One important aspect of due diligence is to know your documents but specifically understanding the details of the lease, insurance policy, and title policy. The lease, out of all of these is of utmost importance because it remains the roadmap for future events concerning the property. Part of the issue with the lease is language. There is a lot of strange stuff, interesting jargon presented in the terms of a lease. Really I wonder when legal ease will be common enough for an ordinary person to understand. Such examples of strange amendments to a generic lease include: First options on purchase, the right to take over adjacent space, tenant ownership of plumbing fixtures (really!), agreements for new carpet every year. Really anything is possible.
One would think that there is a cookie cutter answer to the common lease agreement. It seems very few properties have what is commonly termed as a "standardized lease template" mainly because over the lifetime of the property management, the owner is faced with signing new leases and making concessions for each individual tenant. Some tenants will be more nit picky than others. Some tenant may agree to paint the living room or include other repairs that will amount to a profit for the owner in the long run but mainly benefits the existing tenant. A lot of the time, much goes unnoticed by property managers and it is at the owner's discretion to know the lease backward and forwards.
Every word of the lease is crucial. It is important that everything remain clear for both the owner and the tenant. It is a good idea to have an outside party review the lease and compare notes. If there are questions, please ask them and be straightforward about any concerns. This process is usually so important that I do not let anyone else handle it.
It is in my best interest that I understand every detail of every lease. Otherwise I am just setting myself up for failure with these tenants and sometimes even the owners. Sometimes the owners don't even know the specifics of each lease. That is why you need to ask questions and understand each situation. It is the nature of the job that sometimes people tell me too much and I must remain objective. Still this creates a level of honesty I have come to respect of my clients.
Well as it happens with more and more questions come up things that the client remembers about the leases and something I may not have been aware of from the get go. So I cannot stress enough how important to ask lots of questions in the process. The way I see it is, this is a chance to find out about information that may not have already been discussed.
Remember to get a payment history from tenants. This does not lead to many surprises. For instance, if there is a problem tenant, someone who is consistently late with the rent, then I want to beware of that issue upfront. If it is chronic problem, I may see the need to discount the cash flow, which in turn leads to a lower price offer.
There is also the situation where the owner or property manager does not have a system to tracking the cash flow, or documentation of the rental payments, or even a way of verifying with their bank, this proves to become a much more risky situation for me and everyone involved. Here too, the risk translates to a lower bargaining price. It has been my experience that in these cases, the paperwork magically appears.
One can always tell a lot of vital information from the insurance policy, especially in the case of a building with some age. Mind you, a lot of times insurance inspectors know all the tricks of the trade and if you are able to get a hold of the last risk assessment you will be ahead in the long run. You can request this from your client usually the insured is the owner but a copy is a must. If it is at all possible, get a claims history as well. This can be a grey area because lot of times, you will have to jolt the owner's memory and this can become issue if they changed carriers every year. Here there is no real worry, people change insurance providers all the time shopping the best rate is so common but be cautious if they have failed to pay a policy. What is best in this situation is to make sure the owner can get an affidavit discussing the truth of the claims represented as being complete to the extent of his knowledge. This can be important for future possible litigation because many sellers want the warranties to survive closing.
When in doubt look to the existing title policy. This will inform you the obvious information regarding easements, rights of way, etc. Be on the lookout for any special exceptions to title. It is best to have a General Warranty deed if you can get one. A smart seller will offer a Special Warranty deed as incentive, which will only guarantee title for the time they owned the property.
To further the argument, it is also important to keep in mind the amount of resources and the type of property when completing a due diligence process because some steps may not be warranted. Really when it comes down to it, there is no other proper substitute for due diligence, but this does not stop people from not understanding its importance. No property is perfect and unfortunately there is no way of preventing this without further investigation. In the long run it protects all parties. Depending on one's needs, it is fair to say that each transaction will decide what level of due diligence is needed. There are companies out there that all they do is specializing in this practice.
Posted by: Investors Lounge Online in Tenant, Subject To, Sub Prime Lending, Refinance, Real Estate Investment, Owner Will Carry, Over Leveraged, Mortgage, Market Bubble, Loan To Value, lease purchase, Lease Option, Landlord, Investment, Financing, Credit Cards, Analyze on
Aug 14, 2008
There are different ways to structure real estate transactions that involve seller financing to benefit all parties. Of course the seller has concerns of protecting their property and the need for regular repayment. The following scenario explores this option in detail.
You know that your local market has many rental properties in the inventory and you have found one that meets your needs. You will be purchasing from a seller who is greatly motivated because the property has been on the market longer than a year. The property has an existing long-term fixed rate first mortgage with a balance of just $100,000. Your plan is to buy the property, rent it out and hold onto it as a long-term return on investment property. You know that the home is worth about $150,000 and the seller has it priced at a discount of $120,000.
The offer is as follows. You want to put $5,000 in cash as a down payment but also allow the seller to keep the title in their name with their first mortgage with only a balance of $100,000. The seller must also consent to taking a second lien loan for the remaining $15,000. This transaction may seem like it only benefits the buyer and the seller is left with all the risk. However due to the current lack of home sales in your area, the seller is motivated to continue the arrangement of the sales price, your down payment amount, and also is okay with you taking over the monthly payment for the first lien mortgage because they want to see the property sold in the long run. What bothers most sellers about this type of transaction and what makes it risky for them is that you are not assuming the existing loan. It still remains in their name but the title work protects them for your default. Still there is the concern of the loan remaining in their name and the $15,000 second lien is also risky for them should you fall into hard times but the goal of the sold property remains a common interest for all parties.
A landlord or property manager has certain responsibilities toward the tenants of each rental. They are expected to provide an inhabitable and peaceful space for each tenant to reside. These invaluable rights of tenants have prompted many states to create renter's rights and these laws protect and govern the proper care of rental properties. These laws ensure the landlord follows through. Still generally speaking the proper care of rental property by the landlord or property manager falls into two categories of maintenance and repair. It is important to distinguish the differences between the two.
Many people think along the lines that repair to the rental property includes every small detail when truly there are different levels of importance. Generally speaking repair would fall under if anything on the property breaks, malfunctions or fails to provide a service. Then the landlord or property manager is responsible for repair as soon as possible. Renter's rights include that the tenant should not be inconvenienced by such problems. With this in mind, there are such repairs that fall under the necessities of daily life, well being and hygiene.
These include clean running hot and cold water, air-conditioning and good aeration. In this respect, the landlord should maintain these items on a consistent basis so that in the long run, repairs are not costly to the property owner. Faulty plumbing and electrical can cause not only a tenant to leave and break a lease; end of rental income but also can be a violation of housing authority codes and result in legal and civil actions. Still there is a fine line for the landlord and proactive care.
We live in a world where one's credit rating speaks volumes and leads to prejudice. In this current market, many apartment owners are unwilling to take a chance on some former homeowners because of major blemishes like foreclosure or numerous past due notices. If losing the American Dream was not hard enough already and humiliating for many, it is the struggle to recover that proves to be the true challenge.
As a result many former homeowners find themselves living in hotels after foreclosure because apartment management companies will not rent to them. Staying at the hotel is no vacation at $3000 a month and leads to many living in an upside down predicament. There are possible solutions, remedies for renters in this situation. They can rent from a private owner, mom and pop or other management companies, private investors, that are more flexible with assessing credit risk. Many may not even run a credit or background check. Also money talks and if you have the Benjamins, people have the time to listen. Really it may just be an issue of a double deposit upfront or paying six months in advance on a lease. Still as more former homeowners find themselves between a rock and a hard place, many just don't have the extra funds and continue in this downward spiral. If they had the funds in the first place, wouldn't they have saved their homes?
Currently the American economy is depressed. The housing market bubble has burst causing major havoc in once up and coming areas of the country. Due to increased energy costs with a gallon of gas over four dollars and many regions facing lack of job market growth, more and more people are losing their homes to foreclosure. When they go to apply for an apartment rental, many of these managers are seeing an increase in lack of credit worthiness. These negative marks include not only foreclosures but also short sales and deed-in-lieu situations. These are measures taken by the bank or mortgage company for the homeowner to either sell the property or give it back instead of facing foreclosure all at a loss for both parties. The bank isn't making money and the homeowner is left on the streets.
Renters may think that because you pay your rent in full and on time every week, there's no way you could ever be evicted. But with the current housing crisis in the U.S., this isn't a safe bet.
The upsurge in foreclosures isn't just affecting homes owned by the people who live in them but is also causing trouble for renters when their landlords lose the home due to trouble paying the mortgage. According to the Mortgage Bankers Association, nearly 20 percent of recent foreclosures have been against borrowers who are renting their home to another individual or family.
Lawyers who specializing in helping renters with problems have said that these types of eviction cases are on the rise. For instance, in recent months, one in four calls about housing matters to the Legal Services of Greater Miami's renter advocacy phone line has been about foreclosures and possible evictions. The group says the rate of these types of complaints is up sharply from last year.
Section 8, also called the Housing Choice Voucher Program, is a Federal housing program which provides housing assistance to low-income renters and homeowners. This assistance comes in the form of the city pays the rent, and the federal government reimburses the city for that rent money.
If you are considering renting to Section 8 tenants, you first need to understand how the program works. There may be more in the process and more paperwork, but once you understand the process, there are usually few problems.
Most Section 8 renters are single mothers with children or grandmothers with grandchildren. These renters receive vouchers for housing costs, usually until the children are grown. However, the tenant's income will affect how much of the rent is paid by the government. Having a low-income tenant can actually be a bonus, since the government will pay most of the rent, and the government always pays on time.
Posted by: Shirley_Brown in Tenant, Landlord on
May 22, 2008
News about millions of homeowners losing their homes to foreclosure have been all over the news lately, but the outlook for renters is also alarming. According to a study by the National Low Income Housing Coalition, even rental housing is too expensive for the vast majority of working Americans.
The problem isn't just affecting high-priced urban markets but is happening around the country, but virtually everywhere in the country. The conventional wisdom says housing in rural areas is more affordable than in metro areas, but the coalition's report found otherwise. The coalition's study, called "Out of Reach 2007-2008", found that no state could assure a full-time minimum wage earner access to affordable rental housing even in non-metro areas. Further, the report says that no minimum wage worker could afford rental housing and even workers making significantly more than the minimum are paying more than half of their wages toward rent.
The Department of Housing and Urban Development estimates 30 percent of income to be the "fair market rent" (FMR) for an apartment a given area, and a worker making the median wage for most areas is paying a lot more than a third of his or her income. More than 9 million renter households paid 50 percent or more of their income for housing in 2006. That leaves less money to be used on insurance, food, and other necessities for these folks, who are mostly (98 percent) classified as low-income.
The study asked how much a family in a given community would have to earn to be able to afford a modest apartment. The answer was determined by comparing the "Housing Wage" in each area with the local wage and income for the residents of those communities. The Housing Wage is defined as the full-time hourly wage one would need to earn in order to pay that fair market rent for an apartment in each area.
A smart way to purchase property without regrets after the sale consummates, is to put safe guards in your sales contract that give you a safety net. One of these nets is to always make any offer subject to a SATISFACORY property inspection. Now, whether you can perform this yourself or hire a professional, you still have a legal way of voiding the contract to purchase if something should be revealed that could cause potential financial risk down the road for you. Finding such an inspector is not a hard task and word of mouth within the real estate community is usually the best route. But you can also locate potential inspectors on the internet as all should be licensed with their state.
You are looking for hidden or masked areas of structural, electrical and plumbing problems that the owner is purposely or inadvertently not disclosing that could be major issues down the road for you. If you feel you possess adequate expertise to perform your own inspection, be sure to pay close attention to the following list of possible trouble areas:
Another area of concern that most home buyers take for granted, is past land use that could have caused residual soil contamination. Such as, if a gas station or industrial business that typically used gas or cleaning solvents in the past or the property was used as a dumping ground for hazardous/toxic wastes of some kind.
Posted by: Nick Johnson in Tenant, Landlord, Eviction on
May 09, 2008
Being a landlord is not just about knowing who to rent to and how to manage the properties; it's also about working with tenants in adverse situations. You must be tight with the laws of the business. Whether you are the owner of the rental or involved in a "sandwich" lease, arming yourself with full knowledge of the laws that protect you and those that protect the renter can be critical for your success.
When removing a renter from one of your properties, you must follow the rules using an eviction notice, which is a lawsuit requesting the court remove the tenant. You would be unlawful to ever make an attempt to eradicate the renter yourself, and that includes lock switching, shutting down utilities or using a ruse of "needing to repair" anything to take the doors or windows off.
To begin the process of removal of the tenant, state law demands that you serve them with notice which will terminate the tenancy. When it is due to not paying the rent due, this notice is can take up to 5 days and the actual court proceedings could take up to 30 days and its similar to a smalls claims court and not very formal.
Once you have been awarded the winner in this proceedings against the lessee, a judgment, writ if you may, will be issued and someone in your area, could be the sheriff, will forcibly remove the tenant from your property. Most tenants will get out before this occurs and you could incur some vacating costs, but all worth it in comparison to the losses you could incur the longer they stay in your property. I strongly suggest that if you are going to proceed in this fashion, you become up close and personal with the schedules your county uses to precede in these types of situation. It is not that complicated and does not take a rocket scientist to figure out but because it is not hard to accomplish, little room is allowed for error of any kind. You wouldn't want your case dismissed for minor infractions and ending up being more costly due to not having your ducks in a row in up front. Thus, engaging a real estate attorney with some experience in tenant laws would be well worth the cost in the long run.
