What is “Title Insurance” and Why Should a Homebuyer Have it?

Anyone who has ever purchased a home or other real estate—especially if that purchase was made with mortgage financing—has seen an item on the Closing Statement entitled “title insurance.”  Most buyers do not really understand or appreciate what title insurance is, and why it is in their interests to have it.  Allow this blog post to provide a simple explanation.

After a buyer has contracted to purchase property, but before closing of that purchase and sale, attorneys will search and review the Public Records to make sure the seller has the right to convey title to that property, free and clear of all claims or liens.  If any claims (such as mortgages) or liens (such as claims of unpaid contractors for work done to improve the home) are properly recorded in the Public Records and identified by this “title review,” valid claims and liens will have to be paid at closing out of the seller’s proceeds, and the seller will be paid the balance of the purchase price remaining after such payments.  This process is designed to make sure that the buyer gets good and marketable title to the property, free and clear of any claims except claims made against the buyer’s own interest—such as any mortgage the buyer uses to complete the purchase.

What would a buyer do if the attorneys missed something in their title review?  What options would a buyer have if a lien is later claimed for work done for the seller, but that lien may not have been adequately preserved or “perfected” according to law?  Defending a lawsuit over such matters might be more expensive than paying the lien.  Suing the attorneys who made the mistake by failing to identify a valid claim might be another option.  But, again, lawsuits can be time-consuming, stressful and expensive.  Even if the buyer were ultimately to prevail, it might cost the buyer many thousands of dollars to get to the point of winning a case in court.  This is the purpose of title insurance.

Like most other insurable risks, it is common for buyers of real property to purchase insurance covering the risk that some claim or lien, whether valid or perhaps even invalid or frivolous, may be made against the buyer’s ownership interest in that property.  If a claim is made against the property, the buyer has the right to file a claim against that policy of title insurance; and the title insurer has the obligation to “take it from there,” whether that means defending against a claim in court or paying a valid claim so that it is released.  If the buyer purchased the property with mortgage financing, their lender required title insurance for these reasons.  The lender wanted insurance protecting its sizeable loan to purchase the property.  The premium for the “simultaneous issue” of an Owner’s Policy of title insurance is relatively small, and the homebuyer is well advised to pay that premium to make sure there is coverage for claims that might exceed the amount of the mortgage.  The most important function of title insurance is to provide legal protection of the buyer’s title to the asset he or she is purchasing.  An additional benefit is the peace of mind it provides.

 

With Mortgage Interest Rates Rising and Inventory of Resale Properties Low, Some Nervous Buyers May Be Tempted to Sit on the Sidelines

As the U.S. economy further improves, it is common knowledge that the Federal Reserve plans to continue raising the prime rate of interest (the rate upon which most other loan interest rates are based) to “normalize” the economic recovery following the Great Recession.  In case you hadn’t noticed, this has meant the slow but steady increase in mortgage interest rates over the last 12 months or so.  The interest rate any given borrower will pay depends on a myriad of factors, including credit worthiness, of course.  Rates that had been as low as 3% for 30 year fixed rate mortgages more than a year ago have risen to the 5% range.  Any increase in interest rates means a coinciding increase in the monthly mortgage payment a home buyer can expect to pay. 

Further complicating things has been a consistently low inventory of resale homes.  This has driven up the price of homes, as buyers find themselves bidding against each other for a more limited pool of homes for sale.  Property values that had declined substantially following the economic downturn in 2008 and 2009 have recovered to pre-2008 levels in many areas.

All of this has frightened some home buyers out of the market.  Buyers begin to wonder if they might now be paying too much for a home.  Combining this with higher mortgage interest rates can begin to make some wonder if they might be overpaying on at least two levels—purchase price and carrying costs.

Of course, the only way to judge when you might be paying “too much” for a property is to do your homework.  This is really a question to be answered on a case-by-case basis, using data for recent sales of comparable nearby homes.  This is big decision for even the most experienced buyer, and you need to be armed with as much objective information as possible.  As our company motto goes: “solid analysis identifies great opportunities.”  This is true in any market, and it is certainly true where there is any risk that you might be overpaying for a property.

With respect to interest rates, the market is still characterized by relatively low mortgage rates.  I am old enough to remember interest rates on the Carter administration over 18%!  Even 5.5% seems very reasonable by comparison to that.  And as long as rates remain in that range, the buy vs. rent decision will remain a “no brainer.”  With mortgage interest still deductible for income tax purposes, and with home values continuing to rise gradually in the Charlotte metropolitan area, there is really nothing to be afraid of.  Yes; it is always wise to be cautious and to do your homework—in any market.  But real estate—especially a principal residence—remains one of the most sound and attractive wealth-building investments anyone can make.

If you have any questions or would like to search the entire Charlotte area MLS system for homes, townhouses, condos, etc. -- including foreclosures and short sales-- visit our web site: www.EricDorerRealEstate.com.  

Foreclosures, Short Sales and other Distress Situations… Are They Still A Good Investor Buy?

Five years ago the real estate market in most of the country was awash with REO’s (“Real Estate Owned” by banks after foreclosure) and short sales.  Lenders were anxious to get these properties off their books, and they were willing to accept offers from qualified buyers that reflected their level of motivation.  That was then.  Today the flood of foreclosed properties that entered the market after the real estate market crash of 2008-2009 or so has long been absorbed into the market.  In today’s market, the inventory of resale homes—“distressed” or otherwise—is low in most regions of the country.  That is certainly the case in the Charlotte metropolitan area.

I still encounter buyers—even investors—who perceive that an REO (a “foreclosure”) or a short sale must be a bargain.  I also still encounter buyers who insist on making offers well below the listing price of a home, regardless of what comparable homes have recently sold for.  Both of these perceptions are incorrect in most cases.  Of course, each property presents a unique case and should be approached that way.  But the notion that “foreclosures” are good deals for the buyer/investor by their very nature is generally incorrect in this current “seller’s market,” characterized by low inventory.

Despite popular belief, banks are generally not stupid.  They also have some understanding of the current market, and they also know that inventories or low.  For that reason, they are quite unlikely to price their REO properties below market value.  And if they price their homes at market value, then REO properties in this market are no greater a value than any other resale home.

The thing that can make an REO or a short sale something into which the buyer/investor is more likely to build equity quickly is condition.  It is possible to buy an REO that is in poor condition, and pay a price that reflects the poor condition.  Then rehab or update the home more cost- effectively than most people might and thereby build equity more quickly.  But if you truly pay market value for an REO in poor condition, you may not be getting the bargain you think you are getting—unless you keep the cost of renovations firmly under control.  The equity you build comes from cost-effective renovations, not the purchase price you paid. It is quite conceivable to pay a “discounted” price for an REO (or any other property) based on condition, but spend more than the discount for renovations.  In such a case, the buyer will have ultimately spent more than market value for the home and have no equity in it at all.  This is not a game for the faint-hearted or ill informed.

Very similar considerations apply to short sales.  Remember that a short sale by definition is a home on which the amount of the mortgage exceeds its market value, and the seller is therefore asking the lender to accept less than it is owned on the mortgage to enable the seller to sell the home.  As market values have risen in the last several years, there are fewer and fewer short sales.  If market values are up, why would a bank be willing to accept less than the full amount it is owed unless the market value of the home truly is significantly lower than the mortgage amount outstanding?  The market is no longer flooded with distress sales competing for a small pool of cash buyers. 

The best practice in reviewing REO’s and short sales is to research recent comparable sales—do your homework.  There can be no assumptions that these properties automatically present value.  They really do not anymore—no more so than any other resale property.  As our company motto goes: “Solid analysis identifies great opportunities.” 

We would be happy to answer your questions and help you identify the next great opportunity.  It’s what we do all day, every day.  Feel free to contact us at (980)875-0950 or by visiting www.EricDorerRealEstate.com.

First Time House Flippers: Beware of the “Hard Money Lender”

One of the major obstacles most first time house flippers encounter is how they will finance that first purchase, and then how they will pay for renovations.  Traditional lenders and large banks are as unlikely to finance the first home flip project as they are to finance a start-up business of any kind.  It is common knowledge that most new businesses fail in their first year due primarily to “lack of capitalization”—that is, not having enough access to the cash they need to start and sustain the business in its early stages, before it becomes profitable.  House flipping is like any other business in this respect.  A flipper who is “under-capitalized” is operating with a large and often insurmountable handicap.

In business and in real estate, there have always been lenders who are willing to accept additional loan risk in exchange for higher interest rates and loan fees.  There are some who even claim to loan based solely on the borrower’s credit score… or finance “zero money down” purchases… or help lead you through your first flip project.  BEWARE. These people are not stupid and they know how to protect themselves.  Their overarching goal is to maximize their own profits, not yours. Education and careful analysis are keys to succeeding in any business, and there is no substitute for doing your homework.  If you don’t really understand the most basic concepts such has an annual percentage rate or lender “points,” you are probably not ready to take on your first project.

Here is a true story – a “real life” example of someone I encountered two weeks ago.  A young man with three young children decided house flipping could be a nice supplement to his regular income.  Let’s call him “Dave” for the purpose of this story.  Dave really had no experience with house flipping, or investing or home buying in general.  In fact, he and his family were renting the home they lived in.  He had little money saved and no access to cash.  But he found a lender online that said had “good reviews.”  He contacted the lender, and the lender told him they specialize in flip projects and they would help walk him through his first several projects.  All he needed to do to get started was pay them a $3,000 “membership fee” and he would be approved for up to $250,000 to purchase a project and up to $50,000 for renovations.  Wow, thought Dave.  The online reviews are good.  They say the lender is “expensive,” but that is to be expected.  “Sign me up.”

WARNING ONE: If a supposed lender changes you some fee before you have even found your first project, run for the exit.  You might be amazed at how many trusting souls are willing to pay essentially their only savings to someone who claims they can make their lives easy for them.  Dave paid his $3,000 and he received a letter from the lender saying he had been pre-approved for up to $250,000 in financing and up to another $50,000 in renovation funding, subject to the lender’s underwriting and other guidelines.  Pre-approval letters, even from the largest banks, reserve the right to underwriting review, of course.  So Dave felt he was ready to go to work.

Dave contacted me to find him his first project.  I didn’t know Dave, but I cautioned him that inventory is low in the Charlotte metro area, like it is in many other regions of the United States.  Dave needed to have his financing in place before we started looking.  The best values are likely to receive multiple offers, and an offer submitted without proof of cash to close or pre-approval from a lender is unlikely even to be considered by the seller.  Dave assured me he had been pre-approved to purchase a home up to $250,000, and he sent me a copy of his pre-approval letter. 

In the next month’s blog post I will specifically describe what was wrong with the picture painted above.  I’ll give you a hint: it had something to do with Dave’s lack of even the most basic understanding of finance terms and conditions, and his willingness to trust that this lender was as interested in his success as they were in their own bottom line.  I will end this blog post on a positive note: house flipping is alive and well, even in the most difficult market.  But research, education and caution are a wise foundation for this, or any business.  In the next blog post, I will conclude “Dave’s story.”

Identify and Target Fertile Neighborhoods for Fast Flip Projects in Charlotte

So you have decided you would like to plunge into your first flip project.  You have your financing in place, a list of contractors you plan to use for renovations, and a solid budget.  But in your first several attempts to get a Charlotte home under contract, you found that you were not the only one seeking a solid flip project.  In fact, with inventories of resale homes very low in the Charlotte area, you were promptly notified by the sellers’ agents that there were multiple offers on each property, and “highest and best” offer on each was due by a date certain.  Gone was the notion that you could offer 10% below the listing price.  In fact, each property you wanted to bid on ultimately went under contract ABOVE the listing price.  Does this mean the time for house flipping has come and gone?  Of course not!

Any business proposition involves risk.  Most businesses have to cope with competition.  Business cycles are as old as free enterprise, and seller and buyer markets ebb and flow over time.  Today’s seller’s market may give way to a buyer’s market next year.  Any business needs to be nimble and pro-active.  The overall goal in a flip project is to resell a home quickly, for a profit.  So what can help us accomplish this goal in any market?

The answer is the fundamental consideration in real estate investing: location.  When looking for a good flip project in greater Charlotte in a competitive “seller’s market,” identify geographical areas—usually by subdivision—and focus on finding a project in one of those communities.  In a market where there are likely to be multiple offers on attractive listings as soon as they enter the market, it is likely that the buyer will have to find a home in fairly “rough” condition and build equity into it with reasonable, cost effective renovations.  But there has to be enough room in any given community for the finished product to worth more than the cost of acquisition + renovations and carrying costs.  The larger and more costly the renovations, the smaller the end profit is likely to be, of course.  So it makes sense to find an area of older homes that may have been reasonably well maintained by their owners, but which are in need of significant cosmetic updating.  I mean a home in which the roof and HVAC may be newer, but the kitchen and baths have not been updated since the home was new in 1962.  This will allow the buyer to concentrate spending and updates more on things that are readily observable—cabinets and counter tops… flooring and bathroom fixtures—and less on things that are less likely to add to the resale value of the home in proportion to the expenditures.

There are communities near Charlotte’s city center in which these homes can be found.  They have become popular with professional flippers, so prices continue to rise—even for the “old original” homes before renovations have been done.  Charlotte has a modern, expanding light rail system to shuttle people between home and its city center (called “Uptown”), and that light rail runs near many of these communities.  A location near light rail is also a big plus.  The finished, updated flip projects are quite popular with younger professionals who work in Uptown, where they might otherwise be attracted to a high rise condominium residence. Such prospective end-buyers who prefer a single family residence, with a small yard for gardening or entertaining, and without the high monthly HOA payments a high rise condo usually requires, can find a tastefully updated small home a very attractive alternative.  And these buyers have the income and budget for a high rise Uptown condo. 

For more information on suggested Charlotte communities in which this strategy has been used successful, please feel free to contact us.  As stated early in this article, the market is constantly changing and a subdivision that worked well with this strategy three months ago may not work so well three months from now.  Our company motto is: “Solid analysis identifies great opportunities.”  There is no substitute for doing your homework.     

In this Very Hot Charlotte Real Estate Market, Position Yourself to “Pull the Trigger” Fast

Many homebuyers around the country are experiencing frustration at low inventories of available homes and the resulting multiple offer situations that lead to “bidding wars” for available properties.  The Charlotte metropolitan area (Charlotte… Matthews… Mint Hill… Indian Trail… Huntersville… etc.) is no exception.  So how does a buyer address this situation and win?

The answer is preparation.  The first step in the process of finding a home or investment property is the same in any market: Get mortgage pre-approval and a letter of pre-qualification from your lender BEFORE you begin looking for a home.  Why?  This accomplishes several critically important things.  First, it allows you to know with some certainty what you can and cannot afford.  Why fall in love with a $400,000 home if you can qualify for only $250,000 in financing and have no other resources?  Secondly, sellers in this market (and most other markets) now insist that all offers be accompanied by either a pre-approval letter for financing or proof of funds on deposit to close a cash purchase.  Why would a seller commit to a contract that takes his or her property off the market with having some assurance that the buyer can actually close?  Pre-approval saves you critical time that would have been wasted getting pre-approved AFTER finding a home in a market where there will almost certainly be other buyers who are prepared to make an immediate offer on the home you think would be perfect for you. 

After getting that all-important pre-approval letter from you lender, do your homework.  There is far too much riding on the accuracy of your information to rely on those freebee sites like Zillow and Trulia and their notoriously inaccurate “Zestimates” of value.  Find a realtor who has access to the most recent data and carefully research the market value of any home you might want to make an offer on.  As our company motto goes: “Solid analysis identifies great opportunities.”  There is no substitute for doing your homework, and doing it well.  Armed with a solid opinion of market value, you have a ceiling value above which you are unwilling to bid against other buyers competing for the same home.  If others are willing to bid above fair market value for a home, let them have it and move on to the next. 

Preparation.  It is a key to success in most things in life, and it is certainly critically important in buying a home or investment property.  Get organized.  Do your homework.  Know the current market in your areas of interest; and position yourself to move quickly and decisively on an opportunity.  A large part of this is also knowing when to “pull the plug” on negotiations and move on to the next opportunity.  In the current real estate market, it’s all about preparation.

Giving Careful Thought to Your Precise Goals Can Save Much Frustration in this Very Hot Charlotte Area Real Estate Market

Anyone who has searched for a new home or investment property in the Charlotte, NC, metropolitan area in the last year or so has quickly come to the realization that this has become a red hot “sellers’ market.”  Inventory of available homes in most locations through the Charlotte area is low and buyer interest remains strong.  That often translates into multiple offers on properties that offer good value, and contract prices are often above listing prices.  It has always been important to give adequate thought to your precise goals and objectives when investing in anything—stocks… business ventures… real estate.  So it is sometimes surprising that prospective homeowners and individual investors often take so little time to map out their strategies.

At Eric J. Dorer Real Estate, our company motto is “Solid analysis identifies great opportunities.”   That motto is true in almost any investing or business context.  So it should be all that much more important if the thing you are shopping for happens to be the single largest investment most people make in their lives.  Taking the time to write out a list of priorities and then research how those priorities can be met will save you a great deal of time and frustration in any market, much less in this hot sellers’ market.  Research may cause you to refine and revise your goals.  For example, a 12% annual gross yield on a real estate investment may have been attainable with relative ease five years ago, but you might struggle to realistically reach 10% in the current market because other buyers continue to bid up contract prices.  I don’t know about you, but I would still rather achieve a real 10% gross yield on a property I was able to buy than no yield at all because I could not get a property under contract and closed.  Goals and strategies need to be realistic.

Likewise, I would rather find a home while interest rates are still at almost historical lows than continue to rent a home as interest rates and home prices rise, because I keep losing homes to other buyers by insisting on a significant reduction from the listing price of a home.  “Lowball” offers worked in 2010 as the real estate market was flush with foreclosures and short sales.  But those “distress sales” have since been absorbed into the market, and approaching 2018 with a 2010 strategy is a formula for frustration.

Homebuyers should take the time to write out a list of goals and priorities—school assignments… geographical locations… expectations of future appreciation…etc.  Then research those goals to make sure they are realistic.  A qualified, market-savvy realtor is the best source for such research.  We pay to subscribe to the databases and other sources of the most important market information.  We also deal with it on a daily basis.  “Free” sources like Zillow and Trulia may be tempting, but the research you gather from them is usually worth as much as you paid for it.  Their information is very frequently incomplete and out of date.  Again, when a home is most often the single largest investment a person makes, it seems foolhardy to base decisions on incomplete and old data.  This is especially so when most realtors are paid a commission by the SELLER, even if they represent the buyer.  Engaging a competent professional for assistance should really cost the buyer nothing.  Why would anyone want to go it alone?

Take the time to carefully consider short term and long term goals, write them out, research how attainable they are, revise them as necessary or advisable, and move forward accordingly.  “Sold analysis identifies great opportunities.”  A sold plan enables you to act on those opportunities as you identify them.  In this very hot Charlotte real estate market, these things can go a long way toward helping you avoid frustration and ultimately win.     

For more information about the Charlotte real estate market, and to search the entire Charlotte MLS system for all available homes, condos, townhouse, etc.—including foreclosures and short sales—completely free of charge, go to www.EricDorerRealEstate.com  Or contact us directly.  We would be happy to help you formulate a winning strategy for this Charlotte metro area real estate market.

Real Estate Investing in Charlotte… Location and Other Considerations

Happy New Year to everyone and best wishes for a happy, healthy and prosperous 2018.  This will be my first blog post of 2018, and I will briefly explore a subject of great interest to many people in our currently very hot Charlotte real estate market: investing in real estate.  Of course, even your principal residence—the home in which you live—is an investment.  In fact, it is most often the single largest investment anyone will ever make.  So the same property investment principles discussed here will have general application to “investing” in any real property.  But, since I work mostly with investors, and since many people have considered the notion of real estate investing but are unsure of where to begin, I thought I would devote a blog post or two to investment in the Charlotte real estate market.

Most people have heard the old saying that the three most important considerations in real estate investing are: (1)Location, (2)Location, and (3)Location.  That old adage generally applies to real estate investing here in Charlotte, too.  But what specific locations can generate the best “yield” or return on investment?  This is a very important consideration in this very hot—perhaps overheated—market because it is not uncommon to find multiple offers competing to get a home under contract, when it has been identified as a good value.  I don’t want to make things any more complicated than they have to be, but the answer often depends on the investment strategy.  If you are buying a property to generate rental income and hold for future appreciation, the geographical areas of interest may be a bit different than if you are buying property to renovate and “flip” quickly for a profit.  Why?  Because flippers must make their profit in a short time, and many flippers use more costly financing to purchase their properties.  “Buy and Hold” investors have a longer view and more favorable financing available to them.

One general geographic area I currently find to be favorable to both flippers and buy-and-hold investors with a longer view is the area just south of Uptown Charlotte comprised of smaller, older homes.  Subdivisions such as Starmount, Montclaire, Madison Park and Colonial Village are good examples of this area and general location.  It is possible to find an “old original” home built in the late 1950’s or early 1960’s that has not been updated in many years—perhaps never updated at all.  Proximity to Uptown, light rail, shopping and entertainment have made these areas increasingly very popular with younger, somewhat more affluent buyers.  For these reasons, this general location is enjoying much revitalization.  It is possible to buy a home that needs significant updating at a substantially lower price than its “ARV” or “after renovation value.”  I find focus on these areas is actually much more likely to yield good results in this market than a focus on “distress sales” like foreclosures.  Why?  Because most foreclosures have been absorbed back into the market.  There are far fewer of them now than there were in 2010, for example; and the banks that own these foreclosures know the market is hot and price their REO inventory (“real estate owned” after foreclosure) accordingly high. 

A focus on specific subdivisions—specific locations—calculated to yield more profitable investment prospects is more likely to be successful in this current Charlotte market than a focus on circumstances indicating some sort of distress, such as foreclosure or short sale.  This applies to most general investment strategies, from fast flip projects to buy-and-hold rental investment.  For more information and for assistance identifying, researching and analyzing good real estate investment prospects in metropolitan Charlotte, please do not hesitate to contact us.  “Solid analysis identifies great opportunities,” and this is what we do all day, every day.