Friday, August 08, 2014

Finding Success In ‘‘PAPER " Real Estate: Options

REAL ESTATE IS A GREAT HOME BUSINESS. Some of my real estate entrepreneurs are so close to their business that they live on the property that gives them their income! Could you ask for any closer ties? (These wealth builders live in one of the apartments of their multifamily income buildings.) 
Choose How You Want to Prosper in Real Estate

You can earn money in home-based real estate in two general ways. 
1. Invest small sums in “paper” real estate—that is, options that allow you to control large pieces of real estate for a tiny amount of money. Your income comes from the difference between the cost of the property and the selling price you can get for it. 
2. Buy, and own, income property of a type you feel comfortable with—such as residential (apartment houses), commercial (stores), industrial (factories), etc. Your income is derived from the rents you are paid, after you deduct the operating expenses. 
Let's take a look at each type of real estate and see how you can earn money from it. And—if you'd like—you can run both types of businesses from your home and earn an excellent income. 
How Options Can Help You Build Your Fortune

An option is a written agreement you have with the seller of a property to buy it at a stated price within a named time period—which could be thirty, sixty, or ninety days or more. If you do not buy the property within the option period (i.e., thirty, sixty, ninety days) you lose your option amount. But this amount is so small compared to the value of the property you control, and the profit you might make on its sale, that people shrug it off. For example: 
You find a multi-family building priced at $200,000. An option to buy it costs $100 with a sixty-daytime period. You believe you can resell this property for $250,000 in less than sixty days. With a bit of advertising and a few phone calls you are able to sell the apartment house for $248,000. So your profit after expenses (including your option cost of $100) and closing costs of $11,000 is $248,000 - $11,000 - $200,100 = $36,900. Thus, for an investment of $100, you earned a profit of $36,900. And even if your option cost you $1,000 (which it probably would not), you'd still have a nice profit for a few days' work. Further, if you were unable to sell the property in sixty days, you would lose only $100 in the first instance, or $1,000 in the second instance. 
All of your dealings with an option can be done from home—except for visiting the property you want to buy. 
Never take an option on real estate without seeing it with your own eyes! You might—if you wish—have a trusted partner or relative check a property for you. But—if you can—you're much better off checking it out yourself. 
Some options can cost as little as $1. Such options are on property that is not in great demand. So while your option costs you little, the chance of selling the real estate will be smaller (usually) than for properties whose option costs more. (We've even heard of options that cost nothing—-just your signature on a piece of paper—but the real estate sold fairly fast.) 
To help you understand options better, you should read the Example of a Typical Real Estate Option shown at the bottom of this post. 
The option shown is a general example of one that might be used for your deals. Since every transaction is different, your proposed option should be tailored to your specific deal; don't use this option without the guidance of a competent real estate attorney, who will prepare your option for you. 
What will be your game plan for making money from home in real estate options?
Here's your ten-step game plan: 
1. Decide what type of property you want to work with—that is, option and then resell either the property or the option itself. 
2. Look for such properties in your area by regularly scanning the ads in your Sunday newspapers, and in any other local real estate publications you can find. 
3. Contact sellers of suitable properties when you find one advertised. It is best to deal directly with a seller, instead of going through a real estate broker who might not approve of your offering an option on a property. 
4. Get full data on the property from the seller. This will be supplied free of charge to you and will include the asking price, amount of down payment, income, expenses, real estate taxes, utility costs (water, sewer, etc.), and other important financial data on the property. 
5. Explore the sales possibilities of the property. Is such property in strong demand in your area? Can you raise the asking price to a level where you can make a profit on this property? A real estate broker can help you answer these questions. (Note: A real estate broker may discourage your buying a property with an option, but the same broker will be happy to work with you on the sale of an optioned property. Why? Because he or she earns a commission on the sale!) 
6. Offer the seller an option to buy the property if the numbers (your cost, potential selling price, and demand) appear to be satisfactory. 
7. Try to pay the least amount for the option and get the longest time—more than thirty days and at least ninety days, if possible—for the option. 
8. Put the property on the market quickly—the same day you and the seller sign the option. Use every means you can to get the property in front of its potential market. 
You want to sell as quickly as possible, even though a quick sale may produce a slightly lower price for the property. 
9. Get competent legal advice every step of the way. Why? Because real estate today has many potential problem areas. Only with an experienced real estate attorney at your side can you avoid the traps that might exist. 
10. Go on to your next option deal. Only by moving ahead can you build a big income from your home in the options field. You can—if you wish—pause and enjoy your profit from your first deal. But the best way to earn a large income in this field is to continue deal after deal! You can earn big money in “paper” real estate from home. Just follow the ten steps outlined above to see what you can achieve without having an office, a large payroll, expensive machines, or any other problem-makers! 
A Real·Life Option Success from Home

To show you how you might make big money in options, here's a real-life story from one of our IWS newsletter readers: 
"1 took an option on thirty-three single-family homes for 120 days for zero dollars—no money changed hands. The option cost of these homes at the end of the 120 days would be $796,000. If I could not come up with this much I would lose the houses. But by using creative advertising and sales methods I was able to sell fifteen of the houses for $748,000; my cost for these 15 houses was $392,000. So my profit, before ad expenses, was $748,000 - $392,000 = $356,000.1 had the buyer pay the closing costs. The other eighteen houses sold for $565,000. My cost for these was $404,000; my profit before expenses was $161,000. So my total profit before minor expenses was $517,000. That's not bad for just about four months' work! Even if my expenses ran several thousand dollars (which they didn't), I'd still have a nice year's income.” The way this wealth builder accomplished this real-life deal working from his own home (he showed me all the paperwork) was by: 
  • Knowing the area these homes are located in.He carefully studied values and sales in this location for a long time.

  • Offering his buyers good value for the price they paid,making it a win-win sale for the buyers and the seller—plus the issuer of the option.

  • Arranging the financing so the buyers could get mortgages that were affordable and allowed them to earn money from the homes they bought.

  • Holding to his asking price even though the buyers tried to “knock him down” in price to get a better deal. 


Below is an example of an option to purchase real estate written by a homebased wealth builder. Note: Any proposed option MUST be written by a qualified real estate attorney. Each option must be tailored to fit the parameters of the specific property and proposed transaction. Don't use this example as-is for any actual real estate transaction.

I hereby offer to buy the real estate located at [Address] and described in the attached copies of deed and title, within the next [Number] days, ending on [Date] In the event I do not purchase the above-described real estate within the next [Number] days, this purchase option will expire and any and all rights I have in this Purchase Option will become null and void, and the earnest money of [$ Amount] will be kept by the seller with no possible recourse by myself. 
Signed—Optionee (You)
Signed—Optionor (Seller)

Wednesday, July 23, 2014

Equity Crowdfunding: Venture Capital On Steroids?

CROWDFUNDING IS THE NEWEST WAY TO RAISE MONEY for business, real estate, art, film, new products and more. Crowdfunding lets you get money:
  • in “bite-sized pieces”
  • from tens, hundreds, or thousands of people at once
DEPENDING ON THE NATURE OF YOUR BUSINESS, crowdfunding may be used for business or real estate.

EQUITY CROWDFUNDING IS A NEW AND EXCITING TYPE of crowdfunding that's being called today's Business Angel or Venture Capital investor. In equity crowdfunding, companies sell actual shares of their business to interested investors. 
WITH EQUITY CROWDFUNDING, you can get lots of investors from all around the world to pool amounts as little as $1000 each into your business in return for owning a piece of it—not a bad tradeoff for getting your moneymaking project off the ground.

THE BEST KNOWN TYPE OF CROWDFUNDING IS REWARDS-BASED crowdfunding, where you give investors or donors a small reward like a free product, a discount, or a small cash return for the money they put into your crowdfunded deal. Equity crowdfunding is different because it involves ownership shares in your company.

EQUITY CROWDFUNDING IS LIKE VENTURE CAPITAL ON STEROIDS. It lets big, serious investors read your business plan and decide to get in on your great new idea.

  1. Write out a description of your business, project, service or product idea.
  2. Show how much you expect your business to earn over time. Write this information up in the form of financial projections. Read up on venture capital funding to see how this is done.
  3. Decide how much money you need to raise, at what levels, and what sorts of shares you'll provide. For example, you could sell shares at $1,000 each, $5,000 each, or more.
  4. Study the various equity crowdfunding platforms by visiting their websites and see how they work, what types of projects they support, etc.
  5. Contact an equity crowdfunding platform to help you set up your money raising campaign.

Monday, May 05, 2014

Dealing with Advance Fees and Deposits

“NEVER PAY FRONT MONEY” is a wise rule to live by. If you don't pay for something until you have it in your hands, no one can skip town with your hard-earned cash. To get a business or real estate loan, however, loan applicants may be asked to shell out cash for a deposit or upfront fee (sometimes referred to as an advance fee or front fee). In cases like this, the most important things to know are:
  • Is the deposit or fee for a legitimate, reasonable and documented cost?
  • Is the money refundable, and under what conditions?
  • Can the money be credited toward the cost of closing the loan?
HOW DO YOU TELL A RISKY FRONT FEE from a legitimate, reasonable charge like a good faith deposit, earnest money, or an application fee, processing fee or transaction fee? After all, honest and reliable lenders and brokers sometimes need to charge a deposit or service fee so they can afford to do due diligence and carry out the work you need them to do.

TO DEAL WITH FEES AND DEPOSITS EFFECTIVELY, you need to know the difference between them.

  • accounting 
  • appraisals 
  • legal work 
  • travel 
  • title searches
  • credit reports 
Such fees are often not refundable, but may be credited into a loan's closing costs.

DEPOSITS, SUCH AS EARNEST MONEY in a real estate deal, are a way of acknowledging the costs the lender may incur to make the loan. They also help to ensure the lender that the borrower is serious and acting in good faith about wanting to complete the transaction. Deposits are sometimes refundable and may be rolled up into closing costs.

WHEN A LOAN APPLICATION IS REJECTED or the borrower decides not to proceed with the loan, some lenders will refund the amount of the deposit, minus costs incurred up to that point. For example, if you gave a $500 deposit, and the lender spent $250 on a completed appraisal fee and $20 on a credit report, the lender might refund the difference of $230. Since you paid for the appraisal and credit report, the lender should provide you with copies of each.

IN THE UNITED STATES, RESPA (the federal Real Estate Settlement Procedures Act) requires mortgage brokers and lenders to document their fees, in writing, on good-faith estimates and settlement statements.

IF A BROKER OR LENDER CHARGES the borrower for unearned or illegitimate, nonrefundable fees or deposits, they may be breaking the law and could become subject to legal penalties.

DEPOSITS AND FEES CAN VARY WIDELY from one broker or lender to another and from one deal to another. Larger commercial and real estate loans usually require more work and have higher fees.

HERE ARE SOME TIPS to observe with any loan offer: 
  • Confirm that the lender has provided complete contact information, especially if it's an online lender and you won't be visiting their offices. If a the lender doesn't give their physical address, phone number, and a "real"* email address , avoid them. Today, lenders should also have their own, fully operational websites. *A real email address is one that doesn't come from a free service like Yahoo or Hotmail; ideally the lender will have an email address or form connected with its website. If they fail to produce any of these things UP FRONT, we would not give them any money up front.
  • Make sure the broker or lender has a good reputation. Pay fees only to people you know you can trust. If necessary, check online, at consumer reporting agencies, the Better Business Bureau, or in public records.
  • Confirm that the broker or lender makes the type of loan you want in your area and for the amount you're seeking.
  • Ask for details on loan deals they've completed and see what deposits, fees or refundable amounts were involved in those deals.
  • Work with a skilled attorney who has knowledge of the laws in your geographic area and experience in the kind of deal you're looking to do. 
  • Use a written agreement that clearly lays out all terms of the deal, signed by you and the broker or lender you're working with.
BE SURE YOU KNOW THE EXACT PURPOSE of each fee or deposit. Ask yourself: does it seem reasonable? A $350 appraisal fee might be normal, but a $10,000 travel fee may be out of the ordinary.

ALWAYS GET A SIGNED AGREEMENT STATING WHAT FEES may be charged and what services or products will be provided as part of the deal. This will make it easier to ensure that the broker or lender honors the deal and doesn't pull out or disappear after you've shown your good faith and paid good money. 

THAT MAY SEEM LIKE A TALL ORDER. No broker or lender can guarantee that a deal will always go the way everyone hopes it will. There are too many unknowns. But there are smart things you can do to stay safe. 

AVOID PAYING ADVANCE FEES until you confirm that the person you're dealing with is "legit” and will uphold their end of the bargain as stated in the written agreement. This isn't a guessing game. You can easily confirm the lender's history and reliability by reviewing records of the lenders "done deals." If necessary, you can contact previous clients of the lender for more detailed input.

BELOW ARE SOME SIGNS THAT MAY TELL YOU when you should not pay money in advance. None of these things by themselves mean a broker or lender is bad or dishonest, but if you see a bunch of these signs all at once, it may be wise to wait until you can confirm all the details.

  • The broker or lender asks you to pay an advance fee that seems high for the kind of deal you wish to do. 
  • The broker or lender tries to rush you through a transaction. 
  • The broker or lender says it's a “done deal” or claims you're guaranteed to make a lot of money no matter what happens.
  • The broker or lender won't sign a written agreement or loan document; or they won't agree to standard, reasonable terms; or they try to put unclear words in the fine print; or they don't clearly explain the purpose of a fee.
  • The broker or lender asks for your credit card, bank account or social security information without explaining and documenting why this information is required. 
  • The broker or lender repeatedly fails to answer their phone or email, or fails to identify themselves as the person or company you think they are.
  • The broker or lender won't give you their physical address or refuses to see you at their office.
  • The broker or lender wants you to send money electronically to them or to a third party at a far-off or unspecified place. 
  • The broker or lender refuses to discuss the possibility of any kind of refund if something beyond your control goes wrong.
  • The broker or lender discourages you from checking them out with consumer reporting agencies or looking them up on the Internet or in public records.
WHEN YOU NEED MONEY, THE PROMISE of a loan may seem like an answer to a prayer. Avoid paying unearned front money and advance fees, and you'll risk less and be richer in the long run.

AT THE END OF THE DAY, BORROWERS MUST WEIGH a number of factors to decide for themselves whether a deposit, fee or promise seems legitimate. You may not be able to predict the future, but you can assemble all facts on each lender, evaluate the evidence based on the criteria discussed above, and PAY FEES ONLY WHEN THOSE FEES WILL PAY OFF FOR YOU in the end.

Monday, April 21, 2014

Key Points About Construction Loans for Commercial and Residential Properties

CONSTRUCTION LOANS ARE AVAILABLE in the United States, Canada, and worldwide for all types of real estate, including:
  • Single-family residential properties
  • Multifamily residential properties
  • Businesses and commercial properties
  • Land, raw and developed
CONSTRUCTION LOANS GENERALLY DON’T COME IN NEAT, standardized packages like conventional mortgage loans which are structured according to strict government regulations.

FOR RESIDENTIAL PROPERTIES IN THE U.S., certain parameters relating to construction or renovation of a property being acquired may be specified in the standard Uniform Residential Loan Application (Form 1003) required for government-backed mortgages.

FINANCING FOR MULTIFAMILY AND COMMERCIAL PROPERTIES is more complex and harder to obtain than residential home loans. Commercial properties include office buildings, shopping centers, retail outlets, healthcare facilities, educational buildings, storage structures, apartment complexes, manufacturing facilities or other properties that will be sold or rented. These properties may cost hundreds of millions of dollars to build, renovate or retrofit. In addition, commercial construction may involve multiple investors, joint ventures, bond financing and complicated tax structures.

Either way, all construction loans have certain basic features in common.
Here’s a brief overview of key points about construction loans.

  • Construction loans obtained by the builder
  • Construction loans obtained by the property owner
  • Construction-only financing
  • Construction-to-permanent financing, where the construction loan is converted to a longer-term traditional mortgage after construction is complete
CONSTRUCTION LOANS TYPICALLY REQUIRE interest-only payments during construction. The principal then becomes due after construction is completed or a certificate of occupancy has been issued. On a construction-to-permanent loan, the lender may schedule mortgage payments to begin when construction is finished and the builders have been paid.

CONSTRUCTION LOANS ARE USUALLY, BUT NOT ALWAYS, set at a variable rate and priced according to a short-term interest rate, such as the prime rate. As a result, interest rates on construction loans can change frequently.

KEY PARAMETERS to consider in any construction loan include:
  • type of loan (construction-only, bridge, construction-to-permanent, permanent, forward commitment; new construction, rehabilitation; debt, equity, convertible, commercial mortgage-backed securities, bond)
  • interest rates and type of interest (fixed, variable, Treasury-based)
  • term (short- or long-term, number of years)
  • loan-to-value ratio
  • availability of tax credits (First-Time Homebuyer Credit, Energy Efficient Tax Credit, Renewable Energy Investment Tax Credit, Low-Income Housing Tax Credit, Rehabilitation Credit, Research and Development Credit and others)
  • additional assistance available from state, federal or local government programs or loan guarantees (Department of Housing and Urban Development, Federal Housing Administration, FannieMae, FreddieMac, Veteran's Administration, Canadian Mortgage Housing Corporation)
DURING CONSTRUCTION, FUNDS ARE TAKEN FROM THE LOAN through a process known as a “draw.” The draw is the method by which money from the construction budget is paid out to material suppliers and contractors.

THE BORROWER, CONTRACTOR AND LENDER establish a draw schedule based on stages of construction, and interest is charged on the amount of money disbursed up to a particular date. Different lenders have different requirements for processing a draw.

MANY BORROWERS USE CONSTRUCTION-TO-PERMANENT FINANCING programs where the construction loan is converted to a mortgage loan after the certificate of occupancy is issued. The main advantage here is that the loan requires one loan application and one closing. These construction loans are sometimes called “all-in-one” or “one-time close” loans.

ANOTHER OPTION IS TO SECURE A SHORT-TERM construction loan, then refinance it into a conventional mortgage when construction is finished. This requires two applications and two closings.

OTHER COMMON CONSTRUCTION LOANS include fixed 15-year, 30-year, interest-only and variable-rate loans.

BEFORE PRESENTING THE LOAN APPLICATION TO THE LENDER, the borrower and the builder must prepare a strict budget which covers two general categories of costs:
  • Soft costs—for expenses like architectural, engineering, legal and administrative fees, blueprints, permits, etc.
  • Hard costs—for the “bricks-and-mortar” items like building materials and payments to contractors to build the structure.
NEARLY ALL BUILDING PROJECTS EXPERIENCE CONSTRUCTION DELAYS, so everyone involved must allow for delays and accommodate the changes in costs they inevitably bring. For this reason, the lender usually sets a schedule of regular inspections. A loan officer may visit the property monthly to monitor progress. If changes are needed, a change order is issued to document them.

ADDITIONAL DOCUMENTS TYPICALLY USED in construction financing include a Construction Loan Summary and Budget, Borrower/Builder Agreement, Construction Cost Breakdown, Draw Instructions, Contractor/Supervisor Information Form, Land Plat of Survey, Floor Plans and Builder Specifications, and Description of Building Materials. Many lenders will furnish a Construction Loan Document Checklist to assist in organizing the necessary documentation.

AS WITH ALL REAL ESTATE LOANS, the borrower must complete a loan application and document his or her income, bank account details, assets, credit history and other relevant information. For safety, some real estate experts recommend that borrowers go through a pre-qualification process before applying for a construction loan and embarking on any building or rehab project.

IF THE BORROWER ALREADY OWNS THE LAND, the land may be considered as equity on the construction loan. Private lenders and investors sometimes provide hard money loans which are secured by the value of the land and/or building.

LOCATION CAN MAKE A BIG DIFFERENCE IN HOW EASY IT IS to get a construction loan. In areas where the economy is booming, banks are more eager to make new loans because their risk is much less than in areas where the economy is weak and property values are stagnant or falling.

WHEN SEEKING A CONSTRUCTION LOAN, shop around for experienced lenders with a good track record in construction finance. Construction loans can be quite complex, so make sure you understand all the variables and requirements before accepting an offer. Get all quotes in writing. If possible, consider locking in your interest rate upfront.


For a list of more than 800 active lenders providing loans for single-family, multifamily and commercial real estate of all kinds, see Selected Lenders for Commercial and Residential Construction Loans in the U.S. and Canada, published by IWS Inc. Updated annually, this unique directory includes Lender Name, Postal Address, Telephone, Fax, Email Address, Website Address and Loan Program Descriptions. A detailed description is at Product #IWS-91, 160 pages. 8.5" x 11". Price: $29.50.