Dont dillydally with due diligence

Mortgage Secrets encourages you to ask sellers to provide all or part of your property financing. With some exceptions, you'll find sellers easier to work with than lenders. Plus, you may swing better terms, lower costs, and quicker closings. But this album of advantages plays a different tune on its flip side. Though sellers do make OWC transactions quick and easy, many buyers sign before they investigate.

Only later do they learn that the sellers, the property, or both have failed to meet the buyers' expectations. Troubles brew. Costs mount. The buyers' once-joyful spirit morphs into regret, anger, accusations, and/or litigation. So, yes, eagerly search out seller financing, but don't dillydally

6 If the lender can enforce a "due on sale" clause, this technique does bring about that risk. In that situation, a wraparound works better as a short-term financing strategy. If the lender calls, there may be no long term.

with due diligence. As with all property purchase and finance plans, temper your enthusiastic eagerness with cool calculation. Answer these

questions:'

  • Can you trust the sellers? Nearly all real estate experts urge sellers to assess the character and credit strength of their borrowers, but so must buyers assess the integrity of their sellers. Some con artist sellers know they can line up buyers around the block with promises of easy terms and no credit check. Be wary of sellers who come on too glib, or sellers who raise your suspicious instincts. Cheats and scammers can turn up on either side of a real estate transaction.
  • Can you afford the price and terms? Banker underwriters match your repayment capacity against their approval formulas and qualifying ratios. Sellers may let you slide by. So, it's up to you to realistically (nay, pessimistically) appraise your finances. Some sellers lure hopeful but unprepared buyers into transactions they aren't likely to complete successfully. Why? To keep their buyers' front-end money, kick them out of the property, and repeat the process with the next wide-eyed innocents who bite the "no cash, no credit, no problem" bait the sellers dangle in front of them. Several books written for investors actually promote this unethical seller tactic.
  • How much will you spend to maintain and operate the property? Experts warn you to "Get the house professionally inspected." Good advice, but it doesn't go far enough. Get the facts on the cost to maintain the property, yard, and operating systems (HVAC, plumbing, water, waste disposal, electrical, and so on). Put actual numbers down on paper. Forget ballparking. Determine precisely: Money trap or wise investment?
  • Have you actually researched the market to determine achievable rent levels and occupancy rates? Novice investors all too frequently overestimate the rents they will collect from their properties and underestimate the vacancy rates the property might experience. If you plan to pay expenses and monthly payments with revenue from

7 The 106 Common Mistakes Homebuyers Make (and How to Avoid Them), 4th ed. (John Wiley

& Sons, 2006), details these topics with examples from real homebuyers.

tenants, carefully research other rental units. Prepare a realistic pro forma that's backed up by actual market results.

  • At what price would the property sell without OWC terms? You can sometimes sensibly trade off a higher price for great terms or easy credit. But know what trade-off you're making. It's tough to sell or refinance a property when your debt load tosses you upside down.
  • How do you protect your title interest in the property? If you give the sellers more than a few thousand dollars up front, run, don't walk, to a trustworthy and competent real estate attorney. At very least employ a title company to okay the legal paperwork. I confess that I have violated this rule on a number of occasions and suffered no harm, but Mortgage Secrets cannot recommend this approach to those without experience—unless you carry a guardian angel on your shoulder.
  • How much will you pay for property insurance? During the 1990s property insurers paid more claims than in any other period in history. Fortunately, they made those losses back and more through their investments. The 2000s have not proved so kind. High losses are still mounting (9/11, mold, hurricanes, floods), but investment gains have fallen. That means (if you haven't already noticed) insurance premiums are going up and insurers are cutting back on coverages—especially in high-loss, high-loss-exposure locales. (During the past two years, insurance premiums on my Florida properties have jumped 50 percent—and they're not even located near the coast.) Before you commit to buy, verify the availability of all needed coverages at a price you are willing and able to pay.
  • How much will you pay for property taxes and assessments? Look to the future, not the past. The amount the sellers paid last year could fall far short of the amounts that the tax authorities will bill you next year. (If you itemize, however, you will be able to deduct those taxes. That's at least some consolation.)
  • Is the property governed by a homeowners association (HOA)? Homeowners associations add another layer of costs (and benefits) to a property. How much will the HOA require you to pay each month? Is the HOA fiscally strong with cash reserves, or is it looking at deficits that you and other owners will have to pay? How will the HOA's covenants, conditions, and restrictions (CCRs) and "house rules" crimp your actions? Pets, parking, kids, basketball courts, tree houses, exterior color schemes, home offices, fencing, landscaping, yard care? What, if any, restrictions on rentals apply? You name it. The HOA probably regulates it. Just ignore the HOA? Bad idea. HOAs hold the legal power to assess, fine, and even foreclose when amounts levied remain unpaid.

When you knowledgeably plan your finances and your financing, you can almost always afford to buy a home or investment property. But please, before you sign on that dotted line, verify that you can afford to own the property you buy. Don't dillydally with due diligence.

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