Unless you’re moving in with your best friends, I don’t think many people love the idea of living with roommates.

In fact as I write this, just thinking of my some of my former college roommates makes me cringe. They would forget to turn the stove off, scream at each other all night, and on occasion come home from a late night and puke right beside me as I tried to sleep.

But sometimes, when sharing your house with a roommate means the difference between making the mortgage payments or not, you have to do it. And if you’re careful (and lucky) in choosing your roommates, yours probably won’t be as bad as mine, unless you are a college freshman with randomly assigned roommates, in which case, they probably will be.

If you are going to consider bringing a roommate into your home or apartment, take it slow. Consider all of the possible ramifications and possibilities before you let someone you don’t know into your home. 

PREPARING FOR A ROOMMATE

Determine Fair Rent
The whole reason you get roommates is to save money on your mortgage payment or rent. But what should you charge them? It’s not always as easy as splitting your payment in half. Of course you’ll want to charge as much as somebody will pay to crash with you, but what you charge may also have to be determined by how much of your house you’re letting the roommate share.

Will your roommate have full use of the apartment or home, or is he limited to one bedroom and a bathroom?

Also, if you’re advertising “all utilities included” because you think it will be easier to handle the bills, consider this: the type of person who is going to apply may very well be the type of person that turns the heater on 24/7 and walks around in shorts and flip flops. Splitting utilities down the middle or proportionally based on space may not be as simple, but it may save money.

Draw Up Paperwork
Do not take on a roommate without a written agreement even if (perhaps especially if, that roommate is a friend).

If you have an oral agreement for him to pay you each month and he doesn’t end up paying, you have little recourse. Most lawyers will tell you that you won’t be able to collect the rent you’re owed without something in writing. But don’t worry, you probably don’t need a lawyer to draft as simple roommate agreement. Here’s a sample roommate agreement from NoLo.com.

FIND A ROOMMATE

When you’re ready to find a roommate, of course Craigslist is the ubiquitous hub for apartments, sublets, and roommates. You might, however, want to start with your own network: Post your vacancy on Facebook and ask friends and family for recommendations. Other services like Roommates.com provide paid roommate matching services you may or may not want to consider.

Explore a Roommate’s Personality
When you take on a roommate, you don’t need them to be your new best friend. You may not even interact much if you have different work schedules. But you do want to make sure that your personalities are at least somewhat compatible.

Think about yourself for a second: are you a bookworm? A party animal? All business? You don’t need to find someone who is exactly like you, but try to find someone who won’t mess up your schedule too much. If you go to work at 6AM, then you may not want an admitted party animal who comes home at 2AM. Spend some time getting to know the roommate before he moves in. Go out for coffee and discuss your lifestyles so there are no surprises at the last minute. Gayle White discussed the possibility of taking on a potential roommate who disclosed he was a nudist. She told the Boston Globe, “I probably should have said no right away…”.

Decide on Deal-Breakers
Decide on deal-breakers up front. Will you allow:

• Pets?
• Smoking? (Inside, outside, or not at all?)
• Nudists?

Clearly state in your advertisement what you will and will not accept, and put this in your agreement, too.

Do a Background Check
Just because you and your prospective roommate get along great over coffee doesn’t mean he isn’t an axe-murderer.

Sadly, you just don’t know who you can trust. Although a written contract is a must, you may want to go further in screening potential roommates just as you would screen a tenant renting out your entire home. Do a credit check and ask for at least two months of current pay stubs.

Always remember, if your roommate decides not to pay you one month you are still on the hook for the entire rent or mortgage.)

You should also consider running a criminal background and sex offender check on each roommate applicant. It may cost you anywhere from $15 to $30 for each applicant but it’s money well spent. There are many Websites that you can do criminal and sex offender checks on. I’ve been using YouCheckCredit.com for a couple of years now. It’s easy to use, affordable, and you can check criminal backgrounds and credit at the same time. Just make sure you get the prospective roommate’s written permission to do background checks first.

Finally, take the time to call the roommate’s references, employer and previous roommates or landlords on his application too.

Getting a roommate to share your house is a pain, but it’s often a savvy financial move. Sometimes you have no choice—you need a roommate to pay the rent—sometimes having a roommate or two can simply trim your expenses and build wealth faster.

What about you? Do you have any experience taking on roommates in your home? What advice would you give others looking to do the same?

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Many times, in fact, it’s best to rent.

If you don’t want to settle down, if you’re still building credit and saving for a down payment, or if you’re simply not ready for the significant responsibility that comes with being a homeowner, renting makes a lot of sense.

I’m even looking for a rental right now myself. “Whaaa? A Realtor looking to rent?” It’s true. My husband and I decided to rent out our current home making it an investment property. We’ll find another house to buy, but we’re picky, and in the meantime we’ve got 30 days to find an apartment to live in until we find our next home.

TO FIND THE BEST APARTMENTS, SEARCH SERIOUSLY

Although personally I’m not too concerned about where we stay for a few months, I advise friends and clients looking for longer-term rentals not to take apartment searching lightly. A little extra work will find the best apartments and can net you a rental that is as nice or nicer than what you could buy for the same monthly payment.

What’s the secret to finding the best apartments in your city? A thorough, thoughtful apartment search.

Consider that before buying a house, you would probably want to see a dozen or more houses first. You would think carefully about what features you want and how much you want to pay. And you would enlist a professional to advise you along the way.

So why wouldn’t you apply the same attention to an apartment search? Because you plan to live there for two years instead of twenty? Perhaps. But we are talking about your home—even if it’s just for a year or two. So here are some pointers I’ve picked up from my years in the real estate biz: 

IF NEEDED, USE A BROKER

An apartment broker acts a lot like a realtor—they help landlords find tenants and prospective tenants rent their next apartments. Brokers charge a fee for this service—either to the landlord, tenant, or both. Often times the fee is equal to one month’s rent. It may be more or less, and it’s often negotiable.

Do you need to use a broker or agent to show you different rentals? In many markets, no—you’ll do just fine with Craigslist or newspaper listings and you can avoid paying a broker’s fee.

But if you’re in a competitive rental market like Manhattan or you’re eyeing high-end rentals, a broker’s fee can be well worth it to secure the ideal apartment or just to save time searching for and screening listings. If you do decide to work with a broker, here are a few words of advice:

Ask how the broker gets paid.

Brokers who deal in rentals might be paid by property owners offering out a flat fee for bringing a tenant. If the rental happens to be listed on a multiple listing service, the broker will probably split the commission with a listing broker, similar to when buying a house.

Conversely, if the owner doesn’t want to pay anyone, then you get the privilege of paying the broker. The good news—it’s all negotiable. Ask what the broker normally charges and make an offer that you feel comfortable with.

Give as specific criteria as possible.

Sure, looking at places to live is really fun and exciting at first, but after about five places it starts to get exhausting. The more information you give your broker, the better. Tell him about your:

• Favorite (and least favorite) neighborhoods
• Price range
• Desired number of bedrooms and bathrooms
• Necessary amenities
• Lease terms
• Roommates
• Pets

Be clear on lease terms up front.

If your broker is being paid–in one way or another—by the landlord, expect there to be a lease of at least a year. Property owners simply don’t want to fork up the cash to pay a broker for a tenant, only to have the tenant move out two months later. So if you’re looking for a year lease, this won’t be a problem. But since you may prefer the flexibility of a month-to-month situation, just make sure you ask the lease terms right away.

YOUR CREDIT MATTERS

Bad credit can be as much of a problem for renting as it is for buying a house, but not always. In this economy, many people have poor credit due to problems paying bills after job losses or during times of underemployment. Short sales, foreclosures and bankruptcies also negatively affect your credit.

Although some landlords don’t check credit and background information, the majority do. The most important thing is that you are 100% honest on your applications and up-front when speaking with prospective landlords. Personally, I do feel comfortable renting to someone whose done a short sale as long as they have a steady income, but I don’t feel comfortable renting to anyone with previous evictions.

Several months before you apply for an apartment, pull a copy of your own credit report. This way, if there are any incorrect items, you have time to contact the credit reporting agencies and get them corrected. If you’ve had credit issues in the past but you’re working on it, “get a letter from a previous landlord describing your positive payment history and photocopies of rent checks” says Brigitte Yuille of Bankrate.com.

Some landlords will always demand clean credit. But the more up-front you are about credit issues, the more like you’ll find a landlord willing to work with you. And if you use the following trick, you’ll find landlords will actually want to compete to get you in their rentals.

MARKET YOURSELF!!!

Broker or no broker, good credit or bad, the most important thing you want to do in your apartment search is to market yourself as a good tenant.

Right now, it’s a landlord’s market. There’s a surge of renters who have either gone through foreclosure or are simply waiting out the sleepy housing market. That means at best it will be hard to negotiate a lower rent and at worst you may be competing with other prospective tenants to land the apartment you want.

But because you’re a Money Under 30 reader, you’re looking for an edge over the competition. You can get that edge by applying for an apartment like you apply for a job. The key is put yourself in the landlord’s shoes. Many landlords are people just like you and me who own a few properties as part of their financial plan. A landlord wants responsible tenants who will pay the rent on time, who won’t trash the apartment, and who will stay put for at least a year so the landlord doesn’t have to go through the expense of a search too often.

Present yourself well when viewing apartments.

The landlord or manager showing the apartment will be taking mental notes when you meet to tour the apartment. Don’t roll out of bed without showing wearing last night’s beer-stained jeans. You don’t have to wear a suit, but the idea is to look like a responsible young professional, not a party animal.

About Pets

Pets are a definitely an obstacle when it comes to renting. You can spend the whole day telling the landlord about how well trained your dog is and how he never pees indoors, but one little mistake could cost the landlord (or you) a ton of money. This is why many landlords and property owners have a “no pets” policy. If you’re looking on craigslist and you can’t stand the thought of living without Fido, at least limit your searches to “dogs ok” rentals. If you find an apartment that you have to have but the ad says pets are prohibited, you can call up the landlord or manager and ask if they’re willing to accept a pet with an increased security deposit.

APARTMENT, CONDO, OR HOUSE?

The image of apartment living being a generic one-bedroom unit in a sprawling brick complex with a dingy pool is totally outdated. These days, you can rent just about any type of property you could buy. Single family homes are more likely to have private yards and private washers and dryers or at least the hook-ups. Condos and apartments are typically less spacious, but also more affordable than renting a home. Finally, you may prefer apartment complexes with amenities and resident managers so if there is a problem, someone is always available to help.

If you’re going to be applying for a condo or apartment where the units are all close together, spend some time talking to prospective neighbors. Ask them about the noise level and how the customer service is when it comes to maintenance and repairs. After all, the last thing you want to deal with after going through all the work is looking for another place and moving out anytime soon.

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Renting isn’t always “just something you have to do until you can buy.” And the more time and though you put into your next apartment search, the happier you’ll be in your home for as long as you choose to live there.

What about you? Do you live in an awesome apartment or other rental? What makes it special—and how did you snag it? Let us know in a comment.

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When I started out as a Realtor, I made mistakes just like anyone. I also witnessed clients make mistakes, some that cost them tens of thousands of dollars and many that killed the deals they were trying so hard to close.

Based on those experiences, here are seven lessons that I hope will make your next real estate transaction a little easier.

BUYERS

1. Do your homework.

Buying a home is a lot like writing a school paper…it takes some research, and it’s best not to procrastinate.

I once had a buyer make an offer on a property with the intention of building a guest house in the backyard. Although I offered him information about certain building restrictions in that county, a friend of the buyer had told her guest houses are allowed in the area and she continued with the transaction.

After I checked the zoning codes myself, I again warned her that what she wanted to do wasn’t allowed. About a week after she paid for and attended the home inspection, she decided if the guest house might not be allowed her would rather not buy the house. I was not disappointed that she cancelled the escrow, but more disappointed that she wasted $400 on a home inspection and didn’t heed my warnings about checking into the zoning earlier on. The lesson: Always work with your agent to research potential restrictions on the property you want to buy as early as possible—before putting an offer down or, at least, before sinking money into inspections.

Another note about additions, guest houses, etc.—if they were built without a permit, they can get in the way of getting certain types of financing like VA or FHA loans. It’s easy to ask a seller what was done with and without permits, but the best way to confirm is by going to the county building department.

2. A note about condos.

Condo buyers beware—there are more hoops to jump through to get a mortgage on a condo compared to a single family home. This common hang-up wasn’t an issue years ago, but today, underwriting guidelines are stricter than ever.

In my hometown of San Diego, most lenders won’t allow a buyer to purchase a condo unit with an FHA or VA loan if the complex is less than 51% owner occupied. This means if you want to buy a condo but you can’t put 20% down, it’s going to take a lot of extra time to find a condo that meets this restrictions.

Before I knew this, if a buyer liked a condo and was qualified for a loan, I’d go ahead and put in the offer for them. Then, my buyers and I found out after an offer was accepted that the loan wouldn’t be able to fund for a condo in the complex because of the owner occupancy rate. No one lost any money, but we did waste time. Now, when I have a VA or FHA buyer who wants a condo, I call up every HOA and/or management company to find out the owner occupancy rate before we even head out to see them. Again, the more research you do ahead of time, the less likely you’ll face a costly surprise later.

3. Patience is a virtue.

Do not be rushed into buying a home. Yes, you may want to lock in the best interest rate possible, but what’s a great interest rate going to matter if you’re unsatisfied with the home.

I worked with a couple that wanted to write up an offer on pretty much every house we saw, but after we saw the next house they’d say, “well, this one is better than the last, I guess we don’t really like that one that much.” Here’s where I could have done a better job of preparing the buyers that there are tons of houses on the market and, depending on what you can afford, you may be able to be picky! Don’t ever rush into buying a home because you think there’s nothing better, unless perhaps you’ve already seen 100+ houses with your agent. (In which case, you should probably also treat your agent to a free lunch if you want her to keep working with you!)

4. Make your list, check it twice.

In my first few months as a Realtor, I assumed that buyers knew exactly what they were looking for and would tell me what they liked and didn’t like about houses. Then something funny happened. I saw buyers who liked granite countertops in one house and hated them in another, who wanted a big backyard one day and a small backyard so that they’d have less maintenance the next. It’s fair to say that people’s wants change, this much is understandable. For that reason, I now recommend that before seeing houses, buyers create a list of things they need in a house versus things they want, and, finally if there are any things they absolutely do not want.

When touring homes, you can then weigh what’s most important to you. Because there is no such thing as a perfect house, distinguishing between needs and wants makes it easier to accept small compromises when getting the big things that will make you happy.

5. Whatever you do, DO NOT do this!

In the past, I assumed that each buyer’s lender would discuss the importance of keeping your credit score high when buying a home, especially during the escrow period. Now, I make no assumptions. It really is worth putting this in all caps: DO NOT BUY A NEW CAR OR MAKE ANY MAJOR FINANCIAL CHANGES DURING ESCROW!

Sure, there are exceptions to the rules. If you’re not going to need a loan for the house then it isn’t a big deal to buy a car simultaneously. If your credit is already very high, there’s a chance that the ding on your credit from financing a car or taking on a new credit card won’t affect your ability to qualify for the loan, but do you want to take that risk? What if one more ding on your credit means you won’t qualify to buy at all? Or what if it means you’ll qualify for a loan, but at a higher interest rate? This stuff happens all the time. You have been warned.

SELLERS

6. Honesty is the best policy.

When you sell a house, you’ll have to fill out a bunch of disclosure forms where you state what material facts you know about the property. For example, “Is the property located in a flood zone?”, “Do you know of any alterations that have been done to the property in the past 5 years?” and “Are any of the appliances not in working condition?”.

Because your real estate agent has not lived in your house, she typically won’t know the answers. That’s why when she provides the disclosure forms, it’s your job to fill them out…truthfully. If you don’t, and for some reason the buyer or buyer’s agent finds out, you can get in huge trouble! The punishment will be up to the courts, but let’s just say trying to pull the wool over a buyer’s eyes is not worth this risk.

7. Use your agent.

If you’re under contract to sell your house, you don’t want to make alterations on the property that could affect the value. But did you know, in certain cases, even simply moving out could throw a wrench in the closing process? Well, if you’re selling your house in a short sale and trying to get it approved under the HAFA (Home Affordable Foreclosure Alternatives) plan, which allows you $3,000 in moving expenses at close of escrow, you do NOT want to move out halfway through the process. One requirement of HAFA is that the home needs to be owner-occupied, unless the borrower can prove that he was required to move at least 100 miles away for work. If you just move out while negotiations are being done because you feel like renting a bigger place, you might be losing $3,000.

This is an extreme example, but the point is when you’re selling your house, don’t just assume anything…check with your agent!

What about you? Have you made any mistakes buying or selling a home that cost you time, money—or at least your pride? Share your story in a comment.

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Although it seems like common sense, perhaps I need to restate this cardinal rule of home buying: Before you even start seeing properties, know how much house you can afford.

Fail to heed this advice, and you’ll wind up house poor.

House Poor: A situation that describes a person who spends a large proportion of his or her total income on home ownership, including mortgage payments, property taxes, maintenance and utilities. House poor individuals are short of cash for discretionary items and tend to have trouble meeting other financial obligations… — Investopedia

Some people become house poor when their income plummets and they stay in an expensive mortgage payment. Others create the problem by buying too much house to begin with. Whatever the cause, the financial consequences of being house poor are dire and often include creeping credit card debt and an inability to save enough for retirement.

So how can you avoid the situation altogether? 

KNOW THE REAL COSTS OF OWNING

The best way is to keep that mortgage payment in check.

The rule of thumb is that your entire mortgage payment should be no more than between 28 and 33 percent of your income.  In addition, you want to keep your total debt to income ratio (your monthly debt payments, including the mortgage, divided by your income) below 40 percent.

Second, it’s important to realize the financial difference between renting and owning that almost everybody overlooks: A home requires maintenance and upkeep!

The contributing costs range from the trivial, like leaky faucets and torn screens, to big replacements like a new AC or roof. But just how much does home maintenance run? Ilyce Glink, author of 100 Questions Every First-Time Home Buyer Should Ask warns, “You can expect to spend anywhere from a couple thousand dollars to more than $10,000 per year, depending on the size and condition of the house, on general maintenance.”

That’s a big difference from what you’ll spend on upkeep as a renter (zero).

ENSURE YOU’RE  (REALLY) READY TO BUY

The best way to avoid becoming house poor is to only buy a home when you’re honestly ready. Just because you can doesn’t mean you should. A bank will likely approve you for a mortgage for up to 35% of your gross (before tax) income if you 1) have good credit 2) have held a job for two years and 3) have cash to use as a down payment.

But a house is a big commitment, and there are good reasons not to buy a home. For example:

• You think you might want to move in less than five years.
• You’re unsure how long you’ll earn as much money as you do today.
• You don’t want to be bothered by home maintenance.
• You want to spend money on other big things, like travel, education, or a wedding.

And if you’re worried that you’re throwing money away on renting, consider this: Any return on investment you may be losing by renting really isn’t a loss if you factor in possible credit card debt and defaulting on your mortgage if you become house poor.  And in this economy, your house probably wouldn’t be an investment anyway. According to this article at the Wall Street Journal blog, home prices have plummeted to 2002 numbers.

Living house poor not only hurts your finances, it takes a toll on you mentally and physically.  Knowing that your income and your home expenses rule your life can be a great source of anxiety. Being house poor removes the liberating feeling of being in control of your finances. Ironically, we Americans view home ownership as the ultimate symbol of financial security and success, but if you’re living house poor, your finances are anything but secure.

As I’m finding, it’s better to make slow, thoughtful moves towards home ownership instead of jumping in too early and becoming house poor. When you’re really ready to own a home, the experience will be that much more sweet.

What about you? Are you or have you ever lived house poor? How’d you get there, and what strains did too many housing expenses put on your finances?

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Sadly, in many cases, the only simple answer is “much less than you paid for it.” (Go ahead, you can share your story in the comments. This should get ugly quick.)

But just how much have tumbling housing prices affected the value of your home? Or, if you don’t yet won a home—how can you tell if that house you’re eyeing is fairly priced?

I asked Sarah, an experienced real estate agent, to give us a crash course in how to estimate the value of your home, just like she and other agents do.

* * *

How much is your home worth? If you want the honest answer: it’s worth whatever somebody will buy it for. How do you know how much somebody will pay? You have to figure out how much value they see in it.

Value, of course, is subjective. And that’s why real estate agents and banks spend so much time studying properties to ensure the price is right. So when you’re serious about knowing what your home is worth, you can and should use the same method the professionals do…a comparative market analysis (CMA).

A CMA is a common way real estate agents determine a home’s value through comparing it to similar properties in the area—without ever stepping foot inside the house.  This involves logging into the Multiple Listing Service and searching for at least three active, three pending and three sold properties in the same area with similar characteristics as the subject property. (These are often called “comps” because they’re comparable to your property.) The average of the sold properties is taken to arrive at an average market value for the subject property.

ESTIMATING YOUR HOME’S VALUE USING COMPS

You may not be a professional appraiser, but, realistically, you appraise things every day. For example, the last time you listed something for sale, you made a guess at what someone might pay for that item. You can do the same with a home. (Just don’t expect a bank to write out a loan for whatever you tell them your house is worth—they’re still going to pull a professional appraisal.)

Pull your own comps by looking up recent sales of area home sales with like number of bedrooms and bathrooms and similar square footage. You can get this info at your city hall or on sites like Realtor.com, but keep in mind free Web sites may not be updated or 100% accurate. The best comps are properties sold in the last month, although 90 days will do. Take the average of the sold properties you find, and then add to the value for any upgrades to your home (new kitchen, pool) and subtract for downgrades (no garage, small yard).

SEEKING PROFESSIONAL OPINIONS

If you need more than just a guess as to how much your home is worth, you can enlist a professional—either an appraiser or a real estate broker—to help you.

An appraisal is a professional estimate of value, most of which involve the appraiser visiting the property in addition to analyzing data like use restrictions and area market sales trends. According to the Appraisal Institute: “A written appraisal report generally consists of: a description of the property and its locale; an analysis of the ‘highest and best use’ of the property; an analysis of sales of comparable properties ‘as near the subject property as possible’; and information regarding current real estate activity and/or market area trends.” If you need an appraiser, the Institute offers a directory helpful for finding appraisers.

Similar to an appraisal, a broker’s price opinion (BPO) is an estimate of value done by a real estate broker. Unlike appraisals which can cost hundreds of dollars, many realtors will give you a BPO at no charge if they anticipate winning your business on a future sale.

Whatever you conclude about how much your home is worth, remember that the market will always correct you. Even the best estimate of home value—whether a professional appraisal or a do-it-yourself comp analysis—doesn’t replace the only way to value a home…and that’s to find out what somebody is willing to pay for it.

Is your home worth a lot more or less than you paid for it? Have you ever been surprised to learn the actual value of a property was different than what you guessed? Let us know in a comment.

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If you’re considering bidding on a short sale, here’s some basic information you should know.

WHAT IS A SHORT SALE?

A short sale is a real estate transaction where the owner’s lender or lenders agree to accept a purchase offer of a new buyer, short of what is owed by the original owner.

For example, if a homeowner has a loan of $175,000 but the property is only worth $100,000, the lender may be willing to accept $100,000 from a new buyer. Because participating in a short sale rather than foreclosing on the home saves lenders money, some banks have even created streamline processes to make short sales faster and easier.

THE SHORT SALE PROCESS

In a short sale, the seller’s agent lists the property for sale and collects the seller’s “hardship package” including bank statements, loan information, and a hardship letter explaining why he or she had to do a short sale. Then, when you as a buyer put an offer in to buy a short sale, the agent submits that offer, along with the hardship package to the lenders and the negotiation process starts.

One of the biggest challenges is getting multiple lenders to participate in the short sale. Even though junior lien holders would get wiped out if the home were to be foreclosed on, they often require monetary contributions to release the lien. This can also lengthen the negotiation process. 

HOW LONG DO SHORT SALES TAKE TO BUY?

You’ve probably heard horror stories of buyers waiting six months or more to find out if their offer on a short sale is accepted, and then getting a counter-offer at a price much higher than they can afford to pay. While a rare handful of lenders can accept short sale offers within a month or two, acceptance can typically take four to six months, or even longer.

And when there are junior lien holders, each one will typically have their own Broker’s Price Opinion (BPO) done at the property before they accept the offer. When viewing properties, find out if the short sales have been “approved” or not. Approved short sales are those where the lender has already agreed to take a specific price. Short sales that have not yet been approved take the longest. Good communication from your agent can make this anxious time period go by faster. Don’t forget that just because you have an offer pending on a short sale, does not mean that you have to stop looking at homes.

HOW TO GET A GOOD DEAL ON A SHORT SALE

Is it possible to save money by buying a short sale? Absolutely—yet not every short sale is automatically a deal. Make sure that your agent provides you with recent comparables (statistics of active, pending and most importantly recently sold homes in the area with similar characteristics). Just because the seller isn’t getting any money out of the sale of the house doesn’t mean they will automatically accept your offer.

Keep in mind bidding wars can happen before the listing agent submits the highest and best offer to the lender. How do you ensure that your offer will get accepted over others?

There’s no one winning formula, and it’s not always about the highest price. For example, the financing and terms are also important.  “Some banks may prefer the buyers with large down payments while others just want the highest price regardless of down payment”, according to an article in Realty Times.

An important point to consider is that with some short sale transactions, the junior lien holders may require the buyer to come in with extra cash to release the liens.

So, when the listing agent markets a property at $200,000 based on comparables, the lender in 1st position may accept a purchase price of $205,000, but the lender in 2nd position may require an additional $6,000 to release the lien. Every transaction is different, luckily. Buying a short sale where the owner only had one loan is generally going to save you time and money, but in certain markets, those are far and few between.

“As Is” Condition

Finally, if you’re going to purchase a short sale, don’t expect any repairs to be done for you. Lenders typically won’t pay to repair anything such as cracked slabs, broken windows, or leaky roofs. Though they may pay for termite fumigation when necessary, they will not pay for any cosmetic repairs or concessions. So don’t put an offer in on a short sale that clearly needs work if you don’t have the skills to do the work yourself or the money to hire someone to do it right.

HOW TO BID ON A SHORT SALE

If you are comfortable with the prospect of buying a short sale, first: get mortgage pre-approval. When you do, ask your lender if a.) they will finance a short sale and b.) what additional requirements there are, if any.

One financing has been assured, go ahead and submit an offer with your agent. Be sure to read all the paperwork that you submit and as well as all the lender’s terms and conditions that you get back. If you have questions about any of the paperwork, ask your agent or lender. Do not sign anything that you don’t understand!

Once your offer is in, be prepared to wait and wait and wait. With any luck, you’ll have an acceptance from the lender or lenders just before you start to forget that you made the offer in the first place!

Have you purchased or put an offer on a short sale? How did it work out? Share your story in a comment.

I know you may not be an active (or even aspiring) real estate investor, but I think the principals of real estate investing can benefit ANYONE. Real estate investing is about identifying opportunities through careful research, leveraging your own assets and the financial system to make the investment, and managing your investment to produce cash flow (recurring monthly income).

Today, Arthur’s shares a little bit more about why he invests in real estate (despite the risks) and the formula he uses to ensure every investment property is profitable.

Here’s Arthur:

The following is a true story but names have been changed in case the parties involved read this!

It’s ten o’clock in the morning and John has just gotten another phone call from the property manager who’s currently trying to fill a vacancy in his duplex. He’s told that the existing tenant is breaking the lease because someone has broken in and stolen the tenant’s tools—for the second time in 12 months.

This property has been nothing but problems since John bought it a year ago. Here are just a few of the things that have gone on over the past year:

• John’s been unable to secure a tenant for longer than six months.
• John had to replace two broken windows from vandalism while units were vacant.
• John received three midnight phone calls reporting gunshots.
• There is a busted crack house across the street.
• The next-door neighbor (an elderly woman) was kidnapped from her front porch and is still MIA.

You would think that after dealing with these headaches, John would abandon real estate investing all together.

But that’s not the case.

In fact, he’s more passionate than ever about acquiring rental properties.

Why?

Well, for one, John’s learned some very painful and important lessons from the above nightmare. In fact, over the course of the past year, he’s come up with a strict set of criteria that will ensure that many of these problems aren’t repeated. I’ve taken John’s formula, added a few notes, and even threw a couple of my own criteria into the mix.

The result? A near-perfect strategy for buying cash flowing rental properties.

Before I continue, I just want to emphasize that this strategy is the result of HOURS of reading, multiple conversations with other investors, property managers and real estate agents alike, and an in-depth analysis of our own investments —this strategy is a bi-product of our own personal experience and could vary depending on yours.

Here we go…

The first step to ensuring that you don’t end up with a real estate nightmare is:

EDUCATION

Before getting into specific techniques, I’d like to re-emphasize that just like any other investment out there, if you don’t know what you’re doing, you will get burned and lose A LOT of money. I always recommend doing your homework and investing FIRST in your education.

Here are a couple of things I do to get educated:

Talk to other investors – make sure you are getting solid advice from people who have accomplished what you are trying to do, not from broke family members! You will be surprised by how many well-meaning people are eager to give you free advice on something they know NOTHING about.

Read, Read, Read

I am a HUGE fan of reading. It’s advisable to read a variety of authors who have different approaches. Your job will be to read enough material to begin seeing patterns and to form your own opinions and strategies.

Consider Buying Courses

There is a TON of quality content out there; however, just like any other industry, there’s also plenty of snake oil salesmen peddling get-rich-quick schemes, so be careful. Usually, a thorough Google search will help sort out the bad apples.

KNOW YOUR MARKET

I recommend buying in an area that you are familiar with, at least for your first few properties as you get your feet wet. If you are not familiar with an area, try spending a few weekends in your target market over a period of months. Drive around in 2-3 zip codes you are interested in and talk to neighbors, local shop owners, property managers, etc. so you can get a feel for the area and the potential clientele you’ll be dealing with.

What type of neighborhood should you be looking in?

Well, each person’s strategy is different, but here is how I analyze properties and scout out neighborhoods:

I evaluate them as one of three categories…

A Class

These are in “pride of ownership” neighborhoods occupied predominantly by homeowners. The houses are typically well maintained with green lawns, tree lined streets, etc. These tend to make great homes to impress your friends, but don’t usually pencil out as great investments. I stay clear of these areas.

B Class

This typically has the largest range of product between the three classes. These houses usually serve the greatest number of people within the community and have the largest amount of inventory. I usually try to target a neighborhood where there is a large portion of blue-collar workers and where there is a 35/65 percent ratio of renter to homeowner. You can usually tell if you’re in one of these neighborhoods by the number of utility vehicles parked in driveways – cable repair vans, constructions trucks, etc.

C Class

These are in “run-down” neighborhoods occupied predominantly by renters. These rental properties typically have a high renter turnover rate. People tend to RUN in these areas at night, NOT jog. There’s high crime, gang and drug activity, substantial cop presence, etc. I am not saying these are poor investments; typically the cash flow on these deals can be high. But the successful investors taking these on are probably running a tight operation and have a specialized property management team in place. For someone looking to acquire one or two investment properties as a way to supplement income, I would recommend against this. I haven’t purchased one and I don’t think John is eager to buy another one either.

THE FOOLPROOF FORMULA FOR BUYING INCOME-PRODUCING RENTALS

a. Buy below market 10-20%.

Think of this not only as a way to grow your net worth, but also as a way to ensure your financial security. If you ever have to sell due to an emergency, that 10-20% is going to allow you to lower your offering price to move it quicker. On a positive note, if you don’t have to sell in an emergency, you’ve just made an instant return on your investment.

b. Property must generate at least a 15% ROI, cash on cash.

That means the rent minus the debt (if mortgaged) and expenses must equal 15% or more. For example, a $20K down payment would have to yield at LEAST a yearly cash flow of $3,000. This is actually fairly low – most of my and John’s deals have been well above the 20% threshold.

c. Buy in a B-class neighborhood, 35/65 percent ratio of renter to homeowner.

d. The rent should be at LEAST 1% of the purchase price.

For example, a $100K home should rent for at LEAST $1000 per month.

e. Due your due diligence regarding repairs before buying.

If the repairs plus your down payment exceeds 15% ROI, move on to the next property.

f. Maintain six months of cash reserves per property to pay the debt service.

This should suffice for any unforeseen repairs or vacancies.

TAKE ACTION

These next few years will probably go down as the best time to purchase income-producing rentals in our lifetime. In many markets, you can acquire property far below the cost to build. Interest rates are at historic lows. Generation Y is three times the size of Generation X and is expected to continue to rent for the foreseeable future—while property values have dropped significantly, costs to rent have not.

So what’s John up to now?

Since the acquisition of his nightmare duplex, he’s gone on to purchase three additional B-class properties and is in the process of buying a forth this month. Each house brings in roughly $400 a month in cash flow. And even though he still has to deal with the occasional headache resulting from his duplex, he’s still on track to generate a second income so that his wife can stop working during the first three years of childrearing.

If you’ve ever thought about investing in real estate, what’s holding you back? If you’re already investing, is there anything you might add?

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Arthur Garcia is a real estate investor who blogs at The Business of U, focusing on personal finance, business, and self development.

Arthur’s a 29-year old sales professional for a Fortune 500 company, but also has experience as a part-time real estate investor in Southern California, which ties into today’s post.

I’ve never advocated real estate investing simply because I don’t have experience in the area. I also don’t love the risk involved in taking out multiple mortgages and relying on tenants to generate cash flow. That said, I’m intrigued by investors who make it work, especially those—like Arthur—who have acquired multiple properties while still in their twenties.

Here, Arthur shares why he and his fiancée decided to use a $40k windfall to purchase a rental property rather than pay down debt. Read Arthur’s story, then leave a comment to let us know…would you have done the same?

Here’s Arthur:

Two years ago, my fiancée, Laura, had finally completed her bachelor’s degree and was ready to start working full time. Like many of today’s graduates, however, she graduated with student loan debt.

$30,000 of it.

How did we tackle this problem head on and manage to make 30K along the way? Here’s our story…

After graduation, Laura got a job at a small advertising agency. The starting salary was far from six figures, but enough to cover the bills.

Six months later, the student loans came due and we calculated the monthly payments were going to be roughly $480 a month. Ouch.

Fortunately for us, Laura isn’t very “spendy” and never amassed even a single dollar of high interest consumer debt; she owned her vehicle outright and had no credit card balances.

A few months into repaying her student loans, we learned that Laura’s grandmother passed away following a long illness. Unexpectedly, Laura inherited $40,000 from her grandmother.

WHAT WE DID WITH THE MONEY

Obviously, it was decision time. How should we best use that windfall?

It was interesting talking to different family members regarding how they would allocate the inheritance they received. Some were going to buy a new car, others were going to fix up their primary residence, and a few talked about locking the money away in CD accounts.

Ultimately, we decided to use the money to purchase an investment property.

Everyone we talked to approved of our decision to use the money to buy a house, but their jaws dropped when we told them that we weren’t going to live in it! Few could understand why we would buy an investment property before paying off Laura’s student loans—or at least buy a home for ourselves!

WHY WE DIDN’T PAY OFF THE STUDENT LOANS

Before I go into too much detail, I want to preface the following by saying that we did not decide to implement this strategy “blindly”. We have other rental properties and did our due diligence before making this decision.

With that said, here’s are the three big reasons we made this decision.

1. Student loan debt is tax-deductible. Laura’s loans have an 8% APR, which after tax deductions and the standard rate of inflation (3% if you believe government statistics—another discussion altogether) the actual APR she’s paying is closer to 4%.
2. Liquidity. If we used the windfall to pay off her student loans in full, Laura would have had no additional cash reserves. This would have made her incredibly vulnerable in an emergency (for example, if she needed major medical care or became unemployed.
3. Lazy money. We knew that if we paid off all of her debt, then those dollars would no longer be able to produce additional income for us. Based on our prior experience in real estate, we were convinced that a rental property could produce an annual 25-30% return on our initial investment of $40K or less.

Still scratching your head? Here’s how it worked.

The Details

After researching our target market for about three months, we finally got the perfect place under contract:

Here is what the investment looks like:

• Purchase price: $110k.
• Market Value: Between $135 and 145k (based upon traditional sales, i.e. non-REO or short-sales. Note that the property had $25-35K of built-in equity).
• Down payment: $27K.
• Closing costs: $4K.

Total out of pocket investment: $31.5K.

• Estimated Rent: Two units, a 2bed/1bath: $750 and 3bed/2bath: $1,000 for a total rent of $1,750. (We based on multiple conversations with various property managers).
• Estimated mortgage with tax/insurance: $700.
• Estimated repairs: $1,000.
• Estimated monthly expenses (water, trash, gardener, etc): $165.

Estimated cash flow: $1,750 – ($700 + $165) = $885.

• Cash reserves needed: $3,500 (five months of mortgage payments).

Yearly cash flow: $885 x 12 = $10,620 subtracted by a presumed vacancy rate of 7% ($743) = $9,877.

ROI: $9,877 (actual cash flow) divided by $31,500 (initial down payment plus closing costs) = 31% cash-on-cash return.

When factoring in the mortgage tax deduction, depreciation and possible appreciation, the actually ROI might be closer to 35-38%

CLOSING THOUGHTS

After acquiring this property, Laura will generate enough in rental payments to cover her monthly student loan payments each month and have excess cash flow.

This, in my opinion, is the ultimate example of OPM (other people’s money). Both the student loan interest and the mortgage interest are tax deductible, and she will be paying back the loans with her tenants’ cheaper dollars (due to inflation). And after the student loans are paid off, she’ll still have an income-producing asset.

I’m not advocating this strategy for everyone, but I thought this was an out-of-the-box approach to paying off debt that’s worth sharing. Let me know your thoughts…

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As a Realtor, I know that condos are popular among first-time home buyers. After all, the average condo costs less than the average single-family home. (In March 2011, the average sale price of a condo in the U.S. was $153,000 compared to $160,500 for an existing single family home, according to the National Association of Realtors).

Condos require less maintenance and many complexes offer amenities like gyms and pools, all of which are attractive to young, active owners.

But condos aren’t perfect.

There are homeowner’s association rules and monthly fees to cover association management and upkeep of common areas. And then there’s the fact that condos can be more difficult to buy (at least with a mortgage) than single-family homes. And that’s especially true if you want to use an FHA loan to buy a condo.

Condos Require Special Underwriting

When you walk into a bank and apply for a mortgage, the bank begins the underwriting process, in which it:

1. Evaluates whether you have the means and credit to repay the loan and
2. Assesses the property you’re buying.

The bank wants to know that if you default on your mortgage, it can sell your property and recoup most of its money.

When you’re buying a single-family home, the underwriting process is straightforward. The bank appraises the home to ensure it’s worth what you’re paying for it and that there is a clean title (so somebody else can’t claim they own it).

When you buy a condo, however, the bank considers additional factors such as:

• The finances of your homeowner’s association (reserves and arrearages). If other condo units are in foreclosure—or the owners simply stop paying their condo fees—it’s not good.
• The condo documents. Condo associations are governed by a legal agreement. All are slightly different. None are perfect. The bank will be on the lookout for any red flags in the condo docs that could create a situation that would cause the property to depreciate.
• The percentage of owner-occupied units. The bank may also consider the number of rented units and vacant units as barometers for the property’s potential to holds its value.

These factors began playing a larger role in the underwriting process following at the onset of the housing crash in 2008.

As a result, it’s simply more difficult to get a loan to buy a condo.

Assuming you can’t pay cash, it’s easiest to finance a condo with a conventional mortgage rather than an FHA or VA home loan, which we’ll discuss below. A “conventional” mortgage meets specific underwriting requirements. For example, a conventional mortgage requires a loan-to-value (LTV) ratio of 80% or less. In other words, you must put 20% or more down.

You’ll be subject to the additional underwriting requirements noted above, but not to additional restrictions placed on FHA and VA loans used for condos.

FHA CONDO LOANS

First-time buyers often look to loans backed by the Federal Housing Administration (FHA) because they have relaxed credit requirements and require down payments as low as 3.5% of the purchase price.

In order to secure an FHA loan to purchase a condo, however, the condo you are purchase must be FHA-approved. Unfortunately, that approval process includes a variety of factors that you, as a buyer, cannot control. Some of the current requirements include:

• At least 50% of the condo units must be owner-occupied.
• No more than 15% of the units in the complex can have association dues that are more than 30 days behind.
• No more than 30% of the units in the complex secure existing FHA loans.

In the past, the FHA would insure loans on condo unit without the whole complex having to be approved. These so-called “spot approvals”, however, are long gone, meaning FHA condo buyers have far fewer options.

There is a list of FHA-approved condos here, but keep in mind that approval criteria change constantly, however, so be sure to work with your Realtor to research any condo you want to buy with FHA financing.

For some advanced, dense reading on all these requirements, here’s a HUD .pdf that goes into it.

VA CONDO LOANS

VA loans provide financing to qualified veterans with little money down. Similar to FHA approved condos, the entire complex has to be approved by the Department of Veterans Affairs in order for a buyer to purchase a condo unit with a VA Loan. You can find out if a condo is VA-approved here.

Where to Start

If you have your eye on buying a condo and are hoping to get a mortgage—even an FHA or VA loan—don’t despair, it’s still possible, it simply takes a little more homework to avoid last-minute disappointment that a bank won’t approve the condo you want to buy.

• Work out your budget to know how much house you can afford.
• Get mortgage pre-approval (you can start this online now).
• Find a buyer’s agent experienced with condos and locate units you like, paying attention to their FHA/VA status if it’s a requirement.
• Finally, before or in conjunction with making an offer on a condo—ask to see the condo documents and ask the sellers the same questions the banks will ask about the association finances and owner-occupied units. In many cases, you’ll be able to spot red flags right away.

Your thoughts: Have you gotten a mortgage for a condo recently? How’d it go?

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Don’t be too hard on yourself: NOBODY had the ability to see the future and nobody knew just how bad the housing industry would get. Homeowners from all walks of life have been affected by this—multi-millionaires and people who barely got into homes costing less than $100,000.

If your house is worth less money than you owe right now (a.k.a. underwater or upside down), it may seem like you’re throwing good money after bad and that you don’t have a lot of options. But you do have some, which I’ll lay out here. Research the options that appeal to you, and think carefully about what’s right for you.

Finally, keep in mind that when you’re underwater on your mortgage, your options vary greatly depending on whether or not your lender has filed a notice of default (NOD) on your house—the legal prerequisite for foreclosure.

Please keep in mind that I am NOT an attorney, and if you receive a NOD or are considering some of these options, you should ABSOLUTELY consult one, and possibly a professional accountant, too. Even if you think you can’t afford it and even if you think you can do it yourself. Banks prey on the vast majority of homeowners who don’t lawyer up because they can. Sometimes, just having an attorney at your side is all it take to get them to play fair.

That said, here are some options if you’re underwater on your mortgage:

WAIT IT OUT

This is a favorite option of ostriches. That’s right—stick your head in the sand and avoid the issue. This option works IF:

• You’re not behind on the mortgage payments (and therefore have not had an NOD filed),
• you have enough money to keep paying them, and
• you WANT to stay in your house for a long time.

But who knows when your home’s value is going to come back up? Property values in some areas are starting to rebound but experts say it could be years before the housing market sees a full recovery. The truth is, nobody knows, so if you’re waiting for your home’s value to increase so you can sell or refinance, you could be waiting a long, long time.

REFINANCE

Sorry to break it to you but it’s not going to happen. In this economy, lenders simply will not refinance if there isn’t a sufficient amount of equity in the house.

RENT IT OUT

Renting the house out is a viable option in some situations. There are two important questions to ask yourself when considering renting your property out.

1) Would the current market rent cover my mortgage payment and then some?

Check Rentometer.com to find out what the current market rent is for a house of your same size in your area. Craigslist is another great place to compare rents. Keep in mind you’ll need the rent to cover your mortgage payment plus property taxes and interest, and an allotment for repairs and maintenance. That’s assuming you’re not getting any cash flow.

If you want to make a little money in the process make sure that what you can rent it out for is at least a few hundred dollars above your mortgage payment. If you have an adjustable rate loan, you’ll need to take some extra time to review your paperwork to see when the loan can adjust and how much it can adjust.

2) Am I willing and equipped to handle being a landlord?

If you’ve never been a landlord before, I’d suggest reading a book on landlord-tenant laws in your state and reviewing Rentlaw.com. It’s also a good idea to talk to a few landlords, if you know any, about the ups and downs they experience. You may be able to make a little extra money this way, but unless you pay money to hire a property management company, guess who’s going to get called at 3:00 am when a toilet gets clogged? As a landlord, you’ll be responsible for marketing, screening tenant applications, choosing a tenant, collecting payments, making sure the property is continually safe, making (certain) repairs and if necessary – evicting, at your own expense.

TRY A LOAN MODIFICATION

“Try” being the key word here. People who have missed mortgage payments and are facing foreclosure seem to favor loan modifications, most likely due to the promise that they’ll be able to stay in their homes.

According to Aleksandra Todorova of Smart Money, “It should come as little surprise that with few lenders reducing principal—and most tacking on fees to the loan balance—nearly half of loan modifications (45%) actually resulted in increasing a borrower’s monthly payment.”

Loan modifications may reduce monthly payments for a period of time, but they will never address the underlying problem: negative equity. The other thing to note about loan modifications is the qualifications. If you’re unemployed, you can bet that you probably won’t qualify for a loan mod.

Still want to try a loan modification? BEWARE SCAMS! If you want a loan mod, contact your lender directly, get a trusted attorney, or go through a Department of Housing and Urban Development-approved counseling agency.

FORECLOSURE (OR WALKING AWAY)

Let’s face it, nobody wants to say the “F word”. And, in most cases, you should try to avoid foreclosure. The recent housing crisis has changed that for some people, however, with a growing number of homeowners simply walking away from their homes.

If you’re considering walking away, remember that a foreclosure record can damage your credit for up to seven years, according to the National Association of Realtors. I’ve heard some people say “I don’t care if my credit gets damaged because I don’t want to buy another house for a while.” What you must realize, however, is that your credit also affects your ability to rent an apartment and even, in some cases, get a job. (That said, given the recent housing crises, foreclosures may not carry the same stigma they once did, and provided you have income, you may find landlords and employers willing to listen to your story.)

Though best avoided, sometimes it may make sense to let the bank foreclosure and move on rather than spending money and time fighting to save a home that’s just not worth it. Most people have an emotional attachment to your home, but if you can come to the realization that you can make a happy home someday somewhere else—and somewhere you can AFFORD—foreclosure may not be such a bad thing.

DEED IN LIEU

If you’re far behind on your mortgage payments and know you won’t be able to make up the deficiency, you may consider a deed in lieu of foreclosure. With a deed in lieu, you voluntarily give the deed back to the bank.

A deed in lieu will also negatively impact your credit, and you’ll forfeit any equity in your home (which isn’t an issue, of course, if you’re underwater). Your bank may give you up to $3,000 cash to help rent an apartment. Note, however, that you can only get a deed in lieu if you have only ONE loan on your home (so if you have multiple mortgages or home equity line or loan, you can’t qualify).

DO A SHORT SALE

In a short sale, the lender accepts a purchase price of less than what is owed on the property. The short sale process involves listing the property for sale with a real estate agent, finding a buyer and having the agent submit the buyer’s offer along with a “hardship package” to the lender(s).

The process still damages your credit, but typically not as badly as a foreclosure. With a short sale on your record, it’s clear that you were actively participating in trying to solve the problem, rather than walking away. The National Association of Realtors states that with a short sale, you may be able to buy a home again in as little as 24 months but with a foreclosure on your record the wait could be as long as seven years.

Short sales are great when they work, but you first must find a buyer and get your lender to agree to sell the home for less than you owe. Finally, you may be required to pay federal income tax on the difference between what you owed on the home and what it was sold for…an amount that could total tens of thousands of dollars…so it’s wise to check in with a lawyer or CPA if considering a short sale.

A NOTE ON BANKRUPTCY AND UNDERWATER MORTGAGES

Being underwater on your mortgage by itself isn’t a reason to file bankruptcy. In fact, although bankruptcy law has provisions to help you stay in your home, consumer bankruptcy is really designed to help you deal with unsecured debts like credit cards and medical bills, not mortgages. In all cases, bankruptcy should be a last resort and you should always consult a qualified bankruptcy attorney before taking action.

Are you underwater on your mortgage? How are you handling it? Please share your story…

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