About Home Equity Loan
Many homeowners want to know information about their home equity and how to use it. What are the home equity loan products available for their major expenses?
Let us understand two types of home equity loans in Texas, and why would you need them.
What Is Home Equity Loans In Texas?
A home equity loan is a second mortgage that is borrowed against the remaining equity on your house after the first mortgage. The amount of the loan is decided on the property value and your current 1st mortgage balance.
In HEL borrower gets the entire loan in a lump-sum amount. HEL is usually shorter in term compared to 1st mortgage. The guidelines for a home equity loan in Texas vary from that of the other states.
What is the Home Equity Line of credit in Texas?
Unlike the HEL Home Equity Line of Credit (HELOC) is a revolving credit line with a specific limit just like credit cards. This credit line is given to the borrower against the equity in the house.
With the HELOC borrower can choose how much money to withdraw from the allocated credit line.
And will be making the payment only on the amount withdrawn. HELOC is one of the most popular home equity loans in Texas.
How to obtain HEL/HELOC in Texas?
To get a home equity loan in Texas, an individual should have an excellent to good credit history. Also, the loan to value should not exceed 80 % of the property value, which would also include your 1st mortgage.
The rest of the procedure is very similar to refinancing with cash-out. The choice depends on the borrower to opt between a line of credit or a home equity loan.
Why HEL/HELOC?
HEL/HELOC is usually obtained to cover significant expenses such as home repairs, college educations, medical bills, or paying off any unsecured debts with a high interest rate.
Let’s say you have several credit card debts with high interest rates. You can opt for HEL/HELOC and pay off the credit card debts, and get a lower interest rate under one single payment.
To obtain home equity loans in Texas, get in touch with your current bank or your trusted loan officer.
Conclusion
Though this looks like a beneficial and smart financial move, you have to consider your intentions thoroughly before you tap into your equity, as failure to make the payments on HEL/HELOC may risk your property towards foreclosure.
Talking to your loan officer would give you better knowledge about obtaining any of the home equity loans in Texas.
About After Repair Value (ARV)
If you are looking to buy an investment property or planning to flip one, as an investor it is important that you anticipate the profit that you would be making after you flip the property.
To know your profit margins you might need to anticipate the price of the property in the future considering the variables such as housing market trends, comparables, etc.
One such important variable to consider is after repair value of the property as many investors purchase fixer-uppers to make more profit. In this post, we will understand what is ARV in detail.
What Is ARV In Real Estate?
If you are planning to flip a fixer-upper property, you might have heard about the term ARV.
However, what does ARV mean in real estate? After Repair Value, is the estimated value of the property after the renovations are completed and not in its current condition.
Real estate investors often use after-repair value as a way to assess the value of a home in need of repair, including how much it can be bought and resold after repair.
Repairs or renovations can range from installing new appliances in the home, applying new interior or exterior paint, replacing the roof, etc.
Since the fixer-uppers are not in the best condition, the home buyers and investors will not want to buy them at the market value if they plan on making a profit.
These investors or home flippers purchase the price at a below-market price and use after repair value to anticipate the profits that can make by selling the property once the renovation is complete.
This value can be used to get a loan for the cost of “flipping” the property. Some lenders offer mortgages or loans for home improvement, with the maximum loan amount being around 65% of the after-repair value.
Getting after-repair value is also good for homeowners who are not planning to flip the property as it would help you to anticipate how much your renovations would add to your home value.
What Is The Formula To Calculate ARV?
To calculate the more accurate profit that you would be able to make by flipping a house using the after repair value, there are multiple steps you need to follow.
Your intention in calculating the ARV is to know how much profit you can make by selling the home after the renovations are complete.
Calculating the after repair value is fairly simple.
After repair value = properties current value + value of the renovation
However, before you calculate this you might want to derive the property’s estimated current value and the estimated renovation cost.
Step 1: Derive Property’s Estimated Current Value
You can calculate a home’s current value by comparing five or six properties, called comps.
These are homes that are similar in size or shape in the same neighborhood as the property that you are planning to purchase.
Usually, comps that were sold in the last 90 to 120 days are enough for you to compare and understand the performance of the housing market in the area without going too far back in time.
To find suitable comps, you can search on online portals such as HAR or Zillow, or you can get them from the local tax assessor’s office.
To get the estimate of your property’s current estimated value, take the average sales price of the comps that you found from the sources.
For example, if you find five properties that were sold for $240,000, $250,000, $235,000, $260,000, and $265,000, the average price is $250,000.
If you want to get a more accurate property value, you can calculate the average price per square foot of the comps and apply that metric to your property.
For example, let’s say the area of all your comps added together is about 6,000 square feet, the price of all these comps is $1.25 million.
$1.25 million/6,000 square feet = $208.33 per square foot
If your property in question is 1,200 square feet, you can estimate your property’s current value at $249,996.
Step 2: Derive Estimated Renovation Cost / Value.
Next, you’ll want to consider the estimated value of the home renovation. You should start by considering the cost of these repairs, but remember: the cost of repairs is not necessarily the value of these improvements to the buyer.
Contact multiple contractors and ask them to provide a written estimate of the cost of the work.
Be sure to get a detailed list of any repairs that include both labor and the cost of materials.
Compare the price with the amount you think buyers will pay for the home with these improvements.
Comparing comparables that have these repairs with ones that don’t would help you find the difference in pricing and value of those repairs.
Step 3: Calculate the ARV
With the formula mentioned above, consider the same example mentioned above where your estimated property value is $250,000 and the cost of repairs comes to $55,000.
Your After Repair Value = properties current value + value of renovation = 250000 + 55000 = $305,000
So the after-repair value for your property is $305,000
What Is The 70% Rule?
Now that we know the after-repair value let’s see the way to identify if the property is worth buying.
It is wholly based on the price that you are buying the property for. One way to determine whether the property is worth buying is to use the 70% rule.
The 70% rule states that the highest value you can pay for a property is 70% of the ARV minus the cost of renovations. (After Repair Value x 0.7) – Renovation Cost = Gross Purchase Price
Assume the after-repair value of your property is $305,000 and the cost of repairing is $55,000.
($305,000 x 0.7) – $55,000 = maximum purchase price
$213,500 – $55,000 = $158,500
According to the 70% rule, you cannot pay more than $158,500 to acquire your property.
Remember that this is just an estimate, and you might have to negotiate diligently for the seller to accept your offer.
Conclusion
After-repair value is one of the best tools for real estate investors and homeowners that are looking to sell their property with a good profit margin.
However, there are some drawbacks that you might want to consider as these values are just estimates and the appraiser might come up with different property values.
Make sure that you do a thorough inspection of the property before investing as unseen repairs may add to the cost of renovation thus reducing the profit margin.
Also, make sure that you have a good idea about the housing market trend in the area so that your property value is as close as possible to your anticipation.
About Renovation Loan
Home renovation loans allow the borrower to finance home repairs and updates, which can improve their home’s retail value and aesthetic appeal.
The most popular remodeling projects are kitchens and bathrooms which could cost around $20,000, many homeowners can only afford these projects through a home renovation loan also called a home improvement loan.
The best home renovation loans have low rates, fewer fees, and flexible loan amounts.
The loans to be popular and in-demand should have a feature of the easy application process, fast approval time, and reasonable repayment terms.
The Process Of Determining The Home Renovation Loan Needs
For the purpose of identifying the ideal type of home renovation loan, the homeowner should start by getting a sense of the type of home improvement project they want the loan to cover.
They should decide on a project, the estimated cost, and get quotes from contractors in order to determine what size loan they should opt for.
The loan size may also differ since a smaller project could necessitate a loan of a few thousand dollars, whereas a more wide renovation could cost tens or even hundreds of thousands of dollars.
For instance, if the homeowner goes to renovate their entire kitchen, they may need a loan of around $20,000 to $50,000.
On the other hand, if it is for completing a small project like repainting a room or two in the house, they may only need a $1,000 to $2,000 loan.
When deciding on a loan the borrower should also consider loan terms. The loans with longer terms will have smaller monthly payments because over time they will end up paying more in interest.
With this in mind, homeowners should choose the shortest term length that is comfortably affordable to them.
How To Compare Home Renovation/ Home Improvement, Lenders?
To make sure that they are getting the best possible deal on a home improvement loan it’s important for the homeowner to compare home improvement lenders. Some factors to consider are:
- Interest Rate: The lower the interest rate, the less will be the payment they will make over the course of the loan. Borrowers with excellent credit stand a better chance to qualify for the lowest rates, but the borrower should compare rates from different lenders in order to be sure that they’re getting the best possible deal.
- Loan Amount: Depending on the type of home renovation project that the homeowner has designed, they may need a loan of somewhere from a few thousand dollars to tens of thousands of dollars. They should look for a lender who offers loan amounts that meet their needs.
- Required Credit Score: Many lenders do not approve applications from borrowers having poor credit. If the borrower’s credit score isn’t looking good, then they need to look for a loan from a lender that works with that credit score range.
- Customer Service: While deciding on a lender it is not only the rate that the borrower should consider, they must pay attention to the qualitative features like customer satisfaction. Before looking for a lender the borrower must check for their history and note if they have strong customer service and few complaints.
Applying For A Home Improvement Loan
In order to apply for a home improvement loan, there are a few things that the borrowers need to do which are very similar to the process of applying for other types of personal loans, which can be done online.
Before applying the borrowers should make sure that their finances are in order. Most lenders have a credit score requirement of at least 600, although some lenders will issue loans to borrowers who have scored as low as 580.
In general, the higher the credit score, the more loans amount the borrower will qualify for and stand a chance to get better rates.
If the borrower’s credit isn’t where it must be, then they should take steps to raise their scores before applying for a loan, they must remember that a loan includes making on-time payments, reducing their credit utilization, and keeping old accounts open.
The borrowers should also gather documentation that is typically required for a home renovation loan application, which includes their W2s or pay stubs, mortgage, proof of address, and any other relevant financial information.
The Working Of Home Renovation Loans
The term home renovation loan has 3 different financial products like personal loans for home improvement which may be secured as well as an unsecured loan, home equity loans, and home equity lines of credit.
Even if all 3 of the loans have different features, they also have something in common.
If a borrower qualifies for financing, a lender will lend them money that they can use toward a home improvement or repair project. In exchange, the borrower over time repays the money they have borrowed, along with interest and fees.
Many home improvement loans are reported to the 3 credit bureaus so it’s important that the borrower makes their payments consistently and on time if they want to protect their credit scores. And this will help them in the future.
Once the borrower decides to borrow money for the renovation of their home, there are many lenders like online lenders, banks, and credit unions who may be able to help them.
Are The Home Renovation Loans Tax Deductible?
Many of the deductions that were once available to taxpayers have been changed by the Tax Cuts and Jobs Act.
Yet in many cases as per the IRS, the interest paid on second mortgages, home equity, and home equity lines of credit, may still be deducted from the borrower’s taxes.
To deduct loan interest from their taxes, the funds that are borrowed must have been used to build or substantially improve the home that secures the loan. These loans are called secured loans.
So if the borrower uses an unsecured loan to fund their home renovation, they might not be able to deduct the interest they pay.
Can A Borrower Borrow More On Their Mortgage For A Home Improvement?
Unlike revolving credit cards and credit lines a mortgage loan lets the borrower borrow money and pay it back, and borrow again, whereas an installment loan is issued in a lump sum amount.
For an existing mortgage—for home improvements, a borrower can’t go back to their lender and ask for more money.
However, they can consider a cash-out refinance. With a cash-out refinance, a borrower can apply for a new loan to pay off their existing mortgage.
And if the equity in their home has increased, they may get some extra funds from the closing table.
Conclusion
Home improvement loans allow homeowners to finance home repairs and updates, and improve their home’s retail value and aesthetic appeal.
Part of homes like kitchens and bathrooms are popular remodeling projects which could cost thousands of dollars and many homeowners can only afford these projects through a home improvement loan.
A home improvement loan is best when they have low rates, lesser fees, and flexible loan amounts.
When the loans have an easy application process, fast approval time, and reasonable repayment terms then it is very popular and most sought after.
Introduction
In today’s world owning a real estate property means having an opportunity to gain profit.
As we all know that property values increase every year, and a homeowner has the potential to good earn a profit by selling the property in just one year. However, selling is not the only way to make money in real estate.
One of the most popular ways to earn a good amount of money is called house hacking. In this post, we will understand what is a house hack and how it works in detail.
What Is House Hacking?
A house hack is an investment strategy where you buy a home with a low down payment mortgage and then put a portion of the home on a rent to generate income.
Many homeowners use it as a long-term investment plan to earn money and cover mortgage payments, and other housing costs.
In this type of strategy, you buy a home with a low down payment that you can later turn into an investment home.
House hacking is a way to temporarily reduce housing expenses, or it can be considered the start of a career as a real estate investor.
In any case, with the high cost of housing, it is a method of using the valuable property that you already have to live in, save money, or even buy real estate for investment, all this while you are building equity in your home.
How Does House Hacking Work?
A house hack can be easily done by acquiring multi-family properties that have up to 4 units.
Multi-family houses (up to 4 units) are more adequate for such a strategy as they provide more space to earn money and can be bought with minimum down payments.
Even though these multi-family houses have up to 4 units, they are still considered “single-family dwellings” as per lending standards.
As a house hack, you buy a multi-storied or multi-unit residential property to live on one floor or unit and rent the other floors or units.
This allows you to take advantage of FHA loans, which require as little as a 3% to 3.5% down payment on the primary home.
After you close your loan, you move into the house, rent out the other units, and use the rent money to pay off your mortgage and cover your other housing costs.
What Are The Different Ways Of House Hacking?
Let’s take a look at some common ways to house hack and earn money.
Buy A Multifamily Home
Any property with more than two units is a benefit, and more units have better chances of getting more profit.
This means that triplex is generally better than duplex and quadruplex are better than triplex.
Look for multi-family homes, then research those properties to find out which will have the lowest housing cost.
Remember the intention of using this strategy is to lower your cost as much as possible, and not to buy the best house.
Multifamily properties have been designed to shelter this strategy; hence it is best to look for one if you plan to house hack.
When it comes to analyzing them, there are a few things to keep in mind. First, check for the zoning and homeowner association rules if they allow renting the portion of your multi-family home.
Rooms For Short-Term Rental
If you don’t own a multi-family home and are sure you like the idea of committing to a long-term lease of any part of your current home, you can start a real estate investment career by offering additional rooms to guests on short-term rental platforms such as Airbnb or Vrbo.
For those who are currently thinking of buying a multi-family home for short-term rental purposes, financing is available for Airbnb rentals.
Be sure to check the short-term rental laws in the state and county where the property is located, and if the property is part of a homeowner’s association, be sure to familiarize yourself with their rules before renting.
Most HOAs restrict short-term and long-term rentals in their areas.
Additional Dwelling Units (ADUs)
An ADU is an acceptable addition to a home, usually in the backyard, where plumbing, electricity, and other essentials for a living are located. These are also called “guest houses”.
An ADU is a space that can be lived in or rented out to generate additional income. ADUs are a great asset to look for in a House Hack tool.
Whenever you search for properties with ADUs, keep in mind that not all ADUs are approved.
You can check with the local department to see if any permits have been issued and if local laws allow you to legally rent the space. If they are approved, it’s a great property to use as a house hack.
Conclusion
Eventually, whether to use house hacking for your property is a decision that you have to make as a homeowner and could depend on various life situations.
While this could look like a good option to earn some additional income, make sure you do your complete research on the property location, and local and HOA laws before you decide to use the strategy.
About Freehold Estate
Every buyer has their reasons to purchase a property. Some buyers may buy to move in as a primary residence, while some might buy with the intent to put it on rent and earn some passive income.
Based on the type of property you purchase, the ownership and possession rights may vary. In this post, we will understand what is a freehold estate in detail.
What Is Freehold Estate?
Freehold estate, in short, is a type of ownership where you have exclusive rights to the property for an undefined or indefinite length of time.
In other words, it is an “immovable” asset in that you have a certain amount of interest.
Since freehold estates are forever (meaning the estate can last for your lifetime or after death), they are also referred to as the estate of inheritance.
This means that the ownership of the property will be transferred to the original holder’s living descendants based on a will or laws.
In some cases, a freehold estate can be called an “estate with no inheritance” as the ownership rights may only exist as long as the original holder is alive.
What Are the Types of Freehold Estates?
When you are looking to purchase a house, know that three types of free-hold estates are available including:
- Fee simple absolute
- Fee simple defeasible
- Life estates
Fee simple absolute: Fee simple and fee simple absolute is often used interchangeably and is one of the most common types of freehold estate.
In this type, the owner has absolute ownership rights of the property without limitations.
There is no limit to how long you can own the property, and can also pass it on to your descendants.
You retain unlimited rights as long as you fulfill your obligations as a landlord, such as property taxes. As long as you do it, you can use the land as you want.
Fee simple determinable: This type of free-hold estate is also known as fee simple defeasible.
This type of free-hold estate may include additional conditions compared to fee simple absolute. Below are the examples:
- Conditional use of the property.
- Limitations to change some portion of the property and keep it in a specific way.
- You must transfer the property to someone else at some point.
These conditions may vary based on the contract that is signed. So, if you are considering buying this type of free-hold estate, make sure you read the terms and conditions of the contract carefully.
Life estate: Ownership in life estate lasts for the duration of the owner’s life. A life estate is not the same as a common law ownership contract as it is a deed or leasehold estate.
The original owner, known as the life tenant, may live his life in the house.
While the life tenant is living at the property, they also share joint ownership with the heir.
So the descendants have responsibilities, like paying a mortgage, insurance, and property taxes. But you must have approval from the original holder for any other changes.
The owner has the right to lease property and can only create freeholds or servitudes during his lifetime.
What is a Nonfreehold Estate?
Nonfreehold estate is a type of real estate that you have a limited right to use or occupy, but do not own.
You are renting a property without property ownership. These types of assets are often referred to as estates of no inheritance, less than the free-hold estate, or leasehold estates.
Since this type of ownership involves tenants, it is sometimes also referred to as tenancies.
There are four types of Nonfreehold estates, tenancy for years, tenancy from period to period, tenancy at will, and tenancy at sufferance.
Conclusion
Finally, freehold estate is one of the most attractive types of real estate ownership for homeowners and investors looking to grow their investment portfolios. Every owner is looking for a home that meets their needs.
If you are looking to buy a new home, whether primary or investment, make sure that you read the contract and see what kind of real estate ownership is mentioned in the contract.
If you need more information on freehold estate, get in touch with your trusted real estate agent.
Introduction To NHD
The process and the documentation required in a real estate transaction differ from state to state.
When you are in a process of buying or selling a property there are many disclosure statements that you might come across during the process.
However, there is one specific disclosure report that the seller is required to provide to the buyer by law while selling a property in the state of California. This statement is known as natural hazard disclosure or NHD.
In this post, we will understand what a natural hazard disclosure report is in detail.
What Is A Natural Hazard Disclosure - NHD Report?
The Natural Hazards Disclosure Report is a statement that the state of California requires sellers to provide to buyers while selling their homes.
It is a California-specific report that property sellers must provide to their buyers to sell a home that is located in a natural hazard area.
California state law requires sellers to comply with the Natural Hazards Disclosure Act of 1998.
This report helps the buyers to know if the property that they are buying is located in any natural hazard zone such as:
- Dam breach area
- Flood risk areas
- Areas with a high risk of fire or wildfire
- Seismic Faults or Earthquake Zones
The report may also contain information about other threats that may be closer to homes, such as former military training sites, tornados, landslides, wildfires, volcanoes, hurricanes, tsunamis, and other natural disasters.
Sellers must provide buyers with their completed paperwork during the home inspection.
Once the buyer receives it, they have three days to review it and decide what to do next. If they are not comfortable with the content of the article, they have the option to cancel and walk away from the transaction.
What Other Information Could Be Included In An NHD Report?
Apart from above mentioned mandatory zones disclosures, several additional hazard zones could be included in a natural hazard disclosure report such as:
- Hurricane Risk – Report shows if the property falls under the hurricane impact zone.
- Radon gas – Report shows if the property falls under Radon gas exposure.
- Volcanic Risk – Report shows if the property falls near the volcanic eruption zone.
- Storm Risk – Report shows if the property is located near a possible storm area.
- Military Sites – Report shows if the property is within one mile of a site where the US military has tested explosive ammunition.
- Airport Influenced Area – Report shows if the property is located near an airport and if the noise from the nearby airport can cause constant disturbances.
- Mello-Roo Tax – The report shows is the property is located in a district that charges Mello-Roo Tax.
Who Pays For NHD Report?
The seller can prepare this report with the help of their real estate agent or from a third-party company. The seller has to pay for this report which could cost between $50 and $150.
Every report could be different, hence sellers choose the third-party company wisely.
Since the natural hazard disclosure report is not regulated by any government body, the details provided in the report may vary from company to company.
If the report lacks critical information, the buyer may sue the seller for damages in the future.
Most companies have fault and liability insurance to protect you if something goes wrong. But be sure to read the fine print and hold the company accountable for its mistakes.
Conclusion
Whether you’re buying or selling, natural hazard reporting can be difficult to understand. Having a qualified real estate agent who will guide you through the process can help you protect your valuable interests.
An NHD report is an important part of any real estate sale in California. The report can prevent buyers from taking more risks than they are comfortable with and help them avoid buying a property that requires high insurance premiums.
This report also protects sellers from legal suits from irate buyers who may not realize they are buying in an earthquake zone, flood zone, or part of a state where wildfires are more frequent.
About Rental Property Depreciation
As a real estate investor, there are lots of things that you might have to consider to have a successful real estate portfolio.
You may have heard about many parameters from net operating income, to return on investment in your real estate investment purchase process.
Paying tax on your investment property income is also one of the significant factors that you have to keep in mind. In this post, we will understand what rental property depreciation is in detail.
What Is A Rental Property Depreciation?
Depreciation of rental properties allows investors in the market to take advantage of tax deductions for their investment properties.
This is done by proving to the IRS that the investment property in question has a deductive useful life. Once the useful years of the property are derived, you can use a formula to calculate the annual depreciation and the lost amount which can be used to claim as a deduction in your income tax with IRS.
The useful lifespan of the rental property is based on the type of asset you own. While residential property depreciates over 27.5 years, commercial property has a useful lifespan of 39 years.
To calculate your annual depreciation amount, you can divide the cost basis by a specified number of years based on your rental property type whether it is residential or commercial.
Note that only the value of the structure or building itself, and not the land it sits on, can be used to calculate the cost basis, as only the building has a useful life.
You can continue to claim depreciation until the property has been sold or you’re property reaches its full useful lifespan.
What Is Cost Basis And How To Calculate It?
The cost basis is the total price paid to purchase the property minus the value of the land on which the building or the structure is located.
The cost basis would also include any other cost paid by you to acquire the property such as legal fees, recording fees, escrow fees, inspections, transfer taxes, title insurance, and any expenses made towards home improvements.
For example, if you bought a rental property for $200,000, and the cost of the land is $80,000. You paid $5,000 in all the fees, and you did home improvement worth $5,000.
Cost basis = 200,000 – 80,000 + 5000 + 5,000 = 110,000
Your cost basis for the property for example would be $110,000
How To Calculate Annual Rental Property Depreciation?
Most residential rental properties would calculate the depreciation on rental properties with the help of the general depreciation system (GDS).
According to the rules of The Modified Accelerated Cost Recovery System (MACRS), most taxpayers will use GDS.
As explained in the law, a useful lifespan of 27.5 years is provided for residential, and a useful lifespan of 39 years for commercial rental properties. GDS uses a straightforward calculation to determine the depreciation amounts. Below is the formula.
Rental Property Depreciation = Cost Basis / 27.5 or 39
Let’s take our above example of residential rental property where the cost basis was $110,000 and calculate the annual depreciation amount using the above formula.
Annual Depreciation Amount = 110000 / 27.5 = 4000
In our above example, the annual property depreciation amount would be $4,000 that you can use to deduct from your total taxable income.
What Are The Conditions For Claiming Rental Property Depreciation?
To be able to claim the tax depreciation of a rental property, several conditions must be met:
- It must be income-generating property, generally, most rental properties are.
- The property must belong to you. There are rare exceptions to it.
- You should be able to know the useful lifespan of your rental property. It will differ according to the type of property subject to depreciation. Everything has a different life cycle or rate at which it wears out.
- The useful lifespan of the rental property must be more than 1 year. Anything that sells out in less than a year cannot be tax-deducted.
Conclusion
Depreciation of rental properties helps those who invest in rental real estate to significantly reduce – and sometimes eliminate – the amount that is paid in taxes.
The practice of rental property depreciation can also provide a way to get more profits from your rentals and increase your investment portfolio, without incurring additional costs.
You can calculate your cost yourself; however, it is recommended that you contact your trusted accountant to help you file your tax returns properly.
About Sewer Scope Inspection
As a homebuyer, you might need to go through multiple inspections before you decide to buy a new home.
While buying a new home homeowners generally inspect the roof, HVAC, plumbing, and roof.
However, one more important thing to consider for inspection is sewer inspection. In this post, we will understand what sewer scope inspection is in detail.
What Is A Sewer Scope Inspection?
A sewer inspection, also known as sewer scope inspection is very simple. In this, the certified inspector will use a specialized bore scope camera with long cables that are connected to a monitor to record and view videos of your drainage pipelines.
This specialized camera passes through the main drain of the house and the sewer pipe. Inspectors look for visible cracks, blockages, or damages and report structural damage or health hazards to your drainage system.
A sewer scope can take anywhere from a few minutes to 30 minutes, but it depends on the size of your home’s sewer system and the problem.
The certified inspector will then report the results, usually after the inspection. However, the customer will have to wait for the final photo report and final results from the technician to decide what to do next.
Before buying your dream home, you should schedule a plumbing scope inspection and plan to have it inspected regularly as your home ages.
Why Should You Consider Getting Sewer Scope Inspection Done For Your Home?
There are many reasons why you might need a sewer scope conducted. Clogged or leaking drains can cause many health problems. Here are some of the health hazards that live in sewage systems.
Health Hazards
- Harmful gases
- Parasites
- Bacterial infection
- Viruses
- Molds
- Fungal infection
If your sewer system is clogged or leaking under your home, it can affect your and your family’s health.
Structural Harm
A damaged drain can cause structural damage to your home. For example, movement in the sewer pipes under your home can also cause your home to shift. A leaking drain can also be a sign of a home that is shifting or moving. Finally, if your sewer system is affected by tree roots, steps must be taken to prevent tree roots from affecting the foundation of your home.
Below you will find some common consequences of a damaged or worn-out sewer system. It can also be the reason why you need a sewer inspection for your home.
- Foundation problem
- Sinkholes
- Mold problems
- flooding in your house or lawn
When Should You Consider Conducting A Sewer Scope Inspection For Home Purchase?
Before you start looking to buy a new house, it’s good to know what to look for and what the signs are to conduct a sewer inspection before you make an offer.
Here is a short list of common signs that something is wrong or that the sewer system is in danger of being damaged.
- Standing water in your home or space – This can indicate damage to your sewer system or serious blockage.
- Large trees in the yard – One of the most common causes of damage to sewer lines is large tree roots growing around the pipe. Roots can grow around the pipe, narrowing and breaking it or causing small cracks in the pipe that can clog or leak.
- Home is more than 25 years old – Homes built before 1984 may have clay drain pipes that crack or crumble easily. They usually need to be replaced or at least checked to make sure they are working properly.
- If you notice the ground around the home shifting or moving – If the ground around the home appears to be moving, the drain pipes may be damaged. If it is shifted, it means that it has been broken, bent, or damaged and may need expensive repairs. To determine this, look at things like sidewalks and driveways. If the ground surface level with the driveway or sidewalk appears sunken or is piled up above the surface of the concrete, consider getting a sewer inspection done.
Even if you don’t see any of the problems listed above, it’s a good idea to have the sewer inspected for the property that you are planning to buy.
Minor plumbing problems may cause few or no symptoms but can cost thousands of dollars to fix in the future.
Conclusion
The sewer scope inspection will let you know if the property that you are staying in or planning to buy has any blockages or clogs, cracks, damages, type of material used for pipes, tree roots, separation of the pipeline, or any other issues with the drainage system.
Even if you don’t see any issues with the house, you should still consider getting a sewer scope inspection completed.
It is better to have a sewer that is well maintained rather than having an unrepaired one which may add substantial costs in the future.
About Carrying Costs
As a real estate investor, there are a lot of costs that you might have to take into consideration before buying a property.
Apart from the down payment, broker/realtor fees, closing costs, and other fees, there are additional recurring costs that investors must keep in mind while buying an investment property.
If you are planning to buy a real estate investment property, as a real estate investor you would also need to assess carrying costs before moving ahead with the purchase. In this post, we will understand the carrying costs in detail.
What Is Carrying Cost?
So, what is the meaning of carrying costs? Also known as operating or holding cost, it is the cost to carry on day-to-day operations of commercial real estate.
If you own investment property, you are responsible to pay certain costs to carry the operations smoothly.
One of the most common holding costs in an investment real estate property is a mortgage among other costs.
Let’s say you take out a mortgage to buy an investment property that you are planning to flip. It took around six months to sell the property.
Your holding cost in this case will include all the fees you paid to acquire the mortgage, the monthly payments that you paid on the mortgage for six months, and other maintenance costs like utilities, insurance, or any repairs.
If you are flipping a property, it needs to be completely functional at the time when you put it up for sale.
However, the carrying costs are recurring if you are planning to hold the property as a rental investment.
This means you would be paying the same holding costs as flip and fix properties, however, in this case, it would be for an extended period.
What Is the Importance Of Carrying Costs In Real Estate?
Because net operating income is calculated as gross income minus carrying/holding costs, and the value of the commercial real estate is based on the amount of net operating income it generates, carrying costs can have a substantial impact on the value of the property.
If the carrying costs are not appropriately considered while calculating the net operating income of the property, the return on investment on that property would be impacted.
If you misinterpreted your holding costs to be higher than what they were, you might think that your property is not generating enough cash flow.
On the other hand, if you consider your operating costs to be lower than the actual ones, you might end up thinking that your property is making a good profit.
Hence it is important to consider the right amount of carrying costs incurred during the ownership of the property so that you can understand whether or not your investment is helping you to make profits.
What Are The Types Of Carrying Costs?
The type and amount of carrying expenses may vary based on the type of property, but the main categories are as follows.
Property tax: Cities charge taxes on land use and services such as garbage and water collection. Property taxes are levied annually and can slowly increase over time.
Insurance: Depending on the type and location of the commercial property, landlords may be required to purchase different types of renters insurance. Most of them have some form of general liability to protect you from monetary losses due to accidents that may occur. Other companies may have special policies for things like flood wind/fire damage, etc. Some premiums must be paid for each policy, usually annually or semi-annually.
Property Management: Maintaining commercial real estate is a lot of work every day. Typical tasks include giving tours for new tenants, basic maintenance, collecting rent, and landscaping. In most cases, this is done by an external property management company, which charges a property management fee equal to a percentage of the property’s total income. For some rental properties, an in-house management team carries out these operations, saving you money in the long run.
Maintenance: Routine maintenance activities include air filter replacement, cleaning of common areas, tree trimming, window washing, snow removal, and heavy washing. You may also need to perform large (and therefore more expensive) maintenance tasks less often. Think of things like replacing a roof or fixing a parking lot. These activities are intended to keep the building in good condition which helps to preserve the value of the property over time.
Debt Service: Most commercial real estate is financed with a set amount of loan that must be repaid to the bank or the lender over time. The exact mortgage payment depends on the amount requested by the borrower, the interest rate, the closing cost, the sales price, and the term of the loan. These are usually monthly costs.
In most cases, these fees are paid by the landlord, and depending on the lease agreement with the tenant, some or all of the fees may be refunded as part of the tenant’s monthly payment.
Conclusion
Carrying costs are post-purchase costs necessary to finance the day-to-day operations of rental real estate.
Examples of common expenses include property taxes, insurance, maintenance, and property maintenance and administrative expenses.
The carrying cost of an asset is an important part of the net operating income/cash flow calculation that determines the value of an asset.
Therefore, underestimating the carrying cost of maintaining a property can add up over time and result in a lower-than-expected return on your investment.
About Clue Report (Comprehensive Loss Underwriting Exchange)
When buying a new home, homeowners need to buy a home insurance policy to protect their home from any potential damages.
However, did you know that the insurance company might decline a policy under certain circumstances?
With the help of a comprehensive loss underwriting report, potential homeowners and insurance companies can get details about any claims made on a particular house in the past several years.
In this post, we will understand what is a CLUE report in detail.
What Is CLUE Report?
The CLUE, short for Comprehensive Loss Underwriting Exchange Report, is a valuable tool when purchasing real estate because it provides potential home buyers and insurance companies with a detailed analysis of all homeowner’s insurance claims made against that property over the past 7 years.
This report is useful for buyers as it provides a better understanding of the types of claims on real estate.
Getting one will help you better understand the concerns on the property that you want to know before deciding to purchase the property.
You can expect this report to include information such as type of loss, date of loss, and amount paid. It also contains general information about different insurance companies with the details of claims that were made.
These reports are important because they can provide detail on a property that may help the buyers reconsider their decision of buying a specific property.
For example, if you find out that your property insurance has paid out as a result of major roof damage or structural damage, this could be a cause for concern.
Just like borrowers can get this report so do the insurance companies, and these types of issues can make it difficult to get insurance or the buyer may end up paying higher premiums.
How Does A CLUE Report Work?
Whenever a homeowner makes an insurance claim, the insurance company uploads the claim report to the comprehensive loss underwriting exchange database.
Over the years, every customer, property, and vehicle has developed a CLUE profile. Homeowners and insurance companies can access these reports.
These reports can be used by homeowners to show the history of damage to the property to potential buyers.
Ideally, the report will prove that your home has suffered little or no damage in the past 7 years or that your insurance is covered for all the damages.
Insurance companies use comprehensive loss underwriting exchange reports to assess coverage risk on people’s property and determine the appropriate coverage rate. Insurers calculate coverage rates based on the history of claims that were made on the property.
This means that if there are higher numbers of claims in the past seven years, the insurance company would charge higher premiums on your insurance policy.
If the number of claims is higher, the buyers can also anticipate their insurance premiums to be higher. Being said that, if there are few or no claims on the property, the potential buyers can anticipate the insurance premiums to be lower.
How To Procure A CLUE Report?
Comprehensive loss underwriting exchange reports are available every 12 months through LexisNexis.
Only homeowners or insurance companies can order these reports, but reports can be ordered for free by mail, phone, or online.
To obtain this report, you’ll need to prove your identity by providing personal documents and answering questions regarding ownership of a property.
Most realtors would request the seller to obtain this report to understand the claim history and to anticipate if there are any major issues before you decide to put in an offer to buy the property.
What Does CLUE Report Contain?
The below-mentioned information is included in this Report:
- Name of the insurance company
- Date of birth and Name of the Homeowner
- Policy number
- Types of loss, like fire, roof, or other
- Date of loss
- Amount paid to cover the loss
- Information about the property in question
- Property Address
The information on the loss can only be updated by the insurance companies in the database.
The report includes detailed insurance information, which does not include any additional personal information such as credit history or legal activity.
Conclusion
CLUE report can be one of the most important pieces of document that can help a homeowner to be up to date with their property’s condition.
With the help of this report, potential buyers may be in a position to make an informed decision about buying the property and anticipate the insurance premiums.
It is suggested that as a homeowner, you get this report once a year so that if there are any errors on the property’s claim history, you can get that updated by getting in touch with LexisNexis.
About Prefab Home
As a potential homeowner, you have two options to live in your dream home. You can either buy a move-in ready home or built a new one.
Buying a move-in ready home is one of the most common options that people choose.
When it comes to building a new home, there are many options such as old-fashioned stick-built or prefabricated homes.
In this post, we will understand what is a prefabricated home in detail.
What Is A Prefab Home?
Prefab homes, also known as prefabricated are built outside in a factory and then shipped to the customer’s property for assembly.
These houses can be built much faster and at a lower cost than conventional stick-built homes.
These can be single-family or multi-family homes though traditional homes provide more customization, prefabricated homes can also help customization to a certain extent.
What Are The Types Of Prefab Homes?
Prefabricated homes come in three main types: kit, manufactured, and modular. Below is a brief description of each type.
Kit House: Kit house follows a similar architectural style but is much simpler than a manufactured house. Most home buyers can do the kit themselves.
Manufactured Homes: Homes in this category are built in sections and finally assembled by professionals and heavy machinery.
However, it must meet US Department Of Housing And Urban Development (HUD) requirements.
Modular Homes: These homes are more customizable and often have floor plans choice given to you by the companies.
However, unlike kit and manufactured homes, modular homes have a fixed foundation.
What Are The Pros And Cons Of Prefab Homes?
The Pros Of Prefabricated Houses:
1 - Extraordinary Energy Efficiency
One of the advantages of prefab homes is that they are generally very energy efficient. Tight seams and state-of-the-art windows reduce energy costs while maintaining temperature.
Additionally, the elegant construction of modular homes is renowned for its resistance to natural disasters.
Most people misunderstand prefabricated homes for mobile homes which is not correct. Prefabricated homes (sometimes called modular) come with a foundation just like any other home.
They can be high-quality, modern, and stylish homes and are perfect for those who want a lower carbon footprint than typical American suburban homes.
2 - Speedy construction
Speedy construction is one of the great advantages of prefabricated houses. Since the parts of the prefabricated house are ready, it is enough to assemble it and connect the house to the required utilities.
That is the reason why it is called modular homes. Since the houses are partially constructed in the factory, helps the speed final construction of the property.
This means fewer days and less susceptibility to weather delays and illnesses that can extend the construction process by days or weeks.
But just saving time on construction is not enough, site preparation, including obtaining a permit, can also be time-consuming.
3 - Affordable Housing
Building a prefabricated house is usually cheaper than building a similar house from sticks. Some of the savings are labor-related. Fewer workers need to work fewer days to get ready-to-use prefabs.
This will save you money. Also, as already mentioned, manufactured homes cost less to heat and cool than traditional homes.
When you are ready to buy a move-in ready home, compare the market value of the existing home to the cost of building a prefabricated home.
Keep in mind that different levels of fitment and customization can increase or decrease the cost of your prefabricated home. Contact the manufacturer for available cost-saving strategies.
The Cons Of Prefabricated Houses:
1 - The Cost Of The Land
To build a prefabricated house, you must own the land beneath it. If you don’t have land yet, you need to buy it.
You also need to build a prefabricated house on the land and make sure it can be connected to electricity, water, and sewage.
Soil testing needs to be done for the land on that you are planning to build the home.
Land insurance, inspections, and permits can be costly and time-consuming.
Some companies that sell prefabricated homes help you through the process, obtain permits on your behalf, and include the expenses in the final cost of building the home for you.
2 - Higher Upfront Payments
If you’re buying a move-in ready home, you’ll pay about 20% down, and the rest of the mortgage can be paid off over time.
Although construction and finance loans are available for many manufactured homes, you will need to pay to build the home before you move in.
The contract contains a schedule for installment payments during the construction of the home.
This pay-as-you-go feature of prefab means you need to make sure you can afford it before buying and installing a prefab. On the other hand, paying more upfront can save you interest.
3 - Utilities Can Be Hard To Find
One of the disadvantages of prefabricated houses is that it can be difficult to organize utilities and other details of the site. If your site is uneven, you need to level up.
Next, you need to lay the foundation and prepare for a sewer strike and electrical connection.
Not to mention hooking up to city water or finding well water. If all of this seems too intimidating, search for a construction company that can take care of all these details for you.
Conclusion
Though conventional home purchase is on the rise, building a prefab home is still more affordable compared to buying a move-in ready home.
Before buying a home, make sure that you consider calculating the cost it would take to build a prefab home as well to make an informed decision.
It would not only be more cost-effective but also give you the best customization options as well.
About Gift of Equity
When you are looking to buy a new home, as a borrower you need to make sure that you have enough funds to pay for the down payment based on the type of mortgage you choose to get.
However, there is an option where you can save this down payment if you are buying the property from your family member or a seller with a close relationship.
This term is called a gift of equity and in this post; we will learn what is gifted equity in detail.
What Is Gift Of Equity?
A gift of equity is the sale of real estate to the seller’s family member or close associates at a price below its actual market value as per the conducted appraisal.
The difference between the actual sale price and the market value of the home is known as the effective gift of equity.
Most lenders and banks use this equity contribution to be part of the down payment.
It is a seller’s way of helping a buyer, usually a family member to buy a home. In this type of gift, there is no involvement of actual cash, unlike a down payment gift.
In return, they agree to sell the home below market value and help the buyer with more equity instantly.
How Does Gift Of Equity Work?
A gift letter signed by the seller is required to earn an award for this type of gift. This letter will include your home address and the amount of the equity that will be provided by the seller as a gift.
The letter must also describe the relationship between the seller and the buyer and include a statement that they say this is a gift for which the buyer is not obligated to repay.
The seller is required to hire an appraiser to determine the current property value in the market.
This indicates the exact amount of equity that is being gifted to the buyer. If the property is appraised at $200,000 and the seller sells it for $150,000, the actual equity that is being gifted would be $50,000.
As a borrower, even if they are receiving equity as a gift the process of property purchase remains standard.
The buyer will still need to go through the process of acquiring a mortgage if the equity contribution given by the seller does not cover the entire price of the property.
For example, if the property for $200,000 is sold for $150,000, the buyer needs to apply for a mortgage for $150,000. As the buyer applies for a mortgage, the lender would be required to follow the traditional qualifying process including a credit check and income verification.
For a lender to qualify the buyers, they must provide copies of the last 2 years of pay stubs, the last 2 years of tax returns, the last 2 months of bank statements, and the last 2 years of W-2 forms, with identification documents.
Buyers must also allow lenders to check their credit reports and FICO scores.
Who Has To Pay The Gift Of Equity Tax?
The sellers need to be aware of the tax implication when they are giving equity contributions to the buyer.
According to the IRS rules, each individual can provide up to $15,000 to other individuals in gifts every year including both cash and equity contribution.
This means if a couple wants to gift equity to their child; both can give the equity contribution of $30,000 without filing for tax for that year.
What Are Gift Of Equity Pros And Cons?
Pros:
- No Taxes are to be paid by the buyers for the amount of equity gifted by the seller.
- No actual cash transaction is involved.
- This equity contribution helps the buyer to make less or no down payment.
- Buyers are not required to pay PMI if the gifted equity is more than 20% of the property value.
Cons:
- If the gifted equity is more than the limit set by the IRS, the seller would have to file for gift taxes.
- Since the property is not sold at its actual market value, sellers lose out on an opportunity to gain profits by gifting equity.
Conclusion
With the help of the gift of equity option, the buyer can save a good amount of money and get into homeownership. Reduction in the sales price helps the buyer to get a lower or no down payment.
Having enough money saved along with this gift of equity will help you to get lower monthly payments and save money.
As a seller, you might want to check your gifting limit before you process this type of transaction.
About 1031 Exchange
In real estate investment, taxes play an integral role for many real estate investors. There are many rules and regulations that real estate investors have to follow while building their investor profiles.
One such important implication in real estate investment is known as the 1031 exchange. In this post, we will understand what is 1031 exchange in detail.
What is 1031 Exchange?
The 1031 Exchange is a real estate investment tool that allows investors to exchange their investment property for another property and defer capital gains or losses or capital gains taxes owed upon sale.
This method is famous among real estate investors who want to upgrade their property without getting taxed for the proceeding amount of sale.
This method is also known as starker exchange or like-kind exchange. This 1031 tax exchange may also be applied to other types of properties apart from real estate, like lands or buildings.
How Does 1031 Exchange Work?
The exact 1031 tax exchange process depends on the type of exchange you are going to use. In most situations, you first have to identify the property you want to sell and then choose an exchange assistant to handle the entire transaction.
Just like most real estate investors, you will require a qualified intermediary to hold the proceeds of the sale until you identify the new real estate property you want to buy.
Post the sale, the investor will have 45 days to find the replacement real estate investment property, and to purchase it within 180 days.
It may sound a little complicated, however, the implications of this type of exchange could be huge.
In a general real estate transaction, investors can expect to pay 40% of their taxable capital gains.
Now that you use these exchanges and defer taxes on those capital gains, investors can look for other types of investments, expand their investor portfolios, diversify their investment holdings, or re-arrange their investments with long-term financial objectives.
You can also use this exchange to buy real estate with good cash flow or to lose due to depreciation.
Depreciation allows you to pay less tax as the property wears out over time. For leased properties, the exemption will be phased in over a period of 27.5 years.
If you use depreciation to your advantage, you usually have to pay a depreciation adjustment or income tax on your capital gains after you sell your home.
The 1031 exchanges will let you move these taxes to be paid on a future date.
Deferring those taxes (and capital gains) is a nice perk, but be informed that in this type of exchange there are additional costs involved.
There are still the closing costs and other charges that you have to pay that are traditionally involved in real estate purchase or sale transactions.
It’s a good idea to talk to your trusted tax advisor to find out what charges may be required to pay for a 1031 exchange transaction as many of these could be covered by the funds accumulated in the exchange.
What Are 1031 Exchange Rules?
There are certain rules for this kind of exchange that the investors need to follow about time and type of properties.
Property Rules:
The house you are trading in must meet certain requirements, such as:
- The property to be exchanged must be of the same type or value as the property being sold. Both properties must be similar enough to be defined as “like-kind”.
- The real estate to be exchanged must have similar properties and functions. For example, a rental home or multi-family home cannot be exchanged for a second home. Private residences such as primary residences, secondary residences, or cottages are not eligible for this type of exchange.
- You cannot hold the proceeds made from a sale during the exchange at any time. All funds must be held in escrow by a qualified intermediary, or they will be considered taxable capital gains.
Additionally, section 1031 does not apply to the following:
- Stocks, bonds, or notes
- Trust certificates
- Stocks, bonds, or notes
- Partnership interests
- Other securities or debt
Time Rules:
In addition, as an investor you need to follow some time-related rules:
- Find potential replacement investment property after 45 days from the day you sold your investment property. You have to do this in writing and share it with a qualified intermediary or seller.
- You must purchase the replacement property within 180 days from the day your investment property was sold.
Failing to adhere to the time rules for this type of exchange, you would be taxed for the capital gains.
Conclusion
1031 tax exchange could be one of the best ways for an investor to build a great investor portfolio, defer capital gain tax, and continue to invest in new and better real estate properties.
However, you have to ensure that you follow the property and time rules to avoid any involvement of the IRS.
It requires a lot of patience and knowledge to build a good investor profile. If you are not sure whether your property qualifies for this exchange, speak to your trusted tax advisor to know more.
About RV Loan
Just like buying a real estate property, buying a recreational vehicle could also be intimidating at times as some RVs may cost as same as real estate or even more.
While you apply for a mortgage to buy a real estate property, for RVs you might have to apply for an RV loan. In this post, we will learn more about RV loans in detail.
What Is An RV loan?
It is a loan program designed to finance the purchase of a recreational vehicle. RV loans are typically available for campers, fifth wheels, travel trailers, motor homes, and in some cases horse trailers.
Lenders can offer this type of loan to various borrowers. Some RV owners use their RVs occasionally a year, whereas some RV owners may use them full-time.
The way you intend to use your RV is the best way to find the right lender and choose the lender that is ready to finance your RV purchase based on your choice of use.
How To Get an RV Loan?
RV loans are offered by, online lenders, RV dealers, credit unions, and banks. To get this type of loan, you must complete an application with one of the loan providers mentioned above.
The lender will evaluate this application and provide approval post-review. It is best to compare multiple quotes from different lenders to get the lowest interest rate and repayment terms that fit your requirements.
When you are purchasing the RV from an RV dealer, make sure that you work with one who has tie-ups with multiple lenders, and this would help you to find the right lender according to your unique requirements.
If you are already working with a lender directly, you can get pre-approval for your RV purchase.
This will help you anticipate your payments including interest and principal and also allow you to purchase an RV that fits your budget. Just like any major purchase, you would also need to be ready with a down payment amount to purchase an RV.
After you finalize the RV that you want to purchase, your lender will initiate the loan process.
The lender will check your credit scores and credit history as part of the qualification for the loan. Most lenders and banks would require a minimum credit score of 680.
The lender would also require checking your income documents to analyze your ability to repay the loan.
The borrower may need to consider other expenses before getting this type of loan as fuel costs, maintenance, and repairs could be costly when put together with the loan repayments.
There might be other requirements based on the lender you work with and the way you intend to use your RV. Other documents that may be required by the lender for qualification may be tax returns, proof of income, proof of residency, etc.
Once the underwriting process is complete, you will sign the final documents with the terms of the repayments and the amount will be funded for the purchase.
How Long Is An RV Loan For?
As we already discussed this is a type of long-term loan used to finance the purchase of RVs like campers, fifth wheels, and motor homes.
This loan is very similar to an auto loan or a mortgage, where the asset is kept as collateral against the loan provided by the lender.
The interest rate on RV loans is usually higher compared to mortgage loans as the collateral asset is movable and the lender carries higher risks of default.
The repayment term for RV loans could be as long as 20 years. The borrower can choose to make higher payments and take shorter terms based on their budget and affordability.
Conclusion
Getting an RV loan to finance your RV purchase could be one of the best options to consider. However, you might need to consider other overhead expenses apart from the monthly installments for the loan.
Ensure that you have enough income to cover the overall cost every month and have good credit scores and history before you decide to get this loan.
Introduction
In a typical home purchase transaction, the buyer needs to put a certain amount as a down payment and the rest to be financed through a mortgage.
Borrowers can make a down payment of low as three percent of the sales price in some mortgage loan programs.
Being said that, there is one more option where you do not have to make any down payment and still buy the property using something known as “Sweat Equity.” In this post, we will understand what is sweat equity in detail.
What is Sweat Equity?
Sweat equity can increase the value of your home or underpin your contribution to a new real estate investment.
Also known
as “hard work,” this is the value you add to the sale price of your home
through do-it-yourself efforts or the expertise you invest in to increase the
return on your partner’s real estate investment.
Whether you want to increase the market
value of your home, make it more enjoyable, or get a higher return on your real
estate investment, this type of equity can help you achieve that goal without
having to invest any real money.
The sweat equity definition of an asset is the work you do for an improvement or extension that increases the value of a home or investment property you are planning to put on the market.
So instead of paying someone for a repair or upgrade, do the work yourself.
If you’re buying an investment property intending to fix it up and rent it out or possibly flip it, the do-it-yourself process you’re executing will make you sweat.
When you sell real estate, the
difference between the sale price and the amount you would have received
without the improvements in the asset’s market value is called sweat equity.
Who Qualifies For Sweat Equity Mortgages?
Regardless of the context in which it is used, an important aspect of sweat equity is that it involves unpaid work. And in this case, it means you. You are right. You do the work yourself, not a contractor or other professional worker.
However, that doesn’t mean you can cut back or work part-time. Lenders offering mortgages usually require certain construction skills before agreeing to this type of contract.
In many cases, this type of mortgage program must complete home improvement projects by the deadline to qualify for a down payment.
Whether it’s 30 days or 60 days to closing, it’s a very tight window for renovations, especially for you or the only one renovating the home.
Lenders should also verify the quality and value of renovation from a professional third party, also known as the appraiser.
For example, Freddie Mac’s Home Possible® program requires that all repairs qualified be certified by an independent appraiser to be qualified under this type of mortgage.
What Are The Sweat Equity mortgage Parameters For Freddie Mac’s Home Possible Program?
Initially, when this program was launched, the potential borrowers needed to put five percent as a down payment even after the renovations.
According to the new update, the borrower just needs to follow the below parameters to buy the property without any down payments.
- This type of equity should be used for a full down payment and closing costs up to 97% LTV / 105% total LTV.
- The maximum LTC capped for manufactured homes is 95% of the sales price.
Sweat Equity as an eligible source of financing
- All repairs and improvements made by the borrower are specified in the sales contract and displayed in the appraisal report.
- Repairs or improvements are indicated in the public appraisal report during the appraisal.
- Credit for work performed before the appraiser’s initial examination of the property is not eligible for this type of equity program.
This Type Of Equity Is Calculated As Follows
- The cost of the work carried out must be estimated by a certified appraiser or appraisal management company and documented separately in the valuation report or mortgage document.
- The cost of the delivered material must be estimated by a certified appraiser or appraisal management company, or calculated from the material purchase receipt and documented accordingly.
All work performed must be competently executed and certified by the appraiser to support the appraised value.
Conclusion
When you are planning to buy a new home in a hot real estate market, instead of buying overpriced move-in-ready homes, buying a fixer-upper and using sweat equity to purchase the property can help you save a good amount of money.
As a buyer on a tight budget with construction skills, you would need to find a fixer-upper that you think is habitable after the repairs and find a lender who can provide this type of mortgage loan program.
You would be surprised by the amount of money that you can save.