Surprise Prevention Advisory: 10 New Need-to-Knows for Real Estate Invest-Hers

A couple of years ago, a mortgage company plastered billboards everywhere with the adage, "Surprises are for Birthday Parties," tapping into the ubiquitous aversion to the nasty surprises that arise during real estate transactions. The number one cause of freak-outs during real estate transactions is surprises — especially those that require last minute cash or documentary contortions to close the deal. 

SURPRISE PREVENTION ADVISORY 
Smart women investors educate themselves on the transactional how-to's. Experienced women investors take it a step further. They devise their own systems and strategies for property acquisition and transactions, improving and evolving the system every time they buy, sell or exchange properties. The problem is that the market and mortgage dynamics have undergone a massive sea change. Call it the credit crunch, subprime mortgage meltdown, foreclosure frenzy or simply (my personal favorite), the best buyer’s market since World War II. Real estate and mortgage market dynamics are changing faster than a new Hollywood Mom loses her baby weight! The average how-to book is published two years after it is written, so the books you can buy now contain none of the new tricks of this rapidly evolving trade. Web and seminar resources are more up-to-date, but they can also be tough to filter the wheat from the chaff, making it confusing to know which resources are trustworthy. 

FAST MOVER MOVING FASTER 
As an active real estate broker, the team of agents, mortgage professionals, inspectors and appraisers I use has just scaled the very steep learning curve involved in getting deals done in this new market. To help you plan for smooth and successful transactions, I propose ten new rules, action items, strategies and considerations for taking advantage of the spoils of today's real estate market.

ACQUIRING & MANAGING PROPERTIES
1. It is tempting to invest in properties in "slumburbia" — those outlying suburbs where huge amounts of new-ish (less than 10 years old) housing stock is currently boarded up and in foreclosure. Consider that many of these areas are far from the booming economic and job centers tenants need to be located near, and have poor access to public transportation. As gas prices soar, many of these areas may struggle to recover values, and may become less attractive to tenants. People cannot afford top rents for investor-bait luxury and executive-type homes and shell out $5.00 per gallon for a 150- mile round trip commute. If you buy in these areas, negotiate aggressively on price and buy housing that is appropriate for the local workforce. 

2. Rental units with great “walkability” are positioned for strong long-term rental and resale prospects. Enter a property’s address at www.WalkScore.com to see how walkable it is to the amenities you’ll use as selling points to tenants and, eventually, buyers. Consult neighborhood scores in Where to Live Books at wheretolivebooks.com. Great locations have better marketability, rentability and appreciation than lesser locations. 

3. Keep the gas issue in mind when you consider whether you want to manage your properties yourself. My pitch is that you should nearly always outsource property management. When you consider the cost of gas for all those trips to pick up rents, check out toilets and all the other details involved in property management, you can quickly see the value of a good property manager. That doesn’t begin to account for the opportunity costs of the time you spend there, which you could be spending much more profitably. 

4. Stop watching the news. Well, you can watch it, but don't be stressed by it. Harvard University's Joint Center for Housing Studies just projected that there will be more than 14 million new American households over the next decade — which is several million more than were added during the 1995 to 2005 housing appreciation run-up. Over the long- term, demand and appreciate will rebound. Use this market as an opportunity to position yourself to profit, rather than allowing alarmist news reports to stun you into inaction. 

Also, stop trying to predict the bottom to the exact minute. It’s human nature to wait too long. I know people who have been waiting for the bottom since 1992, and fervently wish they had put their crystal balls away and bought everything they could back then. By now, they would have had a 250 percent return on investment. When it makes it into the headlines the bottom will have already passed. 

(Publisher's Note — This magazine called the market bottom in the first quarter of 2008. Trends in leading micro markets turned positive and are spreading from five-star to four-star neighborhoods as demand rebounds.) 

5. If you are seeking foreclosure-related bargains, get educated! Understand the different phases of the foreclosure process, and the different levels of bargain and drama involved with doing deals involving lenders at the various phases of foreclosure. If you are buying a short sale, for example, understand that the likelihood of closing the transaction is statistically very low, that the property is likely to come back on the market as an REO (real estate owned by the lender), and that you have very little control over whether the seller's lender approves your contract. Expect the transaction to take three to six months to close. 

If you are buying an REO, expect a quicker close, but understand that the bank may choose the escrow company — taking many elements that your real estate agent normally controls out of their hands, that you may need to turn utilities on for inspections, and that the need for inspections is heightened by the relaxed disclosure requirements imposed on banks. If you choose to do a deal with the bank, expect the unexpected and be prepared to roll with the punches of a non-normal transaction in exchange for the prospect of a good deal. You can find good properties at better than retail prices with clean title and no delays by contacting local wholesale property vendors. 

Also, don't underestimate the bargains you can get on plain, vanilla, non-foreclosure properties in this market. 

REFINANCING PROPERTIES & MORTGAGES IN GENERAL 
6. Stated income loans are gone. This makes it much tougher to refinance income property mortgages. Document your rental incomes impeccably and keep your rental properties updated to bolster their appraisal values. Save any excess rental incomes. Many landlords refinancing loans that are about to adjust are discovering that few mortgage lenders will carry a second mortgage on their income properties, so they need to bring in funds to close their refinance transactions.

7. Because of all the daily mortgage guideline changes, plan the refinance of your adjustable mortgage as far in advance as possible. Even a year or two ahead of an adjustment is not too early to ask your mortgage broker to start helping you strategize. You might discover changes, like the fact that Option ARMs and stated income loans are almost non-existent, which may lead you to sell rather than refinance. Income properties don’t sell overnight, so give yourself as much lead time as possible.

8. Attention self-employed investors — because of the elimination of stated income loans from the marketplace, be careful not to be overly aggressive in taking deductions from your tax returns. You may pride yourself on being able to whittle a $250,000 annual income to $3.42 adjusted gross income, but many mortgage lenders are now looking at that AGI figure for income documentation. If you need to refinance over the next few years, keep in mind that the AGI you claim on the two years tax returns prior to the year in which you qualify will be the basis for both the income you claim and the debt-to-income ratios you are charged by your mortgage lender. Be careful to claim sufficient income to qualify for the loans you’ll need. 

LIQUIDATING PROPERTIES
9. If you are selling an entry-level income property, i.e. one that is priced under the federal loan limits for your area of $729,750 in very high cost of living areas and $417,000 in the rest of the country, be aware that a huge number of your pool of qualified buyers will be using FHA or other government financing. 

These loans may take a little longer to close and are very documentation-heavy but, most importantly, will have: (a) fees that the buyer is not allowed to pay and are expected to be paid by seller, and (b) condition requirements, repairs that may need to be done for the transaction to close. If you're offloading a shabby property your tenants trashed, know that the lender may require that broken windows be repaired, slapdash electrical be brought up to code, etc. No, they can't force you, the seller, to do these repairs, but you might wind up in a situation where no qualified buyer can close on the place unless the repairs are done. Many of these buyers won’t have the cash to do repairs themselves. By default, if you want to sell, you’ll need to do the repairs. 

EXCHANGING PROPERTIES 
10. Section 1031 exchanges have very tight timelines — if you fail to close escrow on your replacement property within your allotted number of days, you will have to eat a very unpleasant meal of capital gains taxes. I'd advise you against buying a short sale listing if you're up against these time frames — it's just highly unlikely that you’ll close on time, and if you do, it'll be only after 120 days of night sweats. If your replacement property is a bank-owned property, start early and stay diligent — some banks and asset managers close these deals in 30 days no matter what; others allow these transactions to drag on for months. You are in no position to have a late close that puts you outside of your exchange period. If you're buying bank-owned, start early enough that you can execute a Plan B if closing runs late. 

SOURCE 

Tara-Nicholle Nelson, Esq. is a real estate broker and attorney, Founder and Chief Visionary of REThinkRealEstate.com and the author of The Savvy Woman’s Homebuying Handbook: 150 Insider Secrets, Decision-Making Guides and Online Resources, plus the One Action Plan You Need. For more real estate resources for the savvy woman — and Tara's B.S. Alerts — visit REThinkRealEstate.com.