest in real estate indirectly through crowdfunding, you surrender control to the fund manager. If they do well, you (hopefully) earn a strong return. If they mess up, you get stuck with the costs of their bungles.


Where Does Real Estate Crowdfunding Fit Into Your Portfolio?

While stocks belong in just about every investor’s portfolio, not everyone feels comfortable with real estate crowdfunding. Still, these investments offer a fine counterweight to stocks when used responsibly.

Your ideal asset allocation is personal to you, and depends on factors ranging from your age, target retirement horizon, net worth, and risk tolerance. I recommend thinking of crowdfunded real estate investments as an alternative to higher-risk, higher-yield bonds and public REITs.

For example, say you aim for an asset allocation of 60% equities and 40% bonds. Those equities include 57% stocks and 3% REITs, and your bonds include 30% low-risk government bonds and 10% higher-risk corporate bonds. You could take part of the 13% of your portfolio earmarked for REITs and higher-risk bonds and test the waters of crowdfunded real estate investments. If you like what you see, you can then move a little more, up to your comfort level.

However, real estate crowdfunding should not take the place of extremely low-risk investments in your portfolio, such as Treasury bonds or TIPS.


Final Word

With real estate crowdfunding, you have the luxury of investing small amounts to gauge the performance of your investments and your comfort.

These investments can play a role in any investor’s portfolio, but that role should start small. Don’t invest any money that would financially cripple you to lose, and do your homework on any crowdfunded investment’s past performance and risk management measures.

Most of all, always keep these investments in the perspective of your broader portfolio and asset allocation. These investments don’t exist in a vacuum — they play a role in a larger performance.

Have you ever invested in crowdfunded real estate? If so, what were your experiences?

Source: moneycrashers.com

Eviction Process: What to Do If You Receive an Eviction Notice

Follow these steps if you receive an eviction notice.

The eviction process is stressful. But losing your home isn’t inevitable. It’s possible to delay or prevent eviction. Help is available — you just have to know where to look. And you need to act fast.

What to do after receiving an eviction notice depends on your lease, your state and even your ZIP code. Knowing and defending your rights, working proactively with your landlord or property manager and accessing local, state and federal resources can keep you in your home.

What is an eviction?

“Eviction is a legal process that may be undertaken to remove a tenant from a rental property,” explains a definition on LegalDictionary.net. “The majority of evictions are the result of a tenant’s failure to pay rent, or the tenant’s frequent violation of the terms of the lease or rental agreement. Regardless of the purpose of the eviction, the landlord must follow a process specified by the law.”

Legal grounds for eviction

Landlords and property managers must follow particular steps and a certain order during the eviction process. They’re required to document every step so the eviction will hold up in a court of law.

Landlords must have a legal reason to evict a tenant. Legal grounds for eviction include:

  • Non-payment of rent
  • Incomplete rent payments
  • Criminal activity
  • Committing an act of domestic violence
  • Not abiding by community health and safety standards
  • Not vacating a property when the lease is up
  • Violating the term of the lease by subletting (or subleasing)
  • Housing an unauthorized tenant who doesn’t appear on the lease
  • Keeping an unauthorized pet not specified on the lease
  • Causing significant damage to the property

eviction notice

How long does the eviction process take?

The eviction process varies from state to state. Check the eviction process in your state.

The Eviction Lab provides an overview of eviction rates across the country. The site’s Eviction Tracking System also details the weekly eviction rates in 27 U.S. cities and five states and lists if a state eviction moratorium is in place.

How does the eviction process work?

The eviction process is specific to your state. But the key steps are similar across the country.

The eviction notice

The eviction process begins when a landlord or property manager gives the renter an eviction notice. This is often called a Pay or Quit notice or a Pay or Vacate notice. It serves as a formal, documented warning that a renter violated the lease.

Landlords may post this on the door of a unit. But they usually send it by certified mail so there’s a legal record of the sent and received dates.

This notice tells the renter what they need to do to comply with the lease and avoid eviction. It also lists the number of days permitted before the official eviction notice is filed. The time in between these steps is often just a few days, so it’s important to act immediately.

If you get one of these notices, don’t panic. If you take steps to resolve the issue, your landlord may not file the eviction.

Eviction filing

You must comply with the terms of the lease by the deadline specified in the Pay or Quit Notice. If you don’t, the landlord will file an eviction complaint form to begin the eviction case.

Once a court date is on the books, you’ll receive a summons to court. Both documents will come via delivery by local law enforcement.

Court hearing and judgment

A judge will review documentation in the eviction case. This can include the lease, the payment record and all relevant communication between you and the property owner or landlord.

After reviewing the facts, the judge will issue their ruling. If they find it in your favor, you’ll be allowed to stay in your home.

Even if you win your case, the court case remains part of the public records for up to seven years — just like an eviction. If your next landlord doesn’t read the details of the case, this can negatively influence your background check. That’s why it’s so important to stop the eviction process before it gets to this point, if possible.

If the judge sides with the landlord, you’ll be forced to leave your home. Depending on the rules in your state, unclaimed belongings will be removed through the court process, put in storage or set out on the curb.

Man upset holding an eviction notice.

What to do if you get an eviction notice

It’s normal to feel shocked or overwhelmed by an eviction notice. But since the time between an eviction notice and an eviction filing is short, it’s important to act quickly to stop the process early.

The effort is worth it. An eviction stays on your record for seven years and makes it difficult to rent an apartment in the future. Unpaid rent can damage your credit for years to come. And the stress of eviction has negative physical, mental and emotional effects on the entire household, especially children.

Review the steps below and reach out for help the moment you get an eviction notice or know you’ll be short on the rent. Every step takes time, so pursue multiple resources simultaneously. Don’t wait to hear back from someone before moving down the list.

1. Review your lease

If you’re served with an eviction notice for violating the terms of your lease, review your copy. Make sure any violations you’re accused of are actually listed in the lease.

Paperwork errors can happen. And vague or general language can lead to confusion. If you find an error or wording that’s open to interpretation, contact your landlord for clarification immediately. Document all correspondence.

2. Correct any lease violations

If you’re violating the terms of your lease, change your behavior right away. Unauthorized roommates and pets must find a new place to live immediately. Repair any property damage.

Document your compliance in writing. Supply photos and receipts for repairs. Communicate all positive changes to your property manager or landlord.

3. Make a payment plan

If you’re behind on the rent, create a payment plan and present it to your landlord. This document should tell them why you’re experiencing financial difficulties. It should also give a reasonable repayment schedule.

You can request to delay payments, make smaller payments or ask for rent forgiveness, depending on your financial situation. Stay realistic about what you can afford.

Property managers aren’t obligated to accept your plan. But many would rather have some income and a realistic plan for repayment instead of dealing with the eviction process.

Woman calculating numbers on her laptop.

4. Take advantage of temporary eviction moratoria

If you lost your job during the pandemic (or experienced a loss of income) fill out the CDC Declaration Form and provide a copy to your landlord immediately. The eviction moratorium suspends the eviction process during the COVID-19 public health crisis. This temporary stop to evictions for non-payment of rent extends to June 30, 2021.

This is not a rent forgiveness program. Your rent is still due. But it could buy you some very valuable time to access rent assistance programs and find employment.

Many states are also halting evictions during the pandemic. Regional Housing Legal Services displays temporary state eviction moratoria on an interactive map.

5. Access federal, state and local funding resources

Federal, state and local governments offer emergency rent assistance programs and other resources to help renters secure more affordable housing. You may qualify for more than one program, so reach out to as many as you can, as soon as you can.

The Apartment Guide Eviction Resource Guide lists federal eviction resources. It also helps renters search for service organizations and government programs in their home states. Charitable organizations also offer grants and emergency rent payment assistance.

HUD

The U.S. Department of Housing and Urban Development (HUD) provides affordable housing options across the country. Contact a Public Housing Agency (PHA) for rental advice at (800) 569-4287. Or search by state for an agency near you.

Renters who already receive assistance from HUD may qualify for lower rent through income recertification or hardship exemptions. A PHA representative can help you file the correct paperwork.

The NLIHC

The National Low Income Housing Coalition (or NLIHC) maintains a list of emergency rental relief programs by state. It also offers rental assistance.

The CFPB

The Consumer Financial Protection Bureau (CFPB) features comprehensive advice for renters facing eviction in eight different languages, including Spanish and Tagalog. It includes resources for active duty service members and a list of emergency rental assistance programs across the country.

211

Get help with housing expenses by calling 211 or searching 211.org. Renters can connect with local health and human service agencies, food and clothing banks, shelters and utility assistance programs.

talking to lawyer about eviction notice

6. Know your rights

If you receive an eviction notice, review your tenant’s rights. These vary by state, but there are commonalities. Your eviction is not valid if a landlord has discriminated against you, violated your rights, harassed you or provided a home that is not safe.

Property managers and landlords can’t discriminate against a renter because of race, religion, national origin, gender, age, sexual orientation or physical or mental disability. A landlord can’t evict you because of your marital status, whether or not you have children or the language you speak.

Landlords cannot harass you until you move out or cite personality conflicts as a reason for eviction. They can’t change the locks, throw you out without proper notice or prevent you from entering your home.

Housing law states that tenants have the right to live in clean homes that protect from the elements. They must have working heat, plumbing and electrical systems. Homes should meet all health and housing code standards and be safe and accessible for residents.

7. Contact a fair housing organization

If these rights are violated, call in the experts at your local fair housing agency. These organizations can also help renters facing eviction examine their options. Services and programs vary by state.

“Almost every state has a fair housing organization. And there’s a National Fair Housing Alliance that can help as well,” said Michelle Rydz, executive director of High Plains Fair Housing Center in Grand Forks, North Dakota. “We can help them fill out the paperwork and find money to pay for rent. And we have lawyers that work with us that can help clients when they have a court date.”

8. Get a lawyer

Finding a lawyer might sound like an unnecessary cost. But the eviction process moves quickly and the financial consequences of a judgment are dire. Seek council at the first sign of trouble.

“I think that tenants should seek the advice of counsel at the notice stage,” said Emily Benfer, law professor at Wake Forest School of Law and the chair of The American Bar Association’s COVID-19 Task Force Committee on Eviction.

Retaining an attorney can stop an eviction from becoming part of a renter’s permanent record. Attorneys also help more renters win their cases and stay in their homes.

“Nationwide, only 10 percent of tenants are able to secure representation in eviction cases, compared to 90 percent of landlords,” Benfer said, “Where tenants are not represented, the vast majority lose their case.”

A study conducted by The Kansas City Eviction Project found that 72 percent of tenants without legal representation had monetary damages and/or an eviction judgment entered against them. For renters with attorneys, the percentage fell to 56 percent. Benfer’s article cites a study that shows that 84 percent of New York City renters represented by an attorney remained in their homes.

Free and affordable legal resources

Paying for a lawyer is a major concern for people facing eviction. There are resources available for renters on a budget.

The American Bar Association’s FreeLegalHelp.Org connects low-income renters with federally funded legal aid services. It also includes pro bono attorneys who volunteer their services for free.

Search LawHelp.org for legal assistance and free legal aid programs by state and a list of legal resources. Or visit JustShelter.org to find resources listed by state. The site also links to several legal aid organizations across the country.

woman looking at tablet

How to get an apartment after an eviction

It isn’t easy to get an apartment after an eviction. But it can be done. Some basic tips can help you build up your credit and get back on your feet.

  • Rebuild your credit: Work with a credit counselor, consolidate your debt, reduce your expenses and pay all your bills on time.
  • Get a co-signer: Ask someone you trust with good credit to co-sign your lease to help lessen your landlord’s financial risk and share the financial burden.
  • Find a roommate: Move in with friends or family to minimize expenses, pay off debt and save money for a larger deposit
  • Demonstrate your credibility: Dress to impress and be polite. Tell landlords (ideally in writing) about your eviction and provide evidence that it won’t happen again.
  • Show financial responsibility: offer a larger deposit upfront to minimize the landlord’s financial risk. Produce paycheck stubs and reference letters from your employer and demonstrate how you’re rebuilding your credit.

Keep calm and take action

Eviction isn’t inevitable. By understanding the eviction process, acting quickly and using all your resources, you can hopefully delay or prevent eviction and stay in your home.

The information contained in this article is for educational purposes only and does not, and is not intended to, constitute legal or financial advice. Readers are encouraged to seek professional legal or financial advice as they may deem it necessary.

Source: rent.com

The Pros & Cons of Offering Owner Financing (When You Sell Your Home)

Sometimes, home sellers find a buyer eager to purchase but unable to finance the property with traditional mortgage financing. Sellers then have a choice: lose the buyer, or lend the mortgage to the buyer themselves.

If you want to sell a property you own free and clear, with no mortgage, you can theoretically finance a buyer’s full first mortgage. Alternatively, you could offer just a second mortgage, to bridge the gap between what the buyer can borrow from a conventional lender and the cash they can put down.

Should you ever consider offering financing? What’s in it for you? And most importantly, how do you protect yourself against losses?

Before taking the plunge to offer seller financing, make sure you understand all the pros, cons, and options available to you as “the bank” when lending money to a buyer.

Advantages to Offering Seller Financing

Although most sellers never even consider offering financing, a few find themselves forced to contemplate it.

For some sellers, it could be that their home lies in a cool market with little demand. Others own unique properties that appeal only to a specific type of buyer or that conventional mortgage lenders are wary to touch. Or the house may need repairs in order to meet habitability requirements for conventional loans.

Sometimes the buyer may simply be unable to qualify for a conventional loan, but you might know they’re good for the money if you have an existing relationship with them.

There are plenty of perks in it for the seller to offer financing. Consider these pros as you weigh the decision to extend seller financing.

1. Attract & Convert More Buyers

The simplest advantage is the one already outlined: You can settle on your home even when conventional mortgage lenders decline the buyer.

Beyond salvaging a lost deal, sellers can also potentially attract more buyers. “Seller Financing Available” can make an effective marketing bullet in your property listing.

If you want to sell your home in 30 days, offering seller financing can draw in more showings and offers.

Bear in mind that seller financing doesn’t only appeal to buyers with shoddy credit. Many buyers simply prefer the flexibility of negotiating a custom loan with the seller rather than trying to fit into the square peg of a loan program.

2. Earn Ongoing Income

As a lender, you get the benefit of ongoing monthly interest payments, just like a bank.

It’s a source of passive income, rather than a one-time payout. In one fell swoop, you not only sell your home but also invest the proceeds for a return.

Best of all, it’s a return you get to determine yourself.

3. You Set the Interest Rate

It’s your loan, which means you get to call the shots on what you charge. You may decide seller financing is only worth your while at 6% interest, or 8%, or 10%.

Of course, the buyer will likely try to negotiate the interest rate. After all, nearly everything in life is negotiable, and the terms of seller financing are no exception.

4. You Can Charge Upfront Fees

Mortgage lenders earn more than just interest on their loans. They charge a slew of one-time, upfront fees as well.

Those fees start with the origination fee, better known as “points.” One point is equal to 1% of the mortgage loan, so they add up fast. Two points on a $250,000 mortgage comes to $5,000, for example.

But lenders don’t stop at points. They also slap a laundry list of fixed fees on top, often surpassing $1,000 in total. These include fees such as a “processing fee,” “underwriting fee,” “document preparation fee,” “wire transfer fee,” and whatever other fees they can plausibly charge.

When you’re acting as the bank, you can charge these fees too. Be fair and transparent about fees, but keep in mind that you can charge comparable fees to your “competition.”

5. Simple Interest Amortization Front-Loads the Interest

Most loans, from mortgage loans to auto loans and beyond, calculate interest based on something called “simple interest amortization.” There’s nothing simple about it, and it very much favors the lender.

In short, it front-loads the interest on the loan, so the borrower pays most of the interest in the beginning of the loan and most of the principal at the end of the loan.

For example, if you borrow $300,000 at 8% interest, your mortgage payment for a 30-year loan would be $2,201.29. But the breakdown of principal versus interest changes dramatically over those 30 years.

  • Your first monthly payment would divide as $2,000 going toward interest, with only $201.29 going toward paying down your principal balance.
  • At the end of the loan, the final monthly payment divides as $14.58 going toward interest and $2,186.72 going toward principal.

It’s why mortgage lenders are so keen to keep refinancing your loan. They earn most of their money at the beginning of the loan term.

The same benefit applies to you, as you earn a disproportionate amount of interest in the first few years of the loan. You can also structure these lucrative early years to be the only years of the loan.

6. You Can Set a Time Limit

Not many sellers want to hold a mortgage loan for the next 30 years. So they don’t.

Instead, they structure the loan as a balloon mortgage. While the monthly payment is calculated as if the loan is amortized over the full 15 or 30 years, the loan must be paid in full within a certain time limit.

That means the buyer must either sell the property within that time limit or refinance the mortgage to pay off your loan.

Say you sign a $300,000 mortgage, amortized over 30 years but with a three-year balloon. The monthly payment would still be $2,201.29, but the buyer must pay you back the full remaining balance within three years of buying the property from you.

You get to earn interest on your money, and you still get your full payment within three years.

7. No Appraisal

Lenders require a home appraisal to determine the property’s value and condition.

If the property fails to appraise for the contract sales price, the lender either declines the loan or bases the loan on the appraised value rather than the sales price — which usually drives the borrower to either reduce or withdraw their offer.

As the seller offering financing, you don’t need an appraisal. You know the condition of the home, and you want to sell the home for as much as possible, regardless of what an appraiser thinks.

Foregoing the appraisal saves the buyer money and saves everyone time.

8. No Habitability Requirement

When mortgage lenders order an appraisal, the appraiser must declare the house to be either habitable or not.

If the house isn’t habitable, conventional and FHA lenders require the seller to make repairs to put it in habitable condition. Otherwise, they decline the loan, and the buyer must take out a renovation loan (such as an FHA 203k loan) instead.

That makes it difficult to sell fixer-uppers, and it puts downward pressure on the price. But if you want to sell your house as-is, without making any repairs, you can do so by offering to finance it yourself.

For certain buyers, such as handy buyers who plan to gradually make repairs themselves, seller financing can be a perfect solution.

9. Tax Implications

When you sell your primary residence, the IRS offers an exemption for the first $250,000 of capital gains if you’re single, or $500,000 if you’re married.

However, if you earn more than that exemption, or if you sell an investment property, you still have to pay capital gains tax. One way to reduce your capital gains tax is to spread your gains over time through seller financing.

It’s typically considered an installment sale for tax purposes, helping you spread the gains across multiple tax years. Speak with an accountant or other financial advisor about exactly how to structure your loan for the greatest tax benefits.


Drawbacks to Seller Financing

Seller financing comes with plenty of risks. Most of the risks center around the buyer-borrower defaulting, they don’t end there.

Make sure you understand each of these downsides in detail before you agree to and negotiate seller financing. You could potentially be risking hundreds of thousands of dollars in a single transaction.

1. Labor & Headaches to Arrange

Selling a home takes plenty of work on its own. But when you agree to provide the financing as well, you accept a whole new level of labor.

After negotiating the terms of financing on top of the price and other terms of sale, you then need to collect a loan application with all of the buyer’s information and screen their application carefully.

That includes collecting documentation like several years’ tax returns, several months’ pay stubs, bank statements, and more. You need to pull a credit report and pick through the buyer’s credit history with a proverbial fine-toothed comb.

You must also collect the buyer’s new homeowner insurance information, which must include you as the mortgagee.

You need to coordinate with a title company to handle the title search and settlement. They prepare the deed and transfer documents, but they still need direction from you as the lender.

Be sure to familiarize yourself with the home closing process, and remember you need to play two roles as both the seller and the lender.

Then there’s all the legal loan paperwork. Conventional lenders sometimes require hundreds of pages of it, all of which must be prepared and signed. Although you probably won’t go to the same extremes, somebody still needs to prepare it all.

2. Potential Legal Fees

Unless you have experience in the mortgage industry, you probably need to hire an attorney to prepare the legal documents such as the note and promise to pay. This means paying the legal fees.

Granted, you can pass those fees on to the borrower. But that limits what you can charge for your upfront loan fees.

Even hiring the attorney involves some work on your part. Keep this in mind before moving forward.

3. Loan Servicing Labor

Your responsibilities don’t end when the borrower signs on the dotted line.

You need to make sure the borrower pays on time every month, from now until either the balloon deadline or they repay the loan in full. If they fail to pay on time, you need to send late notices, charge them late fees, and track their balance.

You also have to confirm that they pay the property taxes on time and keep the homeowners insurance current. If they fail to do so, you then have to send demand letters and have a system in place to pay these bills on their behalf and charge them for it.

Every year, you also need to send the borrower 1098 tax statements for their mortgage interest paid.

In short, servicing a mortgage is work. It isn’t as simple as cashing a check each month.

4. Foreclosure

If the borrower fails to pay their mortgage, you have only one way to forcibly collect your loan: foreclosure.

The process is longer and more expensive than eviction and requires hiring an attorney. That costs money, and while you can legally add that cost to the borrower’s loan balance, you need to cough up the cash yourself to cover it initially.

And there’s no guarantee you’ll ever be able to collect that money from the defaulting borrower.

Foreclosure is an ugly experience all around, and one that takes months or even years to complete.

5. The Buyer Can Declare Bankruptcy on You

Say the borrower stops paying, you file a foreclosure, and eight months later, you finally get an auction date. Then the morning of the auction, the borrower declares bankruptcy to stop the foreclosure.

The auction is canceled, and the borrower works out a payment plan with the bankruptcy court judge, which they may or may not actually pay.

Should they fail to pay on their bankruptcy payment plan, you have to go through the process all over again, and all the while the borrowers are living in your old home without paying you a cent.

6. Risk of Losses

If the property goes to foreclosure auction, there’s no guarantee anyone will bid enough to cover the borrower’s loan debt.

You may have lent $300,000 and shelled out another $20,000 in legal fees. But the bidding at the foreclosure auction might only reach $220,000, leaving you with a $100,000 shortfall.

Unfortunately, you have nothing but bad options at that point. You can take the $100,000 loss, or you can take ownership of the property yourself.

Choosing the latter means more months of legal proceedings and filing eviction to remove the nonpaying buyer from the property. And if you choose to evict them, you may not like what you find when you remove them.

7. Risk of Property Damage

After the defaulting borrower makes you jump through all the hoops of foreclosing, holding an auction, taking the property back, and filing for eviction, don’t delude yourself that they’ll scrub and clean the property and leave it in sparkling condition for you.

Expect to walk into a disaster. At the very least, they probably haven’t performed any maintenance or upkeep on the property. In my experience, most evicted tenants leave massive amounts of trash behind and leave the property filthy.

In truly terrible scenarios, they intentionally sabotage the property. I’ve seen disgruntled tenants pour concrete down drains, systematically punch holes in every cabinet, and destroy every part of the property they can.

8. Collection Headaches & Risks

In all of the scenarios above where you come out behind, you can pursue the defaulting borrower for a deficiency judgment. But that means filing suit in court, winning it, and then actually collecting the judgment.

Collecting is not easy to do. There’s a reason why collection accounts sell for pennies on the dollar — most never get collected.

You can hire a collection agency to try collecting for you by garnishing the defaulted borrower’s wages or putting a lien against their car. But expect the collection agency to charge you 40% to 50% of all collected funds.

You might get lucky and see some of the judgment or you might never see a penny of it.


Options to Protect Yourself When Offering Seller Financing

Fortunately, you have a handful of options at your disposal to minimize the risks of seller financing.

Consider these steps carefully as you navigate the unfamiliar waters of seller financing, and try to speak with other sellers who have offered it to gain the benefit of their experience.

1. Offer a Second Mortgage Only

Instead of lending the borrower the primary mortgage loan for hundreds of thousands of dollars, another option is simply lending them a portion of the down payment.

Imagine you sell your house for $330,000 to a buyer who has $30,000 to put toward a down payment. You could lend the buyer $300,000 as the primary mortgage, with them putting down 10%.

Or you could let them get a loan for $270,000 from a conventional mortgage lender, and you could lend them another $30,000 to help them bridge the gap between what they have in cash and what the primary lender offers.

This strategy still leaves you with most of the purchase price at settlement and lets you risk less of your own money on a loan. But as a second mortgage holder, you accept second lien position

That means in the event of foreclosure, the first mortgagee gets paid first, and you only receive money after the first mortgage is paid in full.

2. Take Additional Collateral

Another way to protect yourself is to require more collateral from the buyer. That collateral could come in many forms. For example, you could put a lien against their car or another piece of real estate if they own one.

The benefits of this are twofold. First, in the event of default, you can take more than just the house itself to cover your losses. Second, the borrower knows they’ve put more on the line, so it serves as a stronger deterrent for defaults.

3. Screen Borrowers Thoroughly

There’s a reason why mortgage lenders are such sticklers for detail when underwriting loans. In a literal sense, as a lender, you are handing someone hundreds of thousands of dollars and saying, “Pay me back, pretty please.”

Only lend to borrowers with a long history of outstanding credit. If they have shoddy credit — or any red flags in their credit history — let them borrow from someone else. Be just as careful of borrowers with little in the way of credit history.

The only exception you should consider is accepting a cosigner with strong, established credit to reinforce a borrower with bad or no credit. For example, you might find a recent college graduate with minimal credit who wants to buy, and you could accept their parents as cosigners.

You also could require additional collateral from the cosigner, such as a lien against their home.

Also review the borrower’s income carefully, and calculate their debt-to-income ratios. The front-end ratio is the percentage of their monthly income required to cover all housing costs: principal and interest, property taxes, homeowner’s insurance, and any condominium or homeowners association fees.

For reference, conventional mortgage lenders allow a maximum front-end ratio of 28%.

The back-end ratio includes not just housing costs, but also overall debt obligations. That includes student loans, auto loans, credit card payments, and all other mandatory monthly debt payments.

Conventional mortgage loans typically allow 36% at most. Any more than that and the buyer probably can’t afford your home.

4. Charge Fees for Your Trouble

Mortgage lenders charge points and fees. If you’re serving as the lender, you should do the same.

It’s more work for you to put together all the loan paperwork. And you will almost certainly have to pay an attorney to help you, so make sure you pass those costs along to the borrower.

Beyond your own labor and costs, you also need to make sure you’re being compensated for your risk. This loan is an investment for you, so the rewards must justify the risk.

5. Set a Balloon

You don’t want to be holding this mortgage note 30 years from now. Or, for that matter, to force your heirs to sort out this mortgage on your behalf after you shuffle off this mortal coil.

Set a balloon date for the mortgage between three and five years from now. You get to collect mostly interest in the meantime, and then get the rest of your money once the buyer refinances or sells.

Besides, the shorter the loan term, the less opportunity there is for the buyer to face some financial crisis of their own and stop paying you.

6. Be Listed as the Mortgagee on the Insurance

Insurance companies issue a declarations page (or “dec page”) listing the mortgagee. In the event of damage to the property and an insurance claim, the mortgagee gets notified and has some rights and protections against losses.

Review the insurance policy carefully before greenlighting the settlement. Make sure your loan documents include a requirement that the borrower send you updated insurance documents every year and consequences if they fail to do so.

7. Hire a Loan Servicing Company

You may multitalented and an expert in several areas. But servicing mortgage loans probably isn’t one of them.

Consider outsourcing the loan servicing to a company that specializes in it. They send monthly statements, late notices, 1098 forms, and escrow statements (if you escrow for insurance and taxes), and verify that taxes and insurance are current each year. If the borrower defaults, they can hire a foreclosure attorney to handle the legal proceedings.

Examples of loan servicing companies include LoanCare and Note Servicing Center, both of whom accept seller-financing notes.

8. Offer Lease-to-Own Instead

The foreclosure process is significantly longer and more expensive than the eviction process.

In the case of seller financing, you sell the property to the buyer and only hold the mortgage note. But if you sign a lease-to-own agreement, you maintain ownership of the property and the buyer is actually a tenant who simply has a legal right to buy in the future.

They can work on improving their credit over the next year or two, and you can collect rent. When they’re ready, they can buy from you — financed with a conventional mortgage and paying you in full.

If the worst happens and they default, you can evict them and either rent or sell the property to someone else.

9. Explore a Wrap Mortgage

If you have an existing mortgage on the property, you may be able to leave it in place and keep paying it, even after selling the property and offering seller financing.

Wrap mortgages, or wraparound mortgages, are a bit trickier and come with some legal complications. But when executed right, they can be a win-win for both you and the buyer.

Say you have a 30-year mortgage for $250,000 at 3.5% interest. You sell the property for $330,000, and you offer seller financing of $300,000 for 6% interest. The buyer pays you $30,000 as a down payment.

Ordinarily, you would pay off your existing mortgage for $250,000 upon selling it. Most mortgages include a “due-on-sale” clause, requiring the loan to be paid in full upon selling the property.

But in some circumstances and some states, you may be able to avoid triggering the due-on-sale clause and leave the loan in place.

You keep paying your mortgage payment of $1,122.61, even as the borrower pays you $1,798.65 per month. In a couple of years when they refinance, they pay off your previous mortgage in full, plus the additional balance they owe you.

Of course, you still run the risk that the borrower stops paying you. Then you’re saddled with making your monthly mortgage payment on the property, even as you slog through the foreclosure process to try and recover your losses.


Final Word

Offering seller financing comes with risks. But those risks may be worth taking, especially for hard-to-sell properties.

Only you can decide what risk-reward ratio you can live with, and negotiate loan terms to ensure you come out on the right side of the ratio. For unique or other difficult-to-finance properties, seller financing may be the only way to sell for what the property’s worth.

Before you write off the returns as low, remember that your APR will be far higher than the interest rate charged.

Beyond the upfront fees you can charge, you’ll also benefit from simple interest amortization, which front-loads the interest so that nearly all of the monthly payment goes toward interest in the first few years — the only years you need to finance if you structure the loan as a balloon mortgage.

Just be sure to screen all borrowers extremely carefully, and to take as many precautions as you can. If the borrower can’t qualify for a conventional mortgage, consider that a glaring red flag. Seller financing involves risking many thousands of dollars in a single transaction, so take your time and get it right.

Source: moneycrashers.com

Obama’s Broad Based Refinancing Plan

It took a few weeks, but we’ve finally got concrete details regarding the Obama Administration’s so-called “Broad Based Refinancing Plan.”

First off, homeowners with Fannie Mae and Freddie Mac-backed mortgages who are unable to refinance their mortgage to take advantage of the near-record low mortgage rates will be able to go through HARP 2.0.

HARP 2.0 was introduced back in October to address the needs of homeowners who were too deeply underwater to meet the max loan-to-value ratio cap of 125 percent.

Borrowers with underwater mortgages backed by Fannie and Freddie will continue to go through this program assuming they meet the guidelines.

So nothing really changes here, except perhaps the actual adoption of the problem, which appears to have been sluggish thus far.

Refinancing Program for Non-GSE Mortgages

What about all the underwater borrowers with non-GSE mortgages, those that are not backed by Fannie and Freddie?

Well, Obama is “calling on Congress” to pass a new refinancing program geared toward these homeowners, managed by the FHA.

It would be open to all those with non-GSE mortgages (less jumbo mortgages) who have kept up with their mortgage payments.

The big distinction here is that it requires Congressional approval, which may be an uphill battle. So really it’s just an idea at this point, not a live program.

Still, these are the proposed guidelines:

  • Borrower is current on mortgage for past 6 months and hasn’t missed more than one payment in previous 6 months.
  • Minimum credit score of 580
  • Loan amount does not exceed max conforming loan amount
  • Loan is tied to a single-family, owner-occupied property

Borrowers who meet these very simple guidelines will apply via a streamlined process designed to make it easier and cheaper to refinance.

To determine eligibility, a borrower must only prove they are currently employed. However, even the unemployed can qualify if other requirements are met and they present “limited credit risk.”

A new tax return and appraisal is not necessary to refinance.

The Obama administration will work with Congress to set loan-to-value limits for loans submitted to the program.

While a number hasn’t been set, the Administration used 140 LTV as an example, noting that mortgage lenders could write down the balance of mortgages that exceed that number.

How Will the Refinance Program Be Paid For?

Good question. Well, the cost of the refinancing program is estimated to range anywhere from $5 to $10 billion (quite a range isn’t it).

To avoid any taxpayer burden, the refinancing plan will be fully paid for by the proposed “Financial Crisis Responsibility Fee,” which imposes a fee on the largest financial institutions.

This fee will be based on the size of the institution and risk of their activities.

The FHA, who is set to manage the program, will even pay for a borrower’s closing costs if they choose to go with a shorter-term mortgage, such as a 15-year mortgage.

Those who refinance into mortgages with terms of 20 years or less will have their closing costs paid for the FHA. The GSEs will do the same for HARP 2.0 borrowers.

The Administration hopes this will promote responsible borrowing and reduce the amount of time it takes for borrowers to get back above water.

HAMP Expansion

The existing Home Affordable Mortgage Program is also being expanded to help more borrowers receive assistance.

The first-lien mortgage debt-to-income ratio limit of 31% apparently eliminates certain borrowers from the program because it doesn’t address other monthly obligations.

So the program will consider secondary debt with more flexible debt-to-income criteria.

Additionally, rental properties will be added to the program so long as a tenant currently occupies them or the borrower intends to rent the unit.

Finally, the Treasury will offer bigger incentives to the owners of mortgages who agree to write down principal.

Currently, owners receive between 6 to 21 cents on the dollar for principal reductions. This amount will be tripled to 18 to 63 percent on the dollar.

Fannie Mae and Freddie Mac, who do not currently receive compensation for principal reductions on loan modifications, will also receive principal reduction incentives

The Losers

The obvious losers are holders of jumbo mortgages, who are more than likely homeowners in hard-hit states like California and Florida where home prices have plummeted.

There doesn’t appear to be any relief for this type of homeowner, which is certainly a concern.

Additionally, those behind on their mortgage payments won’t benefit from this new refinance program.

So really only borrowers who have been able to make their mortgage payment each month will benefit.

Also, investors who hold non-GSE loans won’t see any benefit. And those with poor credit scores will be out of luck.

In other words, plenty of homeowners will miss out here, but it’s a tall order to include everyone.

Homeowners Bill of Rights

For the record, the Obama Administration also introduced several other initiatives, including a “Homeowner Bill of Rights,” which will once again revamp and simplify mortgage disclosures.

This includes a foreclosure appeals process and guidelines that prevent conflicts of interest that wind up doing harm to homeowners, along with a joint investigation into loan origination and servicing abuses.

Major banks and the GSEs will also provide up to 12 months forbearance for unemployed borrowers.

Additionally, a pilot program that transitions foreclosed property into rental housing will be employed to stabilize neighborhoods and get the housing market out of its funk.

Final Thoughts

At first glance, it sounds like an awesome program to save housing once and for all. But upon closer inspection, a lot of homeowners are left out, as mentioned above.

Along with that, the borrowers that are targeted may not really be the ones that need help.

The reality is that millions of people who are currently behind on their mortgages are going to lose their homes. And this program won’t change that. It’s simply going to help those on the brink, or even those that don’t even necessarily need assistance to make their mortgage payments, but want to catch a break after buying at the wrong time.

Sure, if all goes well, it could reduce foreclosures to some extent, bolster home prices somewhat, and get more money flowing into the economy. But it still requires Congressional approval to work. And even then, we won’t see a housing recovery without meaningful economic improvement.

Source: thetruthaboutmortgage.com