DEAN GRAZIOSI: DEAN GRAZIOSI REVIEW – REAL ESTATE FEED BY DEAN GRAZIOSI

Homeowner’s Insurance is an inexpensive way to protect one of your largest investments. If you have mortgage, your lender will require you to purchase a Homeowner’s Insurance Policy. 

Homeowner’s Insurance is a contract between the owner and the insurance company.  In exchange for paying the premiums, the insurance company will pay the owner for damages caused by natural disasters or by human error.

Owners have protection against natural disasters like fire, lightning, wind or winter storms.  Damages caused by humans like theft and vandalism are also covered.  Most homeowner policies include liability coverage for persons that incur injuries on the property. The cost of legal defense in these instances is usually included in the coverage.

Homeowner Policies do not include coverage against floods or earthquakes.  If the property is located in an area where these natural disasters are common, the lending institution may insist that the owner acquire flood and/or earthquake insurance.  The cost of this coverage is more expensive than typical homeowners insurance.

As the mortgage company typically has a significant amount invested in the home, which is often more than the owner’s insurance, they will want their investment protected to the maximum amount.  Proof of this insurance will be required before the property will close.  Many mortgage companies will charge the homeowner for the insurance and then pay the premium themselves.

The premiums, like the real estate taxes, will be paid from the homeowner’s escrow account.  Proof of payment and coverage will be forwarded to the homeowner each year.  If the lender does not require premiums to be held in escrow, the mortgage company will send notice to the owner each year requiring a cop of the new coverage.

If the home s sold, the homeowner will receive a refund for the unused portion of the policy.  The same practice applies to unused real estate taxes that have been prepaid. 

Homeowner Insurance is provided at a reasonable rate.  The homeowner is free to seek competitive proposals for the insurance. The homeowner should make sure the coverage meets all the lender’s requirements and serves their best interests as well.

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The mortgage industry has undergone regulatory reform.  The recession took a heavy toll on the creative lending practices.  Subprime lending and exotic subprime mortgage products are a thing of the past.  Here are some of the reforms that have been implemented by the Mortgage Reform Act of 2009 and subsequent legislation.

·                     More documentation – The low documentation loans and no documentation loans that characterized the subprime lending practices are no longer permissible.  Today’s mortgage applications require more paperwork than ever before.  Lenders must substantiate and verify all income and debt.  Borrowers should expect to provide lenders with pay stubs, bank statements, retirement account information, income tax returns and brokerage accounts and debt statements.

·                     Refinancing delays – The banking industry, like many recession industries, has undergone massive layoffs.  Requests for refinancing can now take up to 60 days to process.

·                     New appraisal practices – The new Home Valuation Code of Conduct has overhauled the appraisal profession.  The new code discourages contact between real estate sales people and appraisers.  Only lenders can work directly with appraisers and even that practice is diminishing.  Most appraisers are retained through the use of an independent third party.  These changes have led to some confusion but Realtors have asked Congress to suspend the new rules.

·                     Credit evaluation – In the past a Fair Isaac Company (FICO) score of 740 would entitle the borrower to lower interest rates.  The new favored credit standard is 760.  If your credit score is 760, you may want to consider refinancing.

·                     More Truth in Lending – As of July 2009, lenders must disclose earlier in the application process how much a loan will actually cost.  The purpose of this early disclosure is to allow the prospective borrower more time to consider the mortgage offer.  After the borrower receives the new disclosure, the borrower has even days to confirm the selection.

·                     Longer Closing Dates – It now takes more time to close mortgages.  Part of delay is caused by the extended decision time and part of the delay is caused by the simple fact that foreclosure departments are busier than lending departments.

The most aggressive mortgage lender is now the FHA.  More than 60% of mortgages issued by the FHA in 2009 have been issued to first time homebuyers.  The Federal Housing Administration has lowered their down payment requirement to 3.5% and has increased the acceptable debt to income ratios.

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Given that there are terrific buying opportunities in today’s real estate market, the experienced real estate investor learns how to buy at the best price.  Real estate investors leave the emotion at the door and replace that emotion with facts, figures and budgets.  Quite simply, there is no other way to invest today.

So, now we need to build a reliable checklist that will eliminate surprises and lead us to the bottom line.  To build this list, we break expenses into three basic categories.

Purchase expenses – depending on the type property, the investor’s credit history and the lender’s requirements, there can be some variation to the cash requirements at time of closing.

·    Down payment
·    Attorney fees
·    Taxes in escrow
·    Recording fees
·    Survey costs if necessary
·    Title insurance
·    Pre-paid reimbursements to seller

Income & expenses – with most investment property, current and projected income and operating expenses affect the property’s value.  The buyer should understand:

·    Net heating and cooling costs
·    Net tax obligations
·    Net management fees
·    Annual maintenance expense
·    Cleaning or janitorial expenses
·    Lawn and landscape costs
·    Mortgage expense
·    Income

Each property presents unique income and expense opportunities.  When it comes to gathering this information, more is better than less.  Gather as much info as possible.

Immediate Cash Requirements – every property can be improved.  Some improvements are superficial while others can represent major expenses.  Again, the investor eliminates surprises. Check the following systems thoroughly and be safe rather than sorry by calling in experts for structural inspections.

·    Roofing
·    Basement
·    Heating and cooling
·    Exterior
·    Windows
·    Plumbing
·    Pest control
·    Asbestos mitigation
·    Elevator
·    Electrical

The successful investor will expand these basic lists.  Get behind the numbers to repair or upgrade these systems and use structural experts to help clarify the property’s true, not emotional value.  Your due diligence to these building systems could well determine the success of your investment.

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