Nancy Braam

One Real Estate Investment Plan: Never Sell

This works best with 1st time home buyers, but can work for most people until you get into high-priced homes.

To start: Buy your first house and immediately start saving your next down payment. It will most likely take a few years to save it so this gives you time to enjoy your home and lay down some roots.

When you have your next down payment saved, buy your new home, but don’t sell your old house. Keep it for a rental. Most likely it will more than cover the monthly payments, so what you are really doing is letting the renters finish paying the house off for you. If there is excess money over the payments you can either apply it toward the principal and get it paid off faster or you can put the extra in the next down payment savings account.

If you buy into this plan, you will pick your first couple of homes with an eye toward rentability. Go for 2 baths if at all possible – you can get as much or more rent for a 2 bedroom, 2 bath than you can for a 3 bedroom, 1 bath. And there are less people to wear out the house. 3 bdrm, 2 bath is ideal though.

For other real estate investment ideas, click here.

HUD Foreclosures In Bellingham and Whatcom County – Week of 12/26/11

There are more HUD homes for sale this week than normal. 9 total. Only 2 are new.

This new one is at 3625 W. Rusley and they are asking $205,000. It’s a 3 bdrm, 2 bath, built in 1968.  West Rusley is a little close to the freeway as you can see on the map, but not a bad area or neighborhood. It looks like a pretty good deal.

Click here to see the others available this week. Prices are as low as $73,800! The highest is $225,000.

If you’d like to make an offer, see inside or get more information, contact me.

If you don’t know about buying HUD homes, here’s what you need to know.

The 5 Most Important Tips To Negotiating Real Estate Deals

Are Americans Wimpy Negotiators?

In the international arena of negotiation, Americans are considered wimps because we believe in fairness, so we tend to “split the difference” a lot. In many cultures, fairness is not in play at all…which is another whole story. Splitting the difference is not negotiating and the only time you should do that is when the price difference has been whittled down to a puny amount and negotiations have faltered.

This is straight from the top negotiators. Some of it is common sense.

1. Know the strength of your Plan B option. That means, what will you do if you don’t make this deal work? You’ve heard it said that the person most willing to walk away has the most power.

• If you are a buyer and have three other houses you like, you have a strong Plan B and therefore can negotiate from a position of strength. If you have 3 days to find a house or you will be in the street, your Plan B is not so strong.
• If you are a seller and you’ve already made an offer on another house – not much strength. If you have multiple offers – you are in a strong position to negotiate.

2. Inventory your bargaining chips.

• People tend to think only in terms of price, but there is a lot more. For buyers – maybe the seller would like 3 weeks to move out or they really love their refrigerator. Think about giving them that to get the price you want.
• Sellers can negotiate appliances, lawn mowers, extended closings or the deck furniture.
• Earnest money, title company, closing date, performance dates are all negotiating points you can use. Read the rest of this entry »

What Are Valid Expenses For Investment Real Estate?

When you are looking to buy real estate as an investment, one of the most important numbers you need to know is the Net Operating Income or NOI. That is the actual income after expenses (not including the mortgage payment).

Here are the some common expenses:

• Property Taxes
• Insurance
• Management Fees
• Utilities paid by the owner
• Repairs
• Maintenance
• Advertising
• Supplies
• Lawn care
• Cleaning & Janitorial
• Legal and accounting
• Licensing
• Vacancy

Sellers love to leave out Management Fees, repairs, maintenance and especially vacancy rates.  In fact, it is quite common when you look at an investment property listing, the only fees the sellers include are Taxes, Insurance and Utilities. Then they work the Cap Rate or Cash on Cash return based on the NOI that is not realistic. They argue that you might do your own management or yard care. I say, if you do, you should be paid for it by a larger bottom line. These are valid and standard expenses and should be included to determine a realistic value.

It’s important for you to work your own numbers and determine your own Cap Rate and Cash on Cash return. Ask for the seller’s last couple years of his or her Schedule E. This is what expenses they deduct on their taxes. Granted, there are some write-offs for taxes that you aren’t going to use to determine an offer price, like travel expenses if the seller lives out of the area or depreciation. The most important item on the Schedule E is the true Gross Income. Don’t just take the seller at their word when they say, “It’s always rented.” The Schedule E will also show you what they are spending on repairs, lawn care, cleaning, etc.

There is no substitute for doing your own investigation! If you need help, contact me.

Common Real Estate Investment Analysis Formulas

Gross Rent Multiplier - the ratio of the price of a real estate investment to its annual rental income before expenses. The lower the GRM the better. This doesn’t take into account expenses, and should not be used to determine if a property is a good value.

Price: $450,000 / Annual gross rents: $36,000 = 12.5 GRM

Price: $450,000 / Annual gross rents: $46,000 = 9.8 GRM

Capitalization Rate (Cap Rate) - the ratio of the Net Operating Income (NOI) to the price. The higher the Cap Rate, the better. This is straight return on investment.

Net Income: $24,000 / Price $450,000 = 5.3% Cap Rate

Net Income: $34,000 / Price $450,000 = 7.6% Cap Rate

To work it backwards for pricing properties: i.e. You know the NOI, you think a 6% Cap Rate is a marketable rate.

Net Income $13,000 / 6% = Suggested Price $216,666

Cap Rate does not take condition of the property into consideration. If there is deferred maintenance, the Cap Rate should be higher. Brand new – lower.

Cash on Cash Return - the ratio of the Cash Flow (NOI minus debt payment) to the down payment . Determines the true return on actual investment. The less money down the higher the return will be:

Cash Flow:$2300 / Cash invested: $50,000 = 4.6% Cash on Cash

Cash Flow: $2300 / Cash invested: $36,000 = 7.6% Cash on Cash

None of these factor in depreciation, other tax advantages, mortgage rates, or appreciation. The Net Operating Income is the Gross Income minus the expenses. You have to be careful because Buyers and Sellers tend to determine expenses differently.

Amazing HomePath Financing Options For Bellingham Homes

What is HomePath?

It is a mortgage program offered by Fannie Mae when you purchase one of their forclosed properties. You can have a down payment as low as 3% and still pay no private mortgage insurance!

What are the benefits?

The mortgage can be fixed-rate, adjustable or interest only.

• The down payment can be a gift, a loan from a non-profit, state or local government, even a gift from your employer!
• The lender doesn’t require an appraisal.
• No Mortgage Insurance!
• Fannie Mae can pay a percentage of closing costs.
• Good on primary residence, second home or investment properties.
• Many condo requirements are waived.

HomePath for fixers

They offer a renovation mortgage where you can get 35% (up to $35,000) for repairs done after closing. The only difference from the regular HomePath mortgage is the repair amount is determined by an appraisal of the completed project.

Who’s Eligible?

Everyone! The reason they are offering this is to get rid of their foreclosure holdings. They aren’t property managers and they don’t want to own homes.

What’s the catch?

You can only get a HomePath mortgage through approved lenders. It’s not much of a catch because we have several local lenders that do them.

For a list of HomePath properties currently on the market in Bellingham and Whatcom County, fill out this form and I’ll keep you updated.

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New Listing – Ferndale Rambler

2510 Lakeridge Drive, Ferndale WA

I just listed a really nice home.

Built in 1998 by Turner Construction, this one level home really has a perfect floor plan. Big enough, but not too big with 1866 square feet. The master suite is at one end of the house and the 2 additional bedrooms are at the other end.

• The kitchen has unique granite counters, not the common granite I call “builder’s” granite. There’s lots of counterspace for working and plenty of cupboards and cabinets for storage.
• There’s a formal dining room and a large breakfast area. The owners used the formal dining room as a TV room and still had room for a large table in the breakfast area that looks out on the back yard.
• The master suite is large with a big walk-in closet and bath with jetted tub and separate shower. There are sliding doors to the patio.
• The living room has high, vaulted ceilings, designer colors and a cozy fireplace.
• The 2 car garage was an extra shop area and additional paved parking along side.
• The landscaped and sprinklered yard is really pretty. The back yard is lush with a waterfall. Very peaceful.

Here are some photos – click to enlarge and see as a slide show. To take a look, contact me.

Whatcom County – Why Did Your Property Assessment Go Down And Your Property Tax Went Up

This past week 96,000 property owners received new property assessments and tax bills. Believe me, I got a lot of calls. Most of my clients found that the assessed value of their properties went down yet their property tax increased by about 10%.

We all are happy when the assessed value goes down because usually the taxes go with them, so what happened?

Several things. According to Keith Willnauer, our assessor for 23 years, the reason for the tax increase is primarily due to three factors. The first is that the county changed from 50 years of assessing one quarter of the county each year, so each property was assessed only once every 4th year. Now with yearly valuation, it equalizes the tax burden.

Say for example your property was assessed 4 years ago in 2007. That was basically the top of the market, so that year your house taxes doubled, because you are carrying the bulk of the burden with your new high assessment. So this year with everyone re-assessed, the value of those high properties came into line and their overburden is now spread out among all of us, raising our taxes a little.

Next is the state school levy. This is divided between all the counties in Washington state. Unfortunately for us, this year the divisions were re-evaluated and Whatcom county was given a bigger burden, raising our taxes a little more.

Lastly is the Bellingham school levy for maintenance and operations that we, the voters, agreed to. People living within the Bellingham School District saw the biggest increase of all.

In talking to my clients, I learned that, in Bellingham, the average tax increase is somewhere around $600-$800 per year.

It’s a bitter pill to swallow, but sadly all the fees are legit. The assessor’s office gets lots of angry call at times like this but just remember – they are the messengers. Mostly, we voted the increases in.

Whenever a new tax is put in front of the voters, they present it as pennies per $1000 of property value and it seems really small. Next time, do the math and see what it really means to you before you vote.

Do You Understand Your Credit Score? Don’t Lie To Yourself

First of all, there is a different rating system for different industries. For a car loan you can top out at 1000. For a home mortgage, it’s 900. The algorithms are a mystery, but a few things have been deduced. Here’s what we know, your score is weighed like this:

35% of your score is based on payment history. The number one thing you can do to improve your credit score is to make your payments on time. On time from a credit point-of-view is less than 30 days late. If your payment is due on the first, the bank will charge you a late payment if you pay after the 15th of the month. They will not report it to the credit bureaus until it is 30 days late. You can make your payment late but never let it be 30 days late.

30% is based on the amount owed. This is not the total amount owed. This is the percentage owed against the credit limit. The magic number is 30%. So if you have a credit card with a $10,000 limit, to obtain the biggest credit juice you can’t owe more than $3,333.00 on it. Lately, if you are late, even 1 day, the credit card company may reduce your credit limit down to what you owe. That act alone will damage your credit score.

15% Length of credit history. This is why you don’t close out those cards you don’t use and have had for years.

10% New credit. You don’t want to be applying for credit repeatedly. You get docked, but truthfully, not as much as any of the above.

10% Types of credit used. Real estate at the top end, consumer credit bottom.

You know there are 3 reporting agencies. Experian, Equifax, TransUnion. You are entitled to a free credit report once a year or when you are turned down for credit. A better option is to sign up for a credit service that emails you any changes to your credit report.  They cost $10-20 a month and are well worth it, considering the identity theft risks that exist today.

Have you ever paid a payment late when you have the money and just didn’t get around to it. Don’t do that anymore. Credit scores play into much more than when you want to borrow money. They play in to security clearances and employment too. Keep your credit clean if it is, and if it isn’t do everything you can to clean it up. It won’t take as long as you think. If you have questions, google it, or talk to me.

Bellingham, WA 2010 Real Estate Numbers. How’s the market?

Forget prices for a minute. Let’s just look at the volume or number of sales.

You can see by quickly looking at the numbers on the far right that at the height of the market, we sold 1256 single family residences in Bellingham, WA in 2006. Now 5 years later we sold 820. That’s a decrease of about 35%!

Remember the law of supply and demand? Volume represents demand. So you could say the demand for houses has decreased 35% in 5 years. Looking at it this way gives you an idea why prices are still decreasing. Over 1/3 less people want to by a house. Competing for a sale with fewer buyers drives prices down.

You’ll notice that the market was slow to start in January and February for the past two years. A market that takes off in January after the Holidays indicates a robust market. People are ready to go. It’s an early indicator of the rest of the year.

I’ll update you on January volume and we’ll make a prediction about the 2011 market. Watch for the post the first week in February. If you like to talk numbers and would like more information, contact me. I love to talk about this stuff.