10–12 minutes to read

My Tenants Destroyed My Rental Property

My Tenants Destroyed My Rental Property

Back in 2013, my tenant destroyed my rental property.

Surprisingly, I’m just writing about it.

Here are a few pictures of what my beautiful home looked like when I posted it for rent in late November 2009:

Front of Home

Dining Area

Front Home Entry
Kitchen

Living Room Pic 2

Living Room Pic 1

Master Bathroom

Eagle Blvd Rear

Here is what the home looked like when I finally stepped foot in the home about five years later:

Weeded front yard

Weeded front yard

Broken Screen Door

Broken Screen Door

Busted refrigerator and cabinet

Busted refrigerator and cabinet

Knuckles in the refrigerator door

Knuckles in the refrigerator door

Food left in the refrigerator

Food left in the refrigerator

Busted Cabinet

Busted Cabinet

Up close of busted custom made cabinet

Up close of busted custom made cabinet

Filthy Carpet

Filthy Carpet

Up close of filthy carpet

Up close of filthy carpet

Up close of filthy and riped carpet

Up close of filthy and ripped carpet

Busted Bathroom Door - Fisted

Busted Bathroom Door – Fisted

Garbage door filthy

Garage door filthy

Broken pantry room door

Broken pantry room door

Dirty interior stove

Dirty interior stove

Items left in laundry room

Items left in laundry room

Door missing from hinges

Door missing from hinges

Creative art that needs a repaint

Creative art that needs a repaint

Room with filthy carpet

Room with filthy carpet

Busted rear patio door

Busted rear patio door

Filthy rear patio

Filthy rear patio

Filthy rear patio gutters

Filthy rear patio guttters

Filthy and weeded rear mulched area

Filthy and weeded rear mulched area

Filthy rear patio deck

Filthy rear patio deck

Items left in garage

Items left in garage

Items left in garage 2 - filthy garage door

Items left in garage 2 – filthy garage door

How did I let my tenants destroy my rental property?

In short, the answer is easy. I was a first time landlord who was just happy to have a renter when I had to move because of my job.

My job relocation happened in the same time period as the housing crisis.

My home was super underwater and I wasn’t in a financial position to bring money to the table in order to take a $25,000 loss.

Besides, not many people were buying homes.

So, I was forced to rent my home at a loss instead.

I made all the rookie mistakes possible.

I didn’t take a security deposit. DUMB.

I didn’t take a social security number. ALSO DUMB.

I didn’t talk to any previous landlords. REALLY DUMB.

I didn’t use a management company.

I didn’t…well, hopefully you get the picture.

I was just happy that someone was going to begin paying  me $1,100 monthly for the property in the same month that I had to move out of State.

All was well for about four years.

The tenant was paying her rent on-time and that’s all I cared about, until about June 2013.

A month earlier, her ex-husband stopped paying the rent by direct deposit.

In May 2013, I let the tenant renew the lease without rechecking any credentials. Payment on the new lease was to begin on the 1st of June 2013.

I made plans to visit the house upon renewing the lease, but I never made it.

The tenant told me that May was a busy month for her and I took her at her word. I shrugged it off, especially since I would’ve had to travel by plane to get there only to inspect the property for 5 minutes.

Life went on.

June 1st came and I didn’t receive any payment.

I reached out a couple of times and was given a few excuses.

June 14th came and I received notification of payment from her bank:  [TENANT] has sent you money.

All was well.

So, I thought.

The money never hit my bank account.

On June 2oth, I received notification of cancellation from her bank:  Payment from [TENANT] has been canceled.

At that point, I started demanding rent plus late fees.

Finally, on June 28th, again, I received notification of payment of rent and the late fees from her bank:  [TENANT] has sent you money.

On July 3rd, the same thing occurred as in the previous month.  Payment from [TENANT] has been canceled.

This went on until I sent a notice to vacate to her in August.

Good Evening [Tenant],

You will find attached, the notice of default letter for the month of August. It is important to note that our lease will not be renewed and that I am requesting the property to be returned to me no later than September 1, 2013 at 5:00pm. Of course, we have already discussed these dates via separate correspondence. It is important to note that this will always be sent via official mail.

Also take note that rent is still due, including the late charge of $25 per day, for the month of August. This language is presented in the attached letter.

I would like to schedule a final walk-through of the property in the final weekend of this month. It really was a pleasure having you as a tenant. I hope that this next month goes smooth as I will ask for your extreme flexibility as I have to get the house ready to market again.

This may require entry into the home although you may be out of town. I will be sure to give you a 24 hour notice if this is required. Please do your best to continue to keep the home in the greatest shape as possible.

So, I gave her 30 days to vacate, in which she responded by asking for more time.

Seriously.

Hi Romeo,

If you can give as much notice as possible that would be great, since I am traveling so much [redacted] is here alone and I do not want her to feel uncomfortable. Also, a gentleman phoned today to stop by, but it was late afternoon and I had to run out. We have scheduled a time for him to come by this week. (I didn’t quite catch his name.)

We have enjoyed being here the past four years and hope to use for rental reference.

Thank you!

She made one final payment in August 2013.

When I finally made it to the property.

She was gone and the house was left as is.

Not once did I step foot into my property in the four years the tenant lived there.

And that’s how I let my tenant destroy my rental property.

With no security deposit, forwarding address, or social security number, I really had no recourse.

You live and you learn.

And I learned that the best thing to do is make quarterly inspections of your rental properties or hire a property manager to do it for you if you ever have to become an out-of-state landlord.

11–13 minutes to read

How to the Right Mortgage Loan Officer Can Save You Thousands of Dollars

A few months back, I was looking for a conventional mortgage loan for my real estate properties.

Of course, like any savvy investor, I wanted to save the most I could by putting the least amount of money down on my properties.

Unfortunately, I was a beginner investor in the Memphis area so I had no clue how to start my search for a mortgage loan officer.

Usually, one can easily find a mortgage loan office by joining and networking among their local Real Estate Investor Association. But, I never joined.

So, I pulled the typical rookie mistake.

I took the recommendation of my Realtor. While this, in and of itself, is not a bad thing, it does prevent most people from rate shopping.

At the time, I was looking for a lender that would eventually allow me to finance more than four properties.

After calling up the mortgage loan officer that my Realtor’s recommended, I decided on using him based on the fact this mortgage loan officer was local, the bank that he worked for was a portfolio lender,  and their underwriting was done “in-house”. Having loans approved in-house makes for a very efficient process because my mortgage loan officer could have simply walked into the next room to talk to the approving authority instead of dealing with a separate distant underwriting department.

Also, I found out that his bank, Iberia, would have allowed me to finance up to ten properties. This was good start because most lenders only allow investors to have four properties financed.

Once the mortgage loan officer and I got started, he sent over the quote I requested on a $125,000 property.

4.5% 3o year fixed rate.

20% down payment

No origination charges or other fees.

Principal, Interest: $506.82 monthly

Cash due at closing (before other closing fees*): $25,000

At 20% down, I would have had to bring $25,000 to the table.

Not bad.

1. Don’t Settle For the First Mortgage Loan Officer’s Terms

I thought the rate was a little high for the interest rate environment we were in, but I had to consider that the property was an investment property and not a primary residence. If it were a primary residence, the rate would have been around 3.5%.

Regardless, a week earlier, I received an even higher rate from Wells Fargo.

A week earlier, Wells Fargo gave me the following terms:

5.0% 30 year fixed

20% down payment

No origination charges or other fees.

Principal, Interest: $536.82 monthly

Cash due at closing (before other closing fees*): $25,000

So, I was moving in the right direction.

Had I stopped with Wells Fargo I would have been paying a half percentage rate more. Or about $30 more per month. Over 360 months and that calculates out to an extra $10,800.

I decided to call around to other banks to see just how much of a deal I was getting.

The next mortgage loan officer I contacted was from Quicken Loans.

There terms, too me, were way out of my range.

4.25% 30 year fixed

25% down

2.25 points due at closing ($2,025)

Principal, Interest, and Mortgage Insurance: $461.19 monthly

Cash due at closing (before other closing fees8): $33,275

Adding the points to the down payment, I would have had to bring $33,275 to the table…just to close, in addition to other closing costs!

At that point, I concluded Iberia was the bank for me.

2. Ensure You Know the Current Mortgage Buyback Guidelines

I thought I was all set to go with Iberia until my friend and I started comparing rates.

He, too, was searching for mortgage rates.

After I disclosed the terms given to me by Iberia, he told me that he received similar terms with US Bank Home mortgage, but he would only had to put 15% down.

I was initially puzzled and actually didn’t believe him.

Up to this point, every bank I talked to and every online search I did led me to believe that 20% down was the minimum for any investment property loans.

Why wouldn’t I want to save an extra 5% up front?

A 5% savings, or $6,260, could go towards my rehab cost or my cash reserves requirement.

So, I called US Bank Home mortgage to verify.

As soon as a representative from their mortgage call center got on the phone, I asked about the 15% down requirement and was quickly told that I was wrong, that the minimum down payment due to Fannie Mae and Freddie Mac Guidelines for all investment property loans was 20% down.

At this point, I didn’t know who to believe, my friend or the bank representative’s mortgage loan officer. So, I told my friend about the bank’s conversation via text message, telling him what the bank had told me, to which he quickly responded with a link:

Fannie Mae Standard Eligibility Requirements for Investment Property [pdf]

Clearly, in Fannie Mae’s guidelines, the Maximum Loan to Value required was only 85%, not 80%, which meant that only 15% was required for a down payment, assuming US Bank used these same guidelines.

Seeing this, I did my own research looking into Freddie Mac’s Requirements for Conforming and Super Conforming Mortgages and saw that they, too, only required 15% down for investment properties.

Armed with this data, I talked to my friend again and asked him to give me the contact information to the person at US Bank to whom he had talked. And that’s when I got the confirmation that I only needed to have 15% down for my investment property.

3. Trust, but Verify, the Information You Receive From Your Mortgage Loan Officer

I was ecstatic to have learned this “new” information.

Apparently, these guidelines changed earlier in 2016.

So, it’s kind of forgivable that not every mortgage loan officer I talked to knew these guidelines.

Armed with this new information, I called my mortgage loan officer at Iberia and I informed him of the guidelines that I now knew about and asked how would my terms change.

At 15% down, my terms changed as follows:

4.75% 30 year fixed

PMI $96 per month

No origination charges or other fees

Principal, Interest, and Mortgage Insurance: $650.25 monthly

Cash due at closing (before other closing fees*): $18,750

While this was better for my cash reserves, I wasn’t prepared to pay 4.75% and an extra $96 monthly for PMI. I thought $96 for PMI was excessive, given that a typical rate is .75% of the loan value.

Given these high numbers and the fact that I the mortgage loan lender didn’t provide me the 15% down payment option before, I chose to search for a better deal.

I called up the mortgage loan officer who told my friend about the 15% investment property terms to see the terms he’d give me.

Ultimately, after confirming that US Bank allowed for a 15% down payment for my investment properties, I decided to cancel my application with Iberia.

My ultimate terms from US Bank were as follows:

4.25% 30 year fixed for $102,000

PMI $43.14 per month

$395 Application Fee + $395 Loan Commitment Fee = $770 

Principal, Interest, and Mortgage Insurance: $523.59 monthly

Cash due at closing (before other closing fees*): $19,500

Conclusion

Ultimately, going with a mortgage loan officer who knew the most current guidelines saved me $5,500 at closing. And the cost to me was only an extra $15 per month when compared to my first quote. Because I received two mortgages through the same mortgage loan officer, I kept over $11,000 in my pocket.

If I ever get another conventional mortgage to purchase an investment property, I’ll be sure to first check the most current lending guidelines, and then call around to see which bank adheres to them. Luckily, I found a mortgage loan officer at US Bank that knew his stuff. And for that reason, I’ll likely just stick with him.

*Other closing fees include escrow, title insurance, title company fees, appraisal fees, termite inspections, recording fees, etc.

12–14 minutes to read

Are Hard Money Lenders a Good Idea?

A few months ago, I saw a killer bargain listed in the MLS.

The home was in the suburbs of Memphis, TN, a few miles away from my home.

8174 Old Brownsville, Rd.

The listing agent listed it for a quick sale of $144,900.

After a quick preliminary review of the neighborhood comparables given to me by my Realtor, I saw that the home easily had an after-repair value of $210,000 and could be flipped within 90 days.

My Realtor and I walked through the home and I quickly saw the obvious needed repairs. The home needed a new paint job, hardwood floors and carpet, new kitchen counters, a new window, and only a few other things which could have been taken care of with a total budget of $20,000.

Unfortunately, I knew from my experience with past homes in similar conditions that no conventional lender would have loaned out the money for the home in its condition.

So, I needed to look for unconventional financing to fund the deal.

My first thought was to obtain an unsecured personal loan for $100,000 and use this in conjunction with my personal savings. I prefer investors use an unsecure loan for their deals because it’s much easier to get the funding when compared to conventional real estate financing methods.

But, I had applications pending at a conventional lender for two other investment properties at the time.

I didn’t want my credit pulled and I didn’t want to spend the majority of my cash reserves.

If my credit was pulled to obtain a new loan, I would have had to explain it to the conventional lender, who would have, in turn, calculated the new loan payment to determine a new debt-to-income ratio. This could have affected underwriting’s approval of my loans. If I used the majority of my cash reserves, I would have been ill-prepared to handle any large cash emergencies in my new investment properties.

So, I decided to seek other financing through a hard money lender.

What is a Hard Money Loan Lender?

In the real estate investing world, a hard money lender is usually a private individual or group of private individuals that lend investors money based on the value of the underlying property, as opposed to their credit score. However, their fees are usually much higher than a conventional lender.

I personally didn’t know of any hard money lenders so I went on Bigger Pocket’s real estate community website to search their list of sponsored hard money lenders.

Having never used a private lender but anxious to put an offer on my new golden find, I found a hard money lender and filled out the application for $125,000.

I didn’t even consider the amount I would end up paying for the loan.

A quick, rough estimate in my head calculated the number around “yep, I’ll profit from the flip.”

I just wanted to get a pre-approval letter as quickly as possible so I could put in my offer to the listing agent.

What were the Hard Money Loan Requirements and Interest Rates?

The hard money lender that I chose had a seemingly easy process.

The requirements were pretty simple.

I provided some preliminary information about the home, upload a few pictures, told them about my real estate investing experience, and then clicked through their terms of service.

In a few minutes, I was given a preliminary approval of 19% for a 6 month loan at $125,000.

But, there was a 90 day interest paid minimum requirement.

So, even if I had sold the property in 30 days, I still would have had to pay 90 days of interest on my loan.

The rate seemed excessive to me, but I couldn’t really complain. I was fueled by my drive to quickly secure my property.

I only focus on the fact that I was going to make money on my deal regardless, so 19% was relatively cheap, relative to the money I didn’t have myself.

I was hyped.

At this point, I didn’t see if there were any other charges, but I knew there were. They just weren’t listed in my profile’s dashboard at the time.

Later though, I found that in addition to my 19% interest rate for 6 months on the $125,000, there was a 3% origination fee and a 1.5% service fee.

Hard Money Loan Example

For the lender that I was going to use, here were the numbers:

Loan amount: $125,000

6 months of interest at 19%: $23,750

2.5% origination fee: $3,125

1.875% interest rate: $1,875

Total loan amount if kept for 6 months: $28,750

Would I had been profitable with this Hard Money Lender?

In short, I didn’t end up getting the home.

I had offered only the list price.

I was outbid and ultimately an offer of $151,000 was accepted.

It was my lucky day.

Going into this deal, I just knew that I would have been profitable, but after running the actual numbers…after the fact…I realized that the only people who would have made out on my deal were the lenders and the selling agent.

Here are the numbers assuming I sold the property for my estimated sale’s price of $210,000:

Purchase price: $151,000 + Estimated rehab costs: $20,000 = $171,000

(Acquisition costs) – (After-repair selling value: $210,000) = $39,000

Gross profit: $39,000

The gross profit estimate looks great doesn’t it? And that was my problem. I didn’t even consider the cost of financing and selling the property.

(Gross profit: $39,000) – (cost of financing for 6 months: $28,750) – (6% of sale’s price realtor fee: $12,600) = $-2,350

Estimated Net Profit: -$2,350

What’s missing from the above estimated net profit?

(Closing cost: $2,000) + (holding cost such as utilities ($200 per month): $1200) + (any other miscellaneous costs) = -$5,550

Final Estimated Net Profit (Worst case estimate): -$5,550

Bottom line, I could have bought myself a 6 month stressful job of flipping a property with ZERO profits.

Other Hidden Cost of Using a Hard Money Lender

With only $125,000 funded with financing, I still would have had to use at least $26,000 to close the initial deal, and then another $20,00 for the rehab. So, a total of $46,000 would have been tied up in this project. This is money that could have been used to source other, more profitable deals.

Aside from tying my money up into one project, the hard money lender that I was going to use secures their loan with the underlying property. In other words, they put a first “mortgage” lien on the property, and if I couldn’t have sold the house within the 6 month loan period, the entire loan balance would have been due. The lender would have had the right to foreclose and then take the property, taking it along with the $46,000 that I would have put into the project.

Are Hard Money Lenders a Good Idea?

Obviously, the numbers above use a worst case scenario for THIS deal, and there are plenty other hard money lenders with different funding requirements.

Rehab costs could have been lower, I could have sold the property in fewer than 90 days, and I could have used a listing agent who only charges 1.5% (My Realtor charges me 1.5%).

These numbers would look a bit differently:

Rehab: $10,000

90 days interest: $11,875

Realtor fee of 4.5%: $9,450

3 months holding cost: $600

Net Gross Profit (Better case estimate): $20,075

Somewhere between -$5,550 and $20,075 lies the truth of my would have been net estimated profit.

But remember, everything is an estimate of profit or loss until the deal is done.

Conclusion

In the end, using $46,000 (estimated cash to close plus rehab) of my own money to yield $20,075 (or -$5,550) would have been a great return on my investment 43.64% (or -12.06%), if all went well.

So, I’d conclude to say, “given a best case scenario, hard money lenders can be a great idea.”

But you have to run the numbers and do your own due diligence…before putting an offer on a deal.

If I would have applied these calculations beforehand, this decision would have come down to one question:

Is this hard money loan worth the risk of earning only a negative ROI after putting in 6 months of hard work into this real estate project?

I probably would have concluded no.

Question: Have you used a hard money lender? What was your experience?

 

11–13 minutes to read

Is “Flipping” or “Buying and Holding” Real Estate a Better Strategy

October 2016.

That’s when I created my arbitrary goal to accumulate one million dollars in real estate gross earnings.

This goal followed shortly after I closed on two properties that I purchased for rental income in the suburbs of Memphis, TN.

While many people use real estate to create passive income, build wealth, and obtain financial freedom, I realized after long deliberation that the buy and hold strategy isn’t something that I want or need to do.

Why I don’t need a goal to create a portfolio of real estate properties

Lots of people get inspired by the idea of creating passive income from real estate.

The idea is simple.

Once you have enough net real estate income to cover your living expenses, you’re essentially financially free from working a job.

This can theoretically be obtained with one large multifamily property or many single residential properties.  Or somewhere in between those two investments.

Cover your expenses with your real estate investments and you’d be set

If, for example, your living expenses are $3,000 monthly, you’d only need $3,000 in net rental income.

But, this can take a while if you don’t have a bunch of cash.

The majority of people, including myself, will likely have to use some sort of financing to build a real estate portfolio to help them achieve their financial goal.

For example, let’s say someone purchased one property for $100,000 that has a mortgage payment (including interest, taxes, and insurance) of $700 monthly. Further, let’s assume they can get $1,000 monthly for rent. If there are no breaks in their rental payments, they can yield $300 monthly in net income.

If you were to take action on the above example ten times, you’ll eventually get to a $3,000 monthly net income goal and can then technically declare yourself financially free.

But, there are some caveats.

Although you’ll have $3,000 monthly in net rental income, if you have $3,0000 in living expenses you’ll have to ensure that you collect every penny of rent, every month.

If this doesn’t happen, your options will be to either decrease your living expenses or increase your rental income.

In order to keep the same standard of living, you’ll most likely continue pursing more rental properties.

However, having already accumulated 10 rental properties and one million dollars in real estate debt, it won’t be easy getting further conventional financing.

You’ll have to find a portfolio lender (if you hadn’t already done so after financing property number four), learn some creative financing techniques, or pay off a few of your mortgages.

The above can be done, and it’s done by many real estate investors all over the world.

Why I’d rather flip than buy and hold real estate

I, too, had a goal of having lots of rental properties. I wanted at least three. But now, my goal has changed.

A goal to accumulate one million dollars in real estate is a better goal for me. Here’s why:

1. I am vested in a lifetime pension.

I’m a few years away from obtaining a lifetime pension – In 2020, I’ll retire from my career of more than 20 years with a lifetime monthly pension. Not only will my pension cover my expenses twice over, it’ll be adjusted for inflation every year for the rest of my life.

I’ll be financially free…

…without the need to have multiple rental properties.

Of course, many would say I can always have more. To that I say, you don’t need more as long as you learn to live within your current financial situation. Anything more is just a bonus.

The goal to have a pension that covers all one’s expenses is a financial goal that many real estate investors (and stock market investors) dream to obtain.

The 4% rule is based on this concept: Accumulate one million dollars, withdraw 4% per year, and you’ll have approximately $40,000 to live on for the rest of your life.

My pension is essentially my 4% rule.

The rental properties that I currently have will only act to supplement my pension.

With expenses less than $2,500 monthly and a pension plus rental income of over $4,500 monthly, I really have no financial need to purchase a bunch of properties. In fact..

2. I don’t want a bunch of properties.

I like the idea of having a bunch of rental properties. But I also understand I don’t want to have too many demands on my resources or time once I retire in a few years.

The more loans I obtain, the greater financial risk I take. And, I’m not interested in the idea of holding more than a half million dollars in real estate debt.

Right now my real estate debt is around $350,000, including my primary residence.

While it’s true that more properties would increase the diversity of my portfolio and lessen my financial risk, having more properties still isn’t the answer for me. For me, three rental properties are enough.

Even though there are ways to outsource the management of my rental properties, I’d still have to  manage the property management.

I want the work that I do in retirement to be a hobby not a job.

3.  Purchasing and holding multiple properties (without the use of creative financing) ties up cash reserves

Right after purchasing two rental properties, I quickly saw my cash reserves reduced by $50,000 in a matter of a month. Because my purchase prices were $115,000 and $120,000, respectively, approximately $40,000 went towards down payments. Another $10,000 went into fixing up one of the properties.

Now that the properties are purchased and being held, all $50,000 is tied up into the property. Of course, I can refinance to pull some of the money out, but refinancing is really expensive. So, I’m just coping with the situation that my $50,000 is gone until I sell the properties some time in the future.

4. Purchasing properties to buy and hold is boring 

The most important reason why buy and hold is not for me is I believe it’s a boring strategy.

In contrast, getting a property at a great price, making it look great, and then selling it at a profit is exciting. And once the project is complete, I get to do it all over again.

This is the part of real estate that I love. Sourcing deals, bargaining, buying, fixing, and selling.

It gives me something to do on my weekends. What can I say?

I like the idea of managing a project, reaping a profit, and then using the investment proceeds to do it all over again, which is why I decided to make a financial goal out of it.

I want to keep flipping properties until I meet or exceed a net income goal of one million dollars in real estate.

So, which is better, flipping or buying and holding?

So for me, when people ask is flipping or buying and holding real estate a better strategy, I say it depends on your goals.

If you want a portfolio of real estate to cover your expenses so you can eventually escape the 9-to-5 grind, you may want to make buy and hold your primary real estate strategy. You can always change your strategy once your goal is met.

But if you like the excitement of real estate just for the sheer joy that it brings, regardless of the financial wealth you can build, you may want to make flipping your primary real estate strategy.

In the end, you can also choose a hybrid.

I have rental properties to give me an extra monthly cash flow, but I’m also going to flip. You really don’t have to choose. Do both, depending on your own goals.

11–13 minutes to read

Can you find out how much someone owes on their mortgage?

Can you find out how much someone owes on their mortgage?

When I began making offers on owner occupied homes listed in the MLS, one of the things I wish I could find was the amount someone owed on their mortgage.

The idea was simple, if I could find out the amount they owed, and could offer a little bit above this amount, I would increase the chances of my offer being accepted.

Unfortunately, I could never find this information.

The exact amount someone owes is private and this information is held by the servicing institution and the seller.

Short of talking to the seller himself, and getting him to give you the information, there is no direct way to find out how much someone owes on their mortgage.

Even if you knew the beginning balance of the mortgage, the seller could have made extra payments, missed payments, or stopped making payments, altogether.

For all you know, the seller could be saving up the amount they should be paying to their lender so they can, in turn, use the money to move to another location.

So, unless this information is directly communicated to you by the seller, you won’t be able to use this information to start your bid.

The only time you’ll know exactly home much someone owes on their mortgage prior to transferring the property in your name is after your closing company receives a loan payoff amount from the seller’s loan servicer. If you’re at this point, it’s safe to assume that you’ve already made an offer on the property.

This means that you’ll have to learn how to do some ninja financing in order to get a best estimate of how much someone owes on their mortgage.

How to estimate how much someone owes on their mortgage?

1. Find out the original mortgage price.

Luckily, many counties in different States have at least the original mortgage balance listed on the deed of trust. This information is the required starting point to make a best guest estimate. Surprisingly, the seller’s deed of trust is public on many county’s Register of Deeds’ website.

For example, you can find the original mortgage price of a home I purchased in Charlotte, North Carolina in 2011 by accessing Mecklenburg County’s Register of Deeds. Let’s see how this is done:

Go to Mecklenburg County’s Register of Deeds site. Once on the website, and after acknowledging their terms of service, search for the Real Estate Document Access link.

As you’ll see on the site, you can search for information about a property using several different search options. If you use the Combined Name Search field and search for my actual last name, [Clayton], followed by my first name [Romeo], several documents will be uncovered.

property records screen shot

Under the documents, instrument number 2011105857, is the record deed of trust on my property.

deed-of-trust

If you click through it, page 2 of the recorded deed of trust shows information about the note. The amount of the note is $101,150.00.deed-of-trust-note

This is the amount I owed on my mortgage in September 2011.

**If you don’t know the seller’s name, your county may have a search option for the property’s address. Mecklenburg has this information on a separate site called their Mecklenburg County Real Estate Lookup tool. Put in the property’s address and you’ll find the name of the last owner.

2. Find out the year that the note is due in full.

On the same recorded deed of trust in the Note Section, the full amount of my note was due on October 1, 2041. This was 30 years after the date of the recording which means it’s safe to assume that I had a 30 year mortgage. The only thing to determine at this point was whether my interest rate was fixed or variable.

3. Determine if the rate is fixed, adjustable, or has a balloon payment.

If the mortgage rate was anything different than a fixed rate, you’ll usually notice this in the “Riders” section on the Deed of Trust. For example, my deed of trust would have had either the adjustable rate rider or balloon rider box checked on the Rider section. It does not, so it’s safe to now assume that I had a 30 year fixed rate mortgage product.

Now, the only thing to estimate is the interest rate attached to the note.

4. Estimate the interest rate based on historical data.

Once you know the original mortgage amount, the date the mortgage is due in full, and the mortgage rate product, the rest becomes an educated guessing game. To make the best educated guess, you can use historical mortgage rate data from an online site that tracks this information such as Mortgage Daily News. Using the date that the deed of trust was recorded, September 22, 2011, you’ll see various mortgage rates during the month of  September.

In September 2011, mortgage rates averaged 4.25%. So, this is the number you could use.

**My actual interest rate was 4.0%, so turns out this would have been a great guess.

5. Back calculate a best fit mortgage payment into a loan amortization calculator.

Using the information from above, you can now use any loan amortization calculator to determine an estimate of the current mortgage balance, with a few caveats.

  • Caveat #1: Ensure a second mortgage doesn’t exist. If it does, you’ll have to repeat the process and add this amount to the first mortgage.
  • Caveat #2: Realize that early payments could have been made or that payments could have been missed.
  • Caveat #3: Make sure you’re looking at the correct real estate documents, including the most recent recorded deed of trust.

Luckily, Excel comes with a great, free template for estimating how much someone owes on their mortgage.

In Microsoft Excel, go to File, New, and you’ll see the Loan Amortization Schedule template in the Template Section. If you don’t see it, a quick Microsoft Office Template search will bring it up.

Download the file, open it, and plug in the information you’ve found.

This gives an estimated scheduled payment and a break down of the ending balance on the mortgage after each monthly payment is made.

how-to-determine-mortgage-balance

6. Estimate the remaining mortgage amount.

Using the information you put into the Excel template, if you wanted to purchase the property in September 2013, you’ll see that there was a mortgage balance remaining of $97,665.59.

If you compare this number to the one that uses my actual interest rate of 4.0%, you’ll see that you’d be pretty close.  My actual remaining balance in September 2013 was $97,514.85. My estimate would have only been off by $150.

how-to-determine-mortgage-amount-2

All the Information to Estimate Someone’s Mortgage Payment May Be Public

In some rare cases, all the information you need to estimate someone’s amortization schedule may be public.

When I refinanced my property in 2013 with a new lender, I received a new Deed of Trust recorded as instrument# 2013152507.

deed-of-trust-2

However, the Adjustable Rate Rider was also recorded with the deed of trust.

And on the Adjustable Rate Rider, the interest rate was recorded showing an adjustable rate of 3%, the way the rate adjusts, and the limits on the rate. Couple this with the amount of the loan on page 2 of this Deed of Trust and one can easily calculate what my monthly payment was.

new-amortization-schedule

Conclusion

Using information that is likely already public in your county, you can calculate an estimate of what someone may owe on their mortgage. You can use this information to your advantage by making a purchase offer that’s low enough to save you money but high enough to not offend the seller, assuming he wants to get a price that is at least over his current mortgage principal balance.

10 minutes to read

Use a Personal Loan for Your Investment Property. Here’s Why:

Yesterday, I wrote about several ways that one can purchase an investment property without using a home mortgage.

The post was written in response to Wells Fargo’s underwriting team that wanted to impose red tape on my investment property purchase. Instead of folding to their demands, I figured I’d try other ways to finance my investment property so I wouldn’t have to extend my closing date any more than I had already done.

I went to my primary bank, USAA, and looked at all of their personal loan options.

When I saw that USAA offered personal loans that could be used to purchase a property, I was super excited.

My adrenaline increased and I was off to complete my application. But, not before comparing with other bank’s loans and conditions.

After checking around, I was sold on USAA’s personal loan product.

They were offering personal loans up to 84 months at only 8.49% for well-qualified applicants. Other banks that I checked offered personal loans but only up to 60 months.

I needed $65,000, quickly, and this was how I was going to get it.

It took me about 10 minutes to complete USAA’s online application.  The best part about requesting a personal loan was I that I wasn’t required to submit any paper work.

For the same $65,000 mortgage request, I was required to provide two month’s worth of income stubs, retirement account statements, two years worth of W-2’s, two years worth of rental agreements from rental properties, two month’s worth of checking and savings accounts, an appraisal, proof of hazard insurance, and so on and so on. This process was one thousand times easier.

After completing the application on USAA.com, unfortunately, I didn’t receive an instant approval because the amount that I requested was higher than what is usually requested, I was told. So, an auto-reply message informed me that a decision would be made within one business day.

However, I needed to have a decision as soon as possible, especially because I had to notify my contractors if I needed them to work this Friday. I didn’t really want to pull them from their current job.

I really had to know about the approval. I was on the edge of my seat. If I didn’t get approved for the personal loan, I would have had to go forward with the mortgage.

Two hours after submitting my loan application, I called USAA to ask for a status update.

Well, actually, I called to see what the maximum amount of loan they would consider me for but before I had a chance to ask I was told that my current loan was already with an underwriter.

This was super quick!

After finding this out, I was asked if I wanted to wait on the phone while the underwriter took a look at my paperwork and of course I said, yes.

I was put on hold for about 15 minutes. The representative continued to check on me every five minutes.

Right when I thought I was about to hear my answer, my cell phone call disconnected from USAA as I drove through a weak spot on Interstate 485.

I was furious, but persistence is a virtue.

I called back to USAA and was put on hold again.

Unfortunately, no record of having called was put in the system so I had to wait another 15 minutes after being re-connected with the underwriting department.

After this waiting period, a representative came on the phone to verify and get clarification as to why I needed the money.

I told her.

“I need the money to help me purchase a property. It wouldn’t be a down payment, but an amount that would help me purchase the property in full without a mortgage.”

That’s all I explained.

I was put on hold again and then five minutes later she came back on the phone to tell me that my personal loan for $65,000 was approved.

I was ecstatic!

I gladly accepted the terms and conditions that has me paying $1,035 monthly for the next seven years, if I decide to keep this loan. But I’m not worried.

Here are the benefits of my personal loan:

  • My first payment is pushed out until July 5th, 2014. Although interest accrues daily until the first payment is due, 60 days gives me plenty of time to re-condition my investment property and then list it in the MLS for a hopeful flip prior to July 5th.

  • The home will be mine the day I close. There is no lien holder.

  • I no longer have to have a 25% down payment, which would have taken money from my wealth number account. The money in my wealth number account is also the money that I need to purchase my primary residence next month.

  • I no longer have to have prepaid escrow amounts, such as a year’s worth of taxes and homeowner’s insurance premiums to close on my property.

  • I don’t require an  appraiser to come to the property to tell me that something else has to be fixed, which would make the bank hold off on my closing…again…until the appraiser goes out to the property to verify the fixes…again.

  • After closing on the property, I can apply for a cash-out refinance to pay off the personal loan balance and substantially reduce my debt payments.

  • Best of all, I can close on my property as intended…on May 13th, 2014.

I’m done with banks for my investment properties. As a friend and I discussed last year, the concept of equifinality states, in layman terms, that there is more than one way to skin a cat.

So, going forward I’m going to use a combination of personal loans and cash to acquire all my investment properties.

You should do the same thing. You shouldn’t definitely use a personal loan for a house or investment property.

Worst case scenario, you can always try for a cash-out refinance of your property AFTER it is acquired, fixed-up, and on the market.