A guide to negative equity and how to overcome the problems associated with negative equity, from remortgaging with a 125% mortgage to home improvements

Economic downturn-related property price declines have led to an increase in property owners experiencing a loss of equity. Despite the undesirability of negative equity, the problem will not immediately affect those planning to stay in a property for the longer term. However, negative equity may present a more significant issue if considering moving, remortgaging, or taking out a second mortgage.

Property Investment: What is Negative Equity?

In the first instance, negative equity is simply that an individual has a greater level of outstanding finance on a mortgage than the property’s value against which the mortgage is secured.

For example, if an individual purchased as property for £100,000 with a £25,000 deposit and thus borrowed £75,000, then the individual is said to have positive equity of £25,000. It is market value less the outstanding balance of the mortgage.

However, if the property were a decline in value to a market value of £74,000, then the homeowner would then experience negative equity of £1,000 or the market value (£74,000) less the outstanding mortgage balance of £75,000.

Property Investments: The Problem of Negative Equity

In essence, negative equity means that if one were to sell a property, the money raised from its sale would not cover the amount owed to the mortgage provider. If an individual is not looking to make any immediate changes to property arrangements, this does not create a problem.

However, suppose individual wishes to move houses or sell the current property. In that case, negative equity will mean that the individual must find a way to fund the shortfall to avoid remaining trapped in the existing property. There are numerous ways of financing the shortfall:

• Time – For many, negative equity is simply a product of buying a property at the height of the property cycle. In many cases, merely spending a few more years on the current property and waiting for property prices to increase again may present an automatic solution.
• Home Improvements – One way to tackle negative equity is to increase the property’s value to fund the shortfall between the mortgage’s outstanding balance and the market value. One way of doing this is to invest in a program of home improvements to drive up the property’s value.
• Mortgage Products – Another option for those suffering from negative equity but still wishing to move is to consider taking on additional debt to fund the shortfall. Products such as the 125% mortgage offer those suffering from negative equity one option to fund the shortfall. However, such remortgaging options can be expensive, and the borrower needs to consider whether or not they can afford the additional repayments.

In summary, negative equity is a scenario where an individual’s outstanding mortgage on a property is greater than that of the value of the property itself. Whilst negative equity is an undesirable condition, the scenario in itself does not present any immediate financial dangers. However, negative equity can make the prospect of moving houses or remortgaging a difficult one.

Investing in real estate may be profitable or expensive. Therefore, landlords must take measures to protect themselves financially and personally.

Landlord Self-Protection and Investment Protection, but some things can be expected rather than anticipated. These instances are what will be discussed here.

Protecting the Dwelling and Your Pocketbook

Numerous catastrophic occurrences can happen to homes and property. Fires, water damage, wind and hail, theft, vandalism, earthquakes, hurricanes, floods, tidal waves and lightning strikes are just a few. Not many can afford the luxury of rebuilding their home or rental dwellings without the assistance of payment from the insurance company. First and foremost, before placing the residence for rent and interviewing prospective tenants, the owner must take steps to protect himself and his property first by purchasing Landlord Insurance.

Landlord Insurance, also referred to as Dwelling Coverage, provides financial security to landlords and protection of their rental dwellings against occurrences that may prove financially detrimental to them, such as loss of the structure caused by a fire or tornado. Furthermore, it defends the insured against claims brought against him due to negligence or liability issues related to the covered property. Coverage is subject to the policy conditions and exclusions outlined in the policy.

Finding the Right Tenant

Finding and keeping a suitable tenant is probably the most challenging process to complete. After accepting numerous rental applications and interviewing the most qualified, many landlords become frustrated and let their guard down. At this point, the landlord may be pressed for time due to an upcoming mortgage payment looming in the not too distant future and grudgingly selects a tenant whom he would not have considered initially. That one careless decision may have negative ramifications in the long run.

A proper and unhurried method of screening prospective tenants must be done to alleviate potential problems. But, of course, there are no foolproof ways to guarantee the perfect tenant will be found in all instances. It is just a guideline to alleviate future landlord-related headaches potentially.

• Have a prospective tenant thoroughly complete a written rental application. It is a crucial step. It will provide the current and previous employers and landlords, which will assist in the decision-making process. Thoroughly review the provided information and call the employer, the references and previous landlords.
• Have the applicant sign a credit check authorization form which will allow the landlord to obtain a credit report about the applicant. The tenant’s spending habits and debt to credit ratio will reveal whether or not the applicant may have financial difficulties.
• Provide a written rental agreement, so all rules and expectations are clear. Many landlord-tenant disputes end up in court because there isn’t enough communication, and people don’t understand each other very well.
• After selecting the right tenant, make sure to obtain at least the first month’s rent and a deposit of equal value. The warranty is to be kept in a fiduciary account and be returned to the tenant at the end of the lease period. Remember that any damages caused by the tenant, fewer issues relating to wear and tear, maintenance and deterioration, can be deducted from the refundable deposit.
• Before the tenant moves in, complete a thorough walk-through with the tenant. A walk-through form is a checklist that identifies any damages or concerns to the rental before moving in.

By taking these steps and putting forth the efforts of thoroughly screening tenants, future problems may be alleviated.

Property options explained – how to control real estate without actually owning it.

Property options are one tool in the real estate investor’s toolbox, which is a compelling way to control a property without actually having to pay for it. Sure, a small payment is made, and a contractual agreement is reached. However, in essence, if you have an option over a piece of real estate, you have more control over it than the registered owner of it.

Real estate options have been used widely in the past, but surprisingly sparingly these days, probably because most people don’t know how it works and find the whole process a bit too difficult. That’s a bit of a disappointment because they can be an excellent way for real estate investors to expand their portfolios and build their wealth. That’s why I learned how it works because I saw the potential, and I got a little excited.

Let’s say, for example, you come across a property that’s a little run down in an area that’s experiencing decent population growth. Since the owners bought the house a decade ago, real estate prices have not doubled in size. After talking to the couple, you learn that they would like to sell because they need the money but are a bit fearful of the process and price for the property. You decide to buy the property to boost its value. So you buy an option over the property – you pay them to say $2,000 today in exchange for the right to buy the property at a set predetermined price (say $250,000) in the future (say the next two years).

Options are appealing since the conditions may be negotiated between the parties. The time limit to the option’s expiry may differ, as may the dollar figure, but the principle remains the same. You now control that property, and it cannot be sold while you hold that option. So this allows you to go then and seek out a buyer for the property and sell it. However, how does it work — how can you sell a property you do not own? Easy!

Say six months later, you find a buyer for the property – and you negotiate a price of say $300,000 for the property. Great! You hold the option over the property, right, so you tell the owners, it’s time to go, this is what’s happening, I’ve found a buyer, isn’t that great! They’re happy because they have the $2,000 you paid them for the option, plus you give them the set price for the property, being $250,000. They’ve made a tidy sum in capital gains over the period they’ve owned it. You’re happy, too, because you get the $300,000 from the buyers! Deduct the $250,000 you give the owners and the $2,000 for the option; that’s a profit of $48,000 in 6 months!

Real estate options can work for many real estate investors and businesses, but you must be sure of the laws in your state or territory. It is one of those investment areas where it makes good sense to lean on your team a bit. Use your lawyer to draw up the contracts and real estate contacts to source buyers and sellers. Sometimes you’re just the person to marry them up – for an option and a fee, of course. Enjoy!

If you’ve never bought a foreclosure property before, this article provides you with the steps you need to buy a foreclosed home.

The current market has numerous foreclosed houses; it’s an excellent opportunity for first-time homebuyers and investors alike to get a good deal on a real estate investment. When the mortgage rates are low, it’s an even better time to purchase property and depending on the real estate market that you desire to buy property in; you may get just the deal you are looking for.

Real Estate Investment

To acquire a foreclosed property, you will need an experienced and licensed real estate broker or agent, earnest money, proof of funds or a pre-approval letter and down payment, if required. However, according to the article, “The Safest Ways to Buy Foreclosures,” posted by Bankrate.com at the MSN Money website, many banks will loan you the total price of a foreclosure property if you have good credit. In addition, the earnest money that’s required represents your good faith or sincerity in purchasing the property, and a pre-approval letter for a mortgage loan will typically suffice as proof that you are qualified to buy the property.

Buying Foreclosure Real Estate

The following steps will help you in your endeavour to purchase foreclosure real estate property:

• You should first choose a lender or a bank to get pre-qualified or pre-approved for a mortgage loan.

You can either go into the bank or apply online at a reputable mortgage lending company. As long as you qualify for a loan with the required credit standing and credit scores, your lender will let you have a pre-approval letter to give to your real estate agent. A pre-approval letter does not guarantee mortgage acceptance. It is because, in the home buying process, unexpected incidents can occur to hinder the process.

Nevertheless, many foreclosure companies, such as Fannie Mae, will not even consider your offer on the home unless you provide the company with a pre-approval letter to let them know that you are eligible and qualified to purchase the property. You can also prove that you have the funds by providing them with a statement from your bank.

• Select a registered real estate broker or agent who is knowledgeable about the process of selling foreclosed houses.

   Your realtor will show you various foreclosures that meet your requirements. You must understand that most foreclosures are sold as an “as is” deal.

• Once you’ve settled on a property, you should have an inspection performed

  
  which you will be required to pay for whether you complete the purchase of the real estate property or not. Hiring inspectors might include not only home inspectors but also inspectors who will inspect the parcel for pest, structural and environmental problems, as well as for mould.

• If you are satisfied with your inspection and ready to proceed with an offer,

Your real estate agent will fill out the contract according to the request you want to make. They will help you decide on a reasonable but good offer for you.

• Give the real estate agent the earnest money to submit with the contract offer at the time of the request

  It’s in escrow until closing. Your earnest money is usually $1000; however, sometimes more is required. If your deal is a cash one, your intense money requirement may be at least 10% of the property’s buying price.

• Hire an attorney

  Your attorney will make sure that there are no additional liens or judgments attached to the real estate property and represent you at your closing to ensure that all paperwork is accurate.

• Look over your contract

  The foreclosure supplement added to the real estate contract may include a requirement for you to pay a “per diem” charge or a fee for each day after that that you do not close on the designated or original closing date. The price is generally $100 per day. However, some foreclosure companies are no longer charging a per diem. If you do have a per diem clause in your contract, you should inform your lender and attorney from the very beginning of the buying process of how important it is for you to close on time.

Navigating the real estate foreclosure process is intimidating as buyers negotiate with an institution. Here are the advantages and disadvantages.

It’s sometimes trying to negotiate a real estate purchase with a bank, loan company, or mortgage company as the seller. The institution seems non-caring and even illogical at times, but some advantages make it attractive, namely price. A buyer can save dramatically on current market prices by purchasing a foreclosure. Knowing what to expect helps to be prepared for the experience.

A real estate foreclosure is a property that has been “taken back” by the priority lienholder. This entity is usually a significant bank, loan company, or mortgage company. The homeowners have defaulted on the payments and may have tried to sell the property for a short sale. The priority lien holder will then start legal proceedings to “take back” or “repossess” the home. All subsequent lien holders like home equity line and second mortgage companies are out of luck regarding debt recovery, plus the defaulting homeowners are out their initial down payment.

Most states in the US have been overwhelmed with a massive influx of foreclosures clogging the market and lowering prices drastically. So it’s an excellent time for investors to get a great deal, and there are distinct advantages and disadvantages to buying one.

 Advantages

Prices and interest rates are at all-time lows: The real estate market works on the primary “supply and demand” principle. When the market is oversupplied, demand falls and prices fall. So not only do mortgage or finance company’s price the foreclosures under need, but they also tend to “price war” with their competitors in the same local markets. Regular home sellers can’t compete.

Liens: The liens are usually cleared through the legal act of foreclosure. Like mechanic liens, utility liens, old equity lines, and tax debts are generally cleaned up. It is different from a short sale, in which liens can pop up at any time, and a buyer can quickly get stuck paying them.

Repairs: The banks or mortgage companies will pay for major defects in a home that would prevent virtually anyone from getting a loan on the property, such as significant termite damage or a flooding problem.

Timely manner: The institutions want it done and off their books. The escrow period is similar to most other real estate transactions, between 30-60 days.

Highest bottom line: The institutions want the most significant bottom-line net for their foreclosures. An offer with a bounty of $100,010 with the buyers obtaining a loan can easily win out over an all-cash offer netting the bank $100,000.

Disadvantages

Condition issues: A defaulting homeowner is stressed out trying to save their home and credit score from foreclosure. The poor homeowner has just “had it” by the time a legal foreclosure process is underway. They can be furious and damage the property badly. Homes are often stripped of appliances, fixtures, and major components. There have been cases where cement poured down plumbing drains, and fires were set.

The lending institutions holding the foreclosures aren’t excited about paying for home inspections, warranties, or even activating utilities in preparation for a house inspection. So even if the buyers agree to foot the bill for these costs, it’s hard to get a liability release from them to proceed.

Highest and best

Numerous banks and mortgage companies wish to create bidding wars for their properties. For example, if several buyers submit offers simultaneously, the buyers might be asked for “highest and best”. Meaning it’s back to the buyers to better the deals with higher prices, shorter inspection periods, or removing contingencies.

Buying a foreclosure can be frustrating but well worth the extra effort.

Realtor MLS statistics indicate that on average short sales sell for 50% less than a non-short sale transaction. So how can you share in the profit?

How to Make money buying short sales

The nationwide mortgage meltdown and housing price bust just maybe a once-in-a-lifetime opportunity to accumulate wealth for many of us. Banks were foreclosing on properties with reckless abandonment until Obama was elected. The new administration put in all kinds of constraints to slow down the foreclosure process. One of those constraints included allowing a homeowner to short sell the property before the mortgage lien holder can complete the foreclosure process.

Historically, it was nearly impossible for a homeowner to get a lender to approve a short sale, they just were not willing to take a loss on the property, plus it could take 3-6 months to get approved to short sell. Lenders would rather foreclose than work with a homeowner to short sell.

With many mortgage lenders being insolvent and requiring federal bailout money, short selling suddenly became a faster way to liquidate loans in default to improve the lender’s balance sheet. The result is the concept of a lender “pre-approved short sale”. Some lenders offer HAFA short sale programs (sponsored by the US Treasury Department). Others are offering traditional pre-approved short sales—there are restrictions with a HAFA short sale.

What does short selling include, how does it operate, and how can it be profitable?

• Short selling occurs when a homeowner sells their house for less than the mortgage lender is due.
• Pre-approved short sales are where the lender and borrower have already processed all the required paperwork and wiped out or negotiated with any junior lien holders to allow a deal to close in 45 – 60 days, just like any average transaction would.
• The lender has already approved property values, and list prices, all you need to do is get your contract accepted and the new loan approved.
• HAFA Short Sale is a Government-sponsored short sale as part of the US treasury department HAMP program.
• A traditional sale would be a non-HAFA short sale.

Suddenly, all of the short-selling barriers have been removed, with the mortgage lenders leading the charge.

So how do I profit? Many homeowners are being denied loan modifications and forced into short selling, so there is currently a virtually unlimited supply of short sales. Many of these homeowners could afford their homes at the quick sale price, but the lender denied them a loan modification for whatever reason. Profiting from a short sale may be accomplished in two ways.

1. Buy the home and flip at a higher price at a later date. HAFA short sales require a 90 hold period.
2. Buy the home and do a sale-leaseback to the existing homeowner with equity participation, giving both seller and buyer an opportunity. HAFA short sales do not allow sale-leasebacks.

The sale/leaseback or rent to own program is a great way to stabilize the market, allow someone to re-establish their credit, let them keep their home while providing rental income, tax deductions and capital gains to you as the investor.

However, before you jump into buying short sales as an investment under a sale-leaseback arrangement, You must ensure that you have all of your ducks in a row. For example:

• Make sure you are pre-approved with a reputable mortgage lender for an investment loan; underwriting guidelines are more stringent for this type of loan.
• Ensure you have adequate reserves to make the mortgage payment if the tenant is late paying rent.
• Consider having the utilities put in your name, so they don’t get shut off if the tenant does not pay them. The rent should be adjusted to reflect this.
• Meet with the owner and interview them. How did they end up in foreclosure? Predatory lending, loss of job, illness, death of a family member, overextension of credit. Don’t be judgmental and be empathetic; they may be your new business partner.
• Is the current owner employed? Remember, you are now a landlord, and you need to understand how your tenant will pay your rent.
• Ask for documentation proving the lender has pre-approved the short sale.
• Use an experienced realtor that knows how to write a short sale contract and use all the applicable disclosures and contingency clauses to protect you.
• Use an experienced real estate attorney that is familiar with closing short sales.
• Be prepared to visit the property regularly and realize you may need to repair it to maintain its value.
• Make sure you understand the local real estate market for this property. Is it located in a desirable neighbourhood, good schools, close to employment centres, low crime rate?
• Ascertain that you are familiar with municipal property upkeep rules, resale code compliance, and rentals. Some cities have ordinances you need to comply with.
• Have the sale-leaseback agreement in writing along with any equity participation for when the market recovers or how capital improvements made to the property are recaptured.
• Have a defined end date and goals the tenant can work towards; remember you eventually want out and profit, not be a perpetual landlord.
• Avoid properties with undesirable issues: wrong locations near train tracks, commercial, industrial, busy road, floor plan issues, etc…
• Initiate the process by obtaining a home inspection from a qualified inspector; if problems are found, get contractor estimates and send all the documentation to support your offer. Even on a pre-approved short sale, the lender still needs to approve the proposal.
• Get a title report to make sure the title is clear.
• Don’t get emotional; it’s a business decision, the numbers work, or they don’t work. It would be advantageous if you had at least a 30% gain when the market rebounds to offset your holding expenses.

The due diligence required for short sale investing is just as necessary as it would apply to any other sort of real estate investment.

The significant advantage to short sale investing is that you already have a committed tenant lined up and provides you with a pre-determined exit strategy. Do not violate HAFA rules; it would be a federal violation and subject to Federal Penalties and could be considered fraud.

If you are quick to infer that owning a house is always preferable to renting one, continue reading to learn why this is not always the case.

Renting is often frowned upon, and conventional logic screams that it is always better to own your home than rent. After all, monthly rent to a landlord is a waste of money. At the very least, this is what proponents of homeownership assert. But paying for rent is no more like tossing money in the garbage than is paying your monthly food bill. In both instances, you spend money you’ll never see again, but you have received a necessary good or service in both cases.

Although the decision to buy or rent is ultimately up to an individual’s preference, For these reasons, renting is a better alternative than purchasing a home.

Unfavourable Interest Rates do Not bind you.

Buying a house means entering into a huge debt obligation. If you cannot secure a favourable interest rate because of your current financial situation or because interest rate markets have skyrocketed, it may be better to put off buying until this changes. The cost of ownership may arise when the business ceases to exist.

Viewing a House as an Investment May Be Flawed Logic

Many costs associated with homeownership make it challenging to be classed as an investment or savings plan. For example, homeowners are typically comfortable paying mortgage instalments every month because this contributes to homeowners’ equity. This store of value, although accurate, may not be the best way to save because to access this money, you would need to take an additional loan, albeit at a lower rate of interest. If your objective is to boost your savings, you could be better suited placing your money straight into a savings plan.

Renters Don’t Have to Worry About Maintenance.

While renting, leaky faucets, deteriorating roof tiles, and peeling paint are non-issues. On the other hand, Homeowners must have a fund ready to dip into to take care of these problems as they arise. Home maintenance can be expensive, so it is essential not to buy more houses than you need because this is just an unnecessary cost to carry.

Home Prices Fluctuate, So Homeowners Are Exposed to Risk

Although the general trend is for home prices to rise over time, the housing market fluctuates like every other commodity. As a result, home prices move up and down, and if you are forced to sell during a period of market weakness, you risk incurring a loss on your investment.

Retain the Freedom to Move at Will

Finally, renters get to live a free lifestyle. It is not for everyone, but if your job requires you to be flexible about where you live or if you like to know you can move at the drop of a hat, then renting may be more your style.

Land surveys are underappreciated, yet much property info can be obtained to protect buyers, including encroachments, easements, acreage, and proper boundaries.

Potential buyers always seem to understand the importance of home inspections to look for structural defects in property yet often underestimate the value of a property survey. However, by completing this vital step and combining it with the benefits of a title search, many essential pieces of information can be obtained, protecting the land’s future ownership rights and uses by a buyer.

What Is a Land Survey and Who Can Perform One?

A survey involves the determination of the boundaries of a tract of land by a licensed surveyor or civil engineer. A map or plat of the property is drawn based on the survey. If title insurance is ordered, the surveyor will also complete a certificate or report to disclose information about the property and its improvements.

The North Carolina Board of Professional Engineers and Land Surveyors has established standards of practice and ensures a detailed approach. Today’s technology now allows an advanced computerized approach with unprecedented accuracy; current surveyors must undergo extensive training and utilize equipment such as GPS systems for data collection, analysis, plotting, imaging and generating boundary descriptions that will remain accurate even when physical markers and improvements (such as buildings or other artificial changes) disappear.

The survey helps create a “legal description” of the property, which an attorney in real estate law will review to decide title and title insurance. The attorney will also review the history of deeds and recorded plats adjacent to the property and the current survey of the property to find any discrepancies that may affect actual ownership. The real estate broker should never venture an opinion on property boundaries, and an owner should not consider this opinion legal or final. Only a surveyor can guarantee a formal review.

What Is Property Information Included in a Land Survey That Helps a Future Owner in Real Estate?

• A stretch of land or a lot’s boundaries
• Buildings, fences, and other enhancements
• Location of utility easements and right of way easements (areas of land that are reserved for the use of utility companies and passing power lines, for example, and cannot be built upon even though contained inside the property boundaries)
• Location of water bordering or located on or running through the property
• Acreage confirmation
• rights of way and public roadways, areas of driveways)
• Correct parcel or lot (for legal identification on documents)

How Is This Property Information Useful for Ownership Rights and Potential Use of Land?

The boundaries are precise and will include each corner. It is wise to request these corners to be marked on the property by the surveyor for future use (such as when a property owner decides to build a fence to avoid an encroachment issue or when an improvement crosses over the boundary line and can affect both owners when they later try to sell). The surveyor will also compute the area of the tract so the purchaser can verify the amount of land being purchased. It will avoid future disputes during the closing, and a recent survey can be beneficial to show buyers a seller’s actual property size.

The survey will also confirm if buildings and improvements comply with local zoning “setback” requirements from property boundaries, as well as restrictive covenants and regulations of private property homeowner associations. For example, it can be imperative when buying a home in a neighbourhood with an HOA. The previous homeowner has completed add-on projects such as an enlarged deck, extra room addition, sunroom, or garage. If these rules were not followed, the future buyer would avoid unnecessary problems. Also, if encroachments exist from a neighbour’s current structures (i.e. fence) onto the property considered for purchase, they will be discovered as well.

Easements are also essential to understand, limiting land development and potential use. For example, suppose an easement is present along a highway for the future projected widening of the road or along a railroad or power line. In that case, the lost use of that portion of the land should be considered in the purchase price and the property plans. Usually, improvements such as a building or parking lot cannot be completed in the area of an easement.

Water boundaries are essential to determine if a future homeowner has “riparian rights” related to a waterway, a form of access and ownership. Therefore, the survey will identify creeks, rivers, lakes, ponds, and other bodies of water located on the property.

Acreage confirmation is essential to adhere to minimum lot size requirements in neighbourhoods and confirm an appropriate price for a transaction when the price is based on per acre.

Finally, surveys are essential in real estate transfers involving mortgage financing based on the lender’s closing instructions and title insurance requirements. Whether reviewing issues related to purchasing undeveloped land, buying an existing home in a developed neighbourhood, or a potential commercial property is involved, the survey is an essential element of planning and protection that should not be omitted. Real estate is a significant investment, and a survey will confirm the legal boundaries and potential purchase complications in many ways.