YOUR TRUSTED SOURCE OF INFORMATION FOR LAS VEGAS REAL ESTATE
I MAKE IT LOOK EASY!
YOUR TRUSTED SOURCE OF INFORMATION FOR LAS VEGAS REAL ESTATE
I MAKE IT LOOK EASY!
CHRISTOPHER NEWTON
Whether you are a First Time Home Buyer or a Seasoned Investor, I can help you achieve your Real Estate Goals.
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Large or small, condo or mansion, I can find it and get it for you at the right price. Fixer-uppers? Turnkey Luxury? I can help with all of it. I keep current lists of properties (updated daily) that I can send to you with no obligation on your part.
Rely on Expertise
About a decade ago my expertise was selling properties to foreign investors. Not only did I have to translate everything but I also had to explain every single detail to my clients who were not familiar with our processes in Las Vegas. From the preliminary searches to an eventual close of escrow, every step of the process was scrutinized and explained. These were the most rewarding experiences for me and have served me well in my career; I love to demystify the Real Estate processes and explain in everyday terms what is happening at all stages of a transaction.
Frequently Asked Questions
Please reach us at chrisnewtonrealestate@gmail.com if you cannot find an answer to your question.
The following is about Real Estate Short Sales, not the short selling of financial instruments..
A Short Sale is when a property is sold for less than what the owner owes on the property; the lender ‘forgiving’ the seller for the difference between the proceeds of the sale and the amount owed.
The logic here is that the lender would be taking a smaller loss than what could occur if they escalated to the foreclosure process.
The process usually starts with a borrower experiencing a provable hardship (loss or reduction of income) and becoming unable to meet their financial obligation (monthly mortgage payments). A buyer is then found to purchase the property at market value in the hope that the lender will accept to accept the difference between the sales price and the amount owed as a loss.
Because the short sale approval process could take anywhere from a few weeks to many months, this type of transaction is not suited for a purchaser with a set time frame. Also, at any time during the process the lender could decline the short sale and move on with the foreclosure process instead; in effect voiding the transaction.
Banks and financial institutions are notorious for not being the most efficient when dealing with short sales as they are not of the utmost importance in the grand scheme of things; files get misplaced, personnel changes and to be honest, no one is really interested in being the final decision maker and signing off on a loss…
On the seller’s part, it is important to use a competent agent who is familiar with this type of transaction and will follow up with the lender during all stages of the process.
Now that we have covered the basics, I will share some of the interesting twists to the process I have encountered over the years.
- Buyer gets tired of waiting for the Short Sale approval. Buyer backs out of the transaction and moves on to greener pastures. Well, the whole process starts again from scratch since in bank logic a new buyer generates a new file even if that new buyer is offering the same terms. Back to square one it is…
- Property value changes during the short sale approval process (a). This would happen frequently a few years back when property values started to rise from the crater of the crash. Short sale buyers were able to lock in a low price and purchase at that price even though the market value had risen during the approval process.
- Property value changes during the short sale approval process (b). Because of the example above, banks now require a second appraisal at the end of the process and if the value has changed the buyer will then have to buy at a new price which starts the whole process again!
- Property has a second mortgage. Since the mortgage holder is settling for less, any junior lien (second mortgage) is getting wiped out. I have seen several scenarios unfold: either the junior lien holder obstructs the whole process and the property goes to foreclosure; or a good agent (Like the one writing this!) could be able to negotiate the first lien holder giving some sort of compensation to the junior lien to get the deal done.
In some states, the mortgage holder will go after the seller to recoup the amount lost in the short sale through a deficiency judgment. Nevada is not on the list as it a ‘Non-Recourse’ state but the amount lost by the bank might be considered as taxable income for the beneficiary of a short sale...
Occasionally, I get a request from someone wanting to only look at Foreclosures or Short Sales, usually under the assumption that those properties will be bargain priced.
About 10 years ago the market was flooded with tens of thousands of Bank Owned properties that the banks needed to get rid of at any price, many people were able to buy properties for pennies on the dollar if they had a vision of a better future when everything looked bleak.
Today is a much different market as there are only a handful of REOs (Foreclosed Properties) currently for sale in the whole Las Vegas valley as I am writing this. These properties are on the open market and can be purchased just like any other property. The seller being a financial institution selling a previously foreclosed property will not affect the final price.
Let us back up a little to look at the foreclosure process and the steps before a property ends up on the open market.
The process begins when a home owner stops meeting obligations (the mortgage payments are not made); After a certain amount of time, the institution holding the note will contact the homeowner to initially try and straighten the situation, but will then move on with the foreclosure process if unable to reach an agreement.
The bank will then take possession of the property and the property will become an REO (Real Estate Owned) property. The financial institution will then put the property up for auction.
In Las Vegas these auctions are held in a parking lot on 4th Street in downtown LV.
The winning bidder will need to pay cash for the property within minutes of placing the winning bid, The buyers at these auctions will usually have several hundreds of thousands of Dollars in Cashier’s Checks of various denominations to get as close to the purchase price as possible (always over the amount, never under!) If the buyer is unable to pay for their winning bid within minutes, the property goes back on the auction block…
This is where the good old principle of Risk Vs Reward comes in play. Most of these auction properties are sold sight unseen and very little notice is given to the bidders. As much research will be done by the investor it is always possible that the property has additional liens and/or
encumbrances that will need to be cleared up by the buyer to obtain a clear
title.
The property could have more than one mortgage (Junior lien), the property could also have a number of liens that will need to be handled (HOA liens, mechanical liens, unpaid utility bills and taxes, IRS liens etc. the list goes on).
Even though investors will have a title company run a preliminary title search, those are not fail-proof as certain encumbrances might be too recent or simply not recorded. Buyer Beware!
These properties acquired after a foreclosure could be occupied by squatters and/or have some major repairs needed after being left vacant and neglected.
Whether the buyer at auction is purchasing the home as an owner occupant, intends to use it as a rental or resell it after fixing it up (Flip) they will need to have a ‘Clear and Marketable Title’ and clear up all ‘Clouds’ on the title before being able to do anything with the property.
If the property does not sell at auction a financial institution will then sell the property on the open market using a Realtor like myself who will handle the sale in the same way as any other transaction.
When I first heard the term it sounded to me like a very strange concept as l was close to picturing a giant Costco full of properties!
The truth is much less imaginative:
Basically, a real estate wholesaler will put a sellers home under contract as if they were going to buy it, then sign over the purchase contract to a buyer at a higher price and pocket the difference. The strategy is also known as "assignment of contract" and the wholesaler is a middleman between the buyer/investor and the seller.
Let's look at some of the usual practical details of these niche transactions.
- Most properties that go through this process are distressed properties; they could be in poor condition, have squatters or unwanted tenants and the owners just want to get rid of the problem.
- Properties are usually sold 'as-is' with no inspections and sometimes not as much as a final walk through.
- Some properties have been inherited or passed on to someone who is either unwilling or unable to handle a regular sales process.
- Sellers can know upfront how much cash they will net and the timeframe is usually fast.
- The final purchaser (assignee) usually covers all the closing costs.
- Wholesalers are a good source of properties for investors and flippers.
Now, as a reward for you still reading (!) I will go over some of the more obscure aspects and possible scenarios of these transactions.
Let's take a look at a situation where a wholesaler is unable to locate an end buyer within the time frame specified. Most contracts will be worded in a way that the wholesaler will get any deposits back and the seller will just have wasted a big chunk of time and end back at square one or worse.
Another strategy is for a wholesaler to give some cash upfront to the seller but hold the contract for an inordinate amount of time until a buyer is located. When the deal finally closes the upfront payment is deducted from the final proceeds. This would be appealing to a cash strapped seller but could end up being a very long process with some negative consequences for the homeowner.
Let's end with this thought: The final buyer will only purchase a property if they estimate that there is a profit to be made despite the addition of an assignment fee; Are wholesalers providing a service to the community or is the process unfair to sellers?
You've heard of Companies like OpenDoor.com, Zillow Cash Offers and others who offer to buy properties for cash without the hassle of showings, inspections, repairs or dealing with a real estate agent (!)..
If you've wondered how these companies work and whether you could benefit from selling to them, then you should read on..
These companies first came to market touting themselves as technology companies, vowing to disrupt the real estate industry the same way companies like Uber or Lyft did the taxicab industry.
Expensive real estate agents would be replaced by computers and the world would be a better place..
Actually I am not 100% opposed to such companies as they can be the perfect option in some very specific circumstances.
My first point of contention is the claim that the sellers will save money by not using a real estate agent. I've looked at the contracts of these companies and they all charge a fee that varies between 8 and 11% of the purchase price; that's a huge chunk of money, way above customary real estate commissions. One contract I saw from the biggest company out there called it a "Customer Experience Fee", ain't that special..
Claims that they will buy a property in any condition of disrepair is offset by the fact that they will deduct the cost of any repairs from the purchase price before closing.
Also, homeowners will need to pay a higher portion of the closing costs than customary as the seller has no choice but to use their in-house escrow/title company.
Some of the benefits they offer such as not having the disruption of showing the property, being able to negotiate a move out date etc. are really items that good realtors handle daily in the course of doing business and should not come at the expense of the bottom line for potential sellers.
There is some good news for potential home sellers though. Because these companies vow to eliminate the human factor from the transactions, they blindly rely on their computer algorithms that don't have the ability to fine tune the data the way a human would.
Case in point encountered a few years back: The subject property was in a great neighborhood that was adjacent to one of the most upscale guard gated neighborhoods in the city. The computer valued the property using comparables from the other side of the street and valued the subject property above and beyond what a human would pay for it. Even after their fees and costs the home seller came out a winner and netted more than he would have on the open market. It took the company over a year to resell that property and they ended up taking a huge loss.(insert Schadenfreude here..)
The business model was to deal in volume and be able to lose money on some transactions but this shifting market is testing their limits as the number of losers is growing. The future is uncertain for these companies and some have already stopped buying; the ones still in business are hemorrhaging cash at an astonishing rate. Only time will tell what the future holds for these silicon valley products..
Let's make it clear from the start that the big hotels and casinos are not thrilled at the idea of losing guests and revenue to people renting out rooms or homes via online platforms.
Purchasing a home with the intent of renting it out short term has become a risky proposition in a landscape of ever changing rules and regulations. While many homeowners are operating in the shadows and making serious money that way, it is not a long term winning proposition.
I will cut straight to the loophole: Condo Hotels.
Only a handful of these Las Vegas properties were built on the premise of allowing owners to legally rent out their properties short term. These owners don't need to be concerned about rule changes, being reported by angry neighbors or competition from illegal operators.
Owners of units in Condo Hotel properties can chose to legally rent out their properties for whatever timeframe they wish.
Owners can choose to self manage their property, use the in-house management company or an outside management company (if permitted by the building).
The property manager will use the rental revenue to pay the HOA fees, the utilities, the insurance and the transient tax as well as their management fees. The remainder of the funds is then paid to the owner.
A 'Turn Key' product.
I have sold over a dozen of these properties over the years, from small studios to penthouse suites. Most of my clients own several properties as they quickly realized how easy it is.
Interestingly, quite a few of my clients come from the finance world as it allows them to hold real estate in a manner similar to a financial instrument, receiving the appreciation and income without the day to day hassle of being a landlord.
Basic explanation: Escrow is the neutral third party between sellers and buyers in a real estate transaction.
First, The escrow company will 'Open Escrow' when they receive and hold an Earnest Money Deposit, the amount of which is agreed upon between the parties in the offer (Purchase Agreement).
Throughout the process all funds are held in strictly regulated neutral accounts and cannot be accessed by the sellers or buyers. The escrow officer in charge will then make sure that all the milestones spelled out in the contract are followed to the letter (Appraisals, inspections, due diligence etc.).
During the closing time frame the escrow company will prorate any charges to the day of closing (Property taxes, utilities, HOA fees etc.) so that the seller is paid up all the way to closing and the buyer can take over with a clean slate.
The escrow company then collects the remainder of the funds to complete the purchase, either from the buyer, a lender or a combination of both.
On the day of the closing, the escrow company records the deed in the name of the buyer, pays off any mortgages and liens, then releases the funds to the seller.
It is customary for the escrow fees to be split 50/50 between sellers and buyers but is negotiated in the original purchase contract. Also, if the transaction is cancelled during the process, the contract will spell out who gets any funds or damages based on the terms agreed upon.
To make things more interesting, it is customary in Nevada for the escrow company to also issue Title Insurance; in many other states this is done separately, sometimes by a lawyer.
Title Insurance is a guarantee that the buyer is getting ‘Free and marketable’ title. The title insurance company will follow up the chain of title to ensure that there are no liens or encumbrances on the title (Unpaid taxes, mortgages, mechanics liens or others); If any issues are found, they must be cleared up (paid off) so that the buyer knows that they will not run into issues later down the road and be able to resell the property when needed.
Compound interest is the computing method used in Mortgage Loans instead of Simple Interest that is used in most other consumer loans. With simple interest, the interest only applies to the principal balance; in the case of compound interest, it is applied to the principal balance and the accumulated interest.
Think of it as ‘Interest on Interest’.
The two types of calculating result in vastly different numbers and the difference grows proportionally with the term of the loan (Duration).
Let’s take a look at a $100,000 Loan at 5% Interest for 30 Years.
Simple Interest:
The formula is straightforward: $100,000 X 0.05 X 30 = $150,000.
Total Payments: $150,000
Interest Paid: $50,000.
Compound Interest:
The formula is a little more complicated but goes like this:
Year 1 - Opening Balance: $100,000 + $5000 (Interest) = Closing Balance of $105,000
Year 2 - Opening Balance: $105,000 + $5250 (Interest) = Closing Balance of $110,250
Year 3 - Opening Balance: $110,250 + $5,512.50 (Interest) = Closing Balance of $115,762.50
Apply this formula another 27 times for a 30-year mortgage and you will realize the huge difference that Compounding Interest makes.
Total payments $193,255
Interest paid: $93,255.
Let’s start with the basics of FHA, VA and USDA loans. These are issued by banks the same way as conventional mortgages but are insured by government agencies such as the Federal Housing Administration, the US Department of Agriculture or the Veterans Affairs; this allows for some more lending leeway when it comes to down payment and qualification criteria such as income, debt to income ratios etc...
Fixed Rate Mortgage. The most prevalent type; the interest rate remains the same through the life of the loan and so do the payments. If you read my previous newsletters you will know about the power of compound interest and the principles of amortization that are very important for mortgage loans.
Adjustable Rate Mortgage. An adjustable-rate mortgage (ARM) is a loan where the interest rate varies over time. Typically fixed for a certain period of time (Usually 5 years, but sometimes 2 or 3 Years), it then adjusts based on a benchmark rate. The advantage of an ARM is that the introductory interest rate is often lower than a fixed rate mortgage, making it easier for some people to qualify for a larger loan. However, even though there are limits to how much the rate can go up at each benchmark and in totality; the monthly payments can go up substantially.
Interest Only Mortgage. An interest-only mortgage is a loan where only the interest is paid on the loan for a certain period of time (e.g., 5-10 years). After that, you start paying both the interest and principal. This will significantly increase the monthly payments. This brings us to the ever fascinating Negative Amortization Mortgage. In this scenario, the monthly payments during the introductory period do not even fully cover the interest portion; the deficit gets added to the balance of the loan and payable when the loan switches to principal and interest payments. For example, if the interest is $750/Month and your monthly payments are $500/Month, $250 gets added each month to the amount of the loan. What could go wrong with that, right?
Balloon Mortgage. A balloon mortgage is a loan where you make payments for a certain period of time (e.g., 5 years), and then make a large payment (Balloon) to pay off the remainder of the loan.
Jumbo Loan Mortgage. Loans that exceed the conforming loan limits set by Fannie Mae and Freddie Mac, as the name would tell you, these are typically used for high priced homes.
Reverse Mortgage. These loans allow older homeowners to borrow against the equity in their home. There is usually no repayment required until the home is either sold or the homeowner passes away.
Stated Income Mortgage. This type of product allows people with unconventional or irregular income to still get a mortgage, usually at a higher interest rate due to the increased risk. Because there is a legitimate need for this type of product in some very specific instances (‘Gig economy’ workers, freelance, tip earners etc.), the lenders will want to see alternative guarantees such as bank statements and/or other means of income verification.
NINJA Loan. This is a variant of the stated income loan. The lender simply assumes the good faith of the borrower and the ability for repayment without verification. Very popular during the last real estate bubble, NINJA stands for No Income, No Job: Approved!
FHA 203(k) Loans.
These loans allow buyers to access funds to repair, improve or upgrade a property.
Currently limited to $35K above the price of the property, these loans come at a cost as they require mandatory Mortgage Insurance and are paperwork intensive to obtain and execute. Whilst they are limited to owner occupant buyers there are certain loopholes that can be used by small investors.
Bridge Loans.
Also know as Interim Financing or Swing Loans, these loans are generally short term and designed to be repaid quickly, usually with the proceeds from the sale of an asset or the availability of more permanent financing. These loans will have higher interest rates and fees than traditional sources of funds because of their short-term nature and the increased risk. In real estate, Bridge Loans are typically used when a home buyer needs to purchase a new property before being able to sell their existing property.
Private Lending (Hard Money Lending).
Terms usually used for a type of short-term, asset-based loan offered by private individuals or companies. Unlike traditional sources of funding, hard money lenders focus more on the value of the collateral than a borrower’s creditworthiness. The speed and flexibility of these loans comes at the high cost of higher interest rates and higher origination fees. The favorite form of financing for many flippers, these loans usually require several ‘points’ upfront and steep monthly payments.
Seller Financing.
Also known as Owner Financing or Seller Carryback, Seller Financing is an arrangement where the seller of the property acts as the lender and provides financing to the buyer. The seller (now the lender) retains the right to foreclose on the property just like a traditional mortgage. This can be beneficial to both parties; the seller can get a higher return on their money than they would in other investments, and the buyer gets to purchase a property that they would not necessarily have been able to finance using more traditional means.
Loan Assumption.
This refers to the case when a new borrower takes over an existing loan; taking over the remaining term, interest rate and repayment schedule. This option can be especially beneficial to a buyer who can assume a loan with terms more favorable than a new loan. Not all loans are assumable; Most assumable loans will still require the new borrower to demonstrate their ability to honor the original commitment.
Most Homeowners make their monthly mortgage payments without much thought about how their funds are allocated. Today we will be looking at the repayment model of a fully amortized loan, the most common type of consumer mortgage currently.
Let’s take a look at a $100,000 Loan at 5% Interest for 30 Years. Payments are $537/Month.
At the beginning of the repayment schedule the biggest portion of the payment goes towards paying off the interest and a much smaller portion is applied towards the Principal.
For a monthly payment of $537:
Month 1: $417 go to Interest and $120 to Principal.
Month 2: $416 go to Interest and $121 to Principal.
Month 3: $415 go to Interest and $122 to Principal. Etc.
End of Year 1: $411 go to Interest and $126 to Principal.
End of year 5: $383 go to Interest and $154 to Principal.
End of year 10: $340 go to Interest and $197 to Principal.
Obviously, the trend reverses after the halfway mark (Year 15) but still very slowly!
End of Year 20: $212 still goes to interest and $325 to Principal.
End of year 25: $120 goes to interest and $417 to Principal.
At the end of year 5, even though your 60 Payments of $537 total $32,220, your balance is still $91,829 out of the original loan amount of $100,000...
Even at the halfway mark (Year 15), your balance is still $67,884 out of $100,000; which means that out of the $96,660 you've paid, only $32,116 went to pay down the Principal...