What Papers Do You Sign When You List Your House For Sale?

contract-sale-houseIn listing your house for sale, you will encounter a variety of required real estate agreements and forms. Don’t worry, it only seems like you are signing your life away. In reality, much of what you are signing are disclosures to the buyer about your house. Here is a list of the papers you normally sign, with a brief explanation of each.

Definitions of Working Relationships
This document defines the relationship between you and your real estate sales professional.

  • Seller’s Agent – Agents represent ONLY the seller’s interests in transactions, above their own interests.
  • Transaction Broker – Transaction Brokers help both buyers and sellers “broker a deal,” but are not Agents of either party.

Exclusive Right-to-Sell Contract
This is a contract between you (the seller) and your sales professional that defines the details and terms of the transaction, such as the sales price, commission amount, length of contract, and much more.

Disclosures

  • Seller’s Property Disclosure – Tells the buyer about certain conditions existing in your house.
  • Lead-Based Paint Disclosure – Tells the buyer if there is lead-based paint in your house. Only possible in houses built before 1978.
  • Square Footage Disclosure – Tells the buyer how the square footage in your house was determined.
  • Source of Water Addendum  Defines where the buyer will get their water, such as a municipality, like Fort Collins or Loveland, or a well.
  • Common Interest Community Disclosure – Tells the buyer what your HOA provides and charges.

Authorizations

  • Request for Utility Information – Allows the brokerage to inquire how much your utility bills are.
  • Request for Homeowner’s Association Documents – Allows the brokerage to obtain copies of your HOA documents from the HOA.
  • Lock Box Agreement – Allows the brokerage to install a lock box so other real estate agents may show your house.
  • Loan Payoff Information – Allows the brokerage to find out what is the payoff amount of your loan.

Closing Instructions
Defines who is the title company and how the closing process will work.

If you have any questions about Listing Agreement and Forms, please feel free to contact Gary Clark. 

Fair Housing Act

Equal Housing OpportunityIf you rent residential property, you must comply with the Fair Housing Act. The act, passed in 1988, establishes seven protected classes of people. Therefore, you cannot discriminate on the basis of race, color, religion, national origin, sex, handicap status, or familial status.

Because of the protected classes, landlords are not allowed to take any of the following actions:

  • Refuse to rent or negotiate for housing
  • Make housing unavailable
  • Deny a dwelling
  • Set different terms, conditions or privileges for rental of a dwelling
  • Provide different housing or facilities
  • Falsely deny that housing is available for inspection or rental
  • For profit, persuade owners to sell or rent
  • Deny anyone access to or membership in a faculty or service related to the sale or rental of housing

Prohibited actions are threatening, coercing, intimidating and interfering with prospective renters. You cannot advertise or make statements that indicate you do not rent to protected classes.

You can still be “discriminant” with who you rent to, just not in violation of the Fair Housing Act. So on what basis can you discriminate? On things like credit history, work history, and rental history.

The Fair Housing Act is an excellent ideal to strive for. In practice, it’s not always easy or  straight-forward and, should someone file a complaint against you, there are serious consequences.

The good news is that if you treat all people with equality and respect, and use common sense, you’ll be fine.

Making an Offer on a Property

First-Time-Home-Buyers-ExcitedWhen you find a property that you want to buy, you make an offer on it. Real estate offers are in writing, and inform the seller of how much you are willing to pay. Your offer consists of a Contract to Buy Real Estate, disclosures and addendums, proof of financing, and an earnest money check.

Contract to Buy Real Estate
This is a standard Colorado contract, prepared by your real estate agent, which defines the price, terms and timeline of your offer.

Disclosures and Addendums
There are numerous supporting documents to the Contract. These are the most common ones, although there can be more.

  • Source of Water Addendum – Informs the buyer where the property’s water supply comes from. This is important for rural properties and new subdivisions, where the water source could be less reliable than established municipalities.
  • Seller’s Property Disclosure – Informs the buyer about what the seller knows about the property.
  • Square Footage Disclosure – Informs the buyer where seller came up with the square footage of the property.
  • Closing Instructions – Defines who is the closing company (Title Company).
  • Lead Based Paint Disclosure – Only required for houses built prior to 1978. Informs the buyer of the seller’s knowledge of the presence of lead-based paint on the property.

Proof of Financing or Funds
The purpose is to inform the seller that you are a “serious” buyer with a down payment and loan (or the cash) to purchase their property. Normally you will submit a Pre-qualification Letter from a bank or mortgage company. Even better is a Pre-approval Letter, which means you have been through a more advanced process called underwriting.

Earnest Money Check
The final part of your offer is an Earnest Money Check. Earnest money is a “deposit” on the property, held in an Escrow Account. So be aware…your Earnest Money Check will be cashed; have enough in your account so the check will clear!

Money in an Escrow Account is neither the buyer’s nor the seller’s; it’s held for the benefit of both parties. At the Closing, the Earnest Money is transferred to the seller and is applied to the down payment. If the transaction is terminated prior to the Closing, the money reverts back to the buyer (assuming all contract terms were met).

After You Submit Your Offer…Let The Negotiations Begin
Wait to hear from the seller. They are required to respons prior to the Acceptance Date. The seller has three options:

  1. Accept your offer as-is
  2. Counter your offer
  3. Reject your offer

I hope your buying strategy is sound and you are successful with your offer. Hearing “YES” on a contract is one of the most exciting days of your life.

Mortgage Rules Changes Are Coming in 2014

Mortgage_rulesThe world of mortgage lending has changed significantly since the housing bubble burst. Mortgage lenders have returned to traditional loan standards that require extensive documentation of income and assets for a loan approval.

Government regulatory agencies also continue to react to the housing crisis, with more adjustments to mortgage requirements set to go into effect in 2014:

Qualified Mortgage Rules

Whether you’re thinking of buying a home or mulling over refinancing your mortgage, Jan. 10, 2014, could be an important date for you to remember. The Consumer Financial Protection Bureau is in the process of implementing regulations to meet goals set forth by the Dodd-Frank Act in Congress, which was meant to correct the errors that led to the housing crisis. The CFPB’s “Qualified Mortgage,” or QM, rules go into effect in January. Essentially, these rules require lenders to prove borrowers’ ability to repay a loan by meeting several guidelines, including a maximum debt-to-income ratio of 43 percent. While many lenders already limit borrowers to a similar maximum debt-to-income ratio, the new rules won’t allow for any compensating circumstances such as significant cash reserves or a large down payment to be considered in order to offset a higher debt ratio.

If you have credit problems or a high debt-to-income ratio, you may want to push through your loan application for a refinance or home purchase to make sure you close your loan before the new rules go into effect. However, many lenders are already using QM standards in order to make sure they’re in compliance with the regulation. Mortgages that don’t meet QM standards will have to be held by the lender rather than sold to Fannie Mae and Freddie Mac, so most lenders are careful to meet the new standards.

The 3 Percent Rule

The new QM requirements also limit fees for originating a loan to no more than 3 percent of the loan amount. If you’re financing a more costly home, such as a $400,000 home or more, the lender can easily keep fees under 3 percent, which in this case would be $12,000. However, if you’re refinancing a smaller loan balance or purchasing a less expensive home — for example, for $80,000 — the lender might find it more difficult to keep all fees under $2,400. Mortgage lenders are less likely to offer loans for smaller amounts since they won’t always recoup their costs and make enough profit to pay their staff. If you need a small loan, you may want to push to get it closed before Jan. 10, 2014.

Self-Employed Borrowers

One particular group of borrowers will most likely be impacted by the QM rules: self-employed borrowers. These borrowers already are heavily scrutinized and find it more difficult to obtain a mortgage because they must prove their income based on tax returns and profit-and-loss statements, rather than standard paystubs and W2 forms. The “ability-to-repay” feature of QM rules requires all borrowers to prove they have the cash flow to make payments on their mortgage. Self-employed borrowers often have fluctuating income and rely on cash reserves to pay bills in-between payments, but the emphasis on cash flow can make it harder for lenders to approve a loan even for someone with significant funds in the bank.

Potential Lower Loan Limits

The Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, announced in October that plans to reduce the maximum loan limits for conventional conforming loans will be delayed until later in 2014. Typically, loan limits are adjusted on Jan. 1 of each year, but the agency decided to wait to see the impact of the introduction of QM rules before making changes. Currently, the limits are $417,000 in most housing markets and rise to $625,500 in high cost areas. If you need a mortgage near these limits, it would be wise to close your loan earlier in 2014 rather than later in case limits are lowered.

If you would like a referral to a qualified lender, please contact me. 

Reprinted from Realtor.com, December 2013

Mortgage Debt and Inflation: An Investor’s View

Inflation-rateInvestment advisors are nearly unanimous in saying that inflation will hit the USA in the next few years. So what is the thinking on mortgage debt in inflationary times? Overall, debt should be avoided whenever possible, in my opinion. However, a manageable, intelligent mortgage on your residential rental property can be good.

Remember that debt on a rental property isn’t paid by you; it’s paid by tenants. (As long as you made a reasonable down payment, such as 20-25%, and your payments and maintenance costs cash flow.) But what happens to your debt if the inflation rate hits 10%?

Rents would presumably rise with inflation. Your mortgage payments, on the other hand, would remain fixed (assuming you have a fixed rate loan). Certain costs, such as maintenance, utilities, insurance and taxes, would all go up too. All in all, your cash flow would probably improve. You could either pocket the extra revenue or use it to pay down your mortgage faster.

What about your loan principle? Let’s say you borrowed $150,000 at 5% fixed rate, prior to inflation taking off. Your payment would be $805.23. Now let’s assume that interest rates climb to 8%. The payment at that rate would be $1,100.65. In five years that makes a difference of $1,477.10. Suddenly your 5% loan seems like pretty cheap money.

Now consider that the value of your property would also rise with inflation. If you bought your property for $200,000, before inflation took off, it would likely increase at the 10% inflation rate. In 5 years your house would conceivably be worth $292,820.

Investment advisors say solid inflation hedges produce income, allow prices to rise along with costs, and increase in value along with the inflation rate. Rental property meets all these criteria.

Every way I evaluate rental property against inflation, it comes up favorably. You have to compare it against own investment criteria, of course. And you have to want to be in the business. But if it’s the right thing for you, I think you’ll find that rental property will protect your wealth when inflation hits.

What Type of Investment Property Should You Buy?

house-for-rentOver time, investors develop a certain type of property they prefer to own. Some like single-family houses, others like duplexes, townhouses or condos. It’s simply a matter of taste.

For new investors who don’t have the benefit of experience, what is the best type of property to buy? There’s no right or wrong answer, all properties have advantages and disadvantages. Let’s look at the merits of each type, based on a few criteria.

Profitability. Properties without Home Owner Association (HOA) dues tend to be more profitable than properties with HOAs.  To be fair, if you don’t pay HOA dues, you still have repairs and maintenance costs so you’ll need to set aside money in a reserve account. The difference is that HOA dues include administrative expenses and profit, which you save by doing it yourself.

Management. Townhouses and condos are easier to manage than houses. That’s because associations maintain townhouses and condos, while owners maintain their houses. (To be clear, by “maintain” I’m referring to the exterior.) Newer houses are easier to manage than older houses because they take less maintenance. The easiest form of management is to hire a property management company.

Ease of Renting. When it comes to rentability, my experience is that people like to rent houses the best, townhouses second best, and condos third (depending on the condo configuration). Why? Privacy, personal control, noise.  In today’s world of 2% vacancy rates, however, you’ll find you can rent practically anything without much effort. Who knows how long that will be the case, however.

Multiple Properties. If you plan on owning several rentals, management time is your biggest consideration. If you are busy and time is an issue, townhouses and condos are your best option. If you have time for management and want to maximize profit, look for newer houses without HOAs, but have very efficient management systems in place.

The best advice I ever got was: think about the tenants you want to deal with and buy housing they want to live in. The caveat to that statement is to stay within the boundaries of fair housing laws. Do you like working with college students, professionals, section 8 folks, or factory workers?  Then buy properties that are ideally located, priced, and set up for those prospective tenants.

If you would like to explore investing in rental property, please contact me. My company, Rooftop Property Management, owns one of each type of property and I’ll be glad to share what I’ve learned over time.

Treat Your Rental Property Like a Business

What have I done!?When you have one rental property, it’s not tough to handle. But what happens when you have multiple properties? Unless you are organized, you can miss lease renewals, forget maintenance schedules, and get behind on your accounting.

What if you treated your rental property as a business? Successful businesses organize important tasks into functional areas, devise systems, and build tools to ensure work is done efficiently, correctly, and consistently.

The best time to organize your rental business is when you only have one property. You’ve got more time and aren’t under pressure.

Start by identifying common tasks, and grouping them into functional areas. Here are typical functions performed by the average rental property owner.

Management – oversees the company vision, buys new properties
Property – repairs and maintains properties
Residents – collects rent, signs leases, handles resident issues
Accounting – deposits money, pays bills, handles bank accounts, prepares for taxes

For the basic tasks you perform over and over, make sure you have standardized ways of completing them. Write down a list of steps to complete these tasks and, if necessary, make checklists to ensure you don’t forget anything.

By identifying important tasks, organizing them into functional areas, and defining how you will perform the tasks, your life will be less stressful when you buy additional properties. Not only that, you’ll make more money. You won’t have to hire a property manager and pay them 10% of your rental income.

This approach is well documented in the classic book The E-Myth Revisited by Michael Gerber. According to Gerber, “great people have a vision of their lives that they practice emulating each and every day. They go to work ON their lives, not just IN their lives.”

Surely you started a rental property business because you had a vision of yourself retiring someday, working for yourself, or diversifying your investments from the stock market. If that’s so, then why not go to work on that vision and on the life you want?