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Dora’s Tips to Financial Success: Part 2

Find Part 1 here!

I always love hearing about the times of the 10 cent ice creams and the 1 dollar movie theaters and this time was no different when Dora mentioned she had purchased her first house for only $12,000. As shocking as this amount was the story was a familiar one. When the homeowner asked for a $6,000 down payment, her husband said it was too much, but Dora had a different answer.  She said she could offer $5,000 cash on the spot, leaving her husband dumbfounded. This reminded me of my own mom and dad where his famous line is, “I just work and she does all the rest” meaning his grasp on the financial investments that take place in the household are little to none. I gave a knowing chuckle and let her continue…

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Q: How did you get started on your first property?

After living in an apartment for 10 months they decided to buy their first house. After 10 years and having kids they wanted a larger space which allowed them to rent out their first home. Her next house was acquired through a wraparound mortgage, which at first seemed like a good idea. The listed price was $70,000 and the sellers existing mortgage was $20,000.

Throughout her story, I sat there nodding my head, occasionally jotting down some notes, but really I had no idea what she was talking about. So I had to do a bit of research to clear things up.

Wraparound mortgage (assumable mortgage and owner financing also apply)

In a conventional buying selling process the buyer would get a loan from the bank to help pay for the $70,000 (I’m ignoring the down payment). One of the main reasons a wraparound mortgage starts is because the buyer can’t get a loan from the bank for whatever reason (ex: poor credit). Combine that with a seller who is eager to move or is having a hard time selling in the current economy and you have a deal! The seller is now going to act like the bank and allow the buyer to pay in installments with interest. The way this benefits the seller is if they increase the buyer’s interest rate above their current mortgage with the bank. This increased interest rate will pay for their existing mortgage of 20,000 plus the rest of the 50,000.

Two
negatives that arise:
Buyer – Not paying the installments, which puts the seller in a bind because they cannot pay their existing mortgage.
Seller – Has a “due on sale” clause which means if the bank finds out your trying to convey the title of your home to someone before your payments are complete they have the right to speed up the process and demand the rest of the full payment.

Of course there are more positives and negatives, and it seemed like someone always had a loophole to a negative situation, but the point is this wraparound mortgage option carries risk.

For Dora the risk came from the seller. He had an emergency with his house and ended up offering it to her for a cheaper price. A plus for her, but it showed her how brittle these agreements can be.

After her first property her longtime friend and husbands barber was looking to sell his shop. Because of her past experience with the wraparound she agreed to buy it only if it was financed through the bank.

Q: Have you ever had any trouble with renters? How did you deal with the troublesome ones?

There’s never a bad apple until there’s a worm. Or in Dora’s case a “snake.” She always has her renters pay the first, last, and the deposit fee.  One day she went to turn a check in and it bounced. She had to go through the district courts to kick her out and on top of that had to pay the officers who enforced it. Now she has a good lease from the city and a strict vetting process. She always calls her renters place of work to see how long they have worked there and where they currently live, among other questions.

“A lease, or rental agreement, is a document used for the use of space (commercial or residential) for a period of time in exchange for monthly rent. The terms of the contract are negotiable between the landlord and tenant and once signed by both parties the agreement is considered legally and mutually binding.”

Q: Do you have any secrets on how to find the best bargains for houses?

People always think about low income areas, but they forget about auctions.”
Stand your ground at auctions, she told me. She went to one by herself and offered up $19,000 for a house worth $30,000. Sold! However, when she went to the office to sign all the paperwork they tried to raise the price to $25,000. Sticking to her $19,000 she walked away. They had her wait for hours outside their office before calling her back in and selling it to her at her original bid price. She remembers how she was the only woman there by herself and tells me again the importance of holding yourself with confidence.

Q: What kind of loan do you prefer when buying your homes?

I had brought up several loans that I had heard of, but when she mentioned conventional loans I continued with my smiling and nodding. Back to the internet I went or to be more specific to Dave Ramsey.

Funny thing is apparently a conventional loan is the most popular mortgage option out there. For one it offers more flexibility to the buyer, but is also riskier because they are not insured by the federal government and is usually harder to qualify for one. “Instead, the loan is backed by private lenders, and its insurance is usually paid by the borrower.”

Government-backed loans include the VA, which are guaranteed by the Veterans Administration and FHA loans, back by the Federal Housing Administration. For these you usually have a down payment, a mortgage insurance premium (MIP), or a one-time funding fee.

“With a conventional loan, the lender is at risk if you default,” and if you do the lender has the right to sell your house through a short sale process or even a foreclosure. Because of the lenders risk you have to pay private mortgage insurance (PMI) if you put less than %20 down.

Risks aside there are many reasons why people choose conventional loans:

  • Low interest rates
  • Fast loan processing
  • Diverse down payment options, starting as low as 3% of the home’s sale price
  • Various term lengths on a fixed-rate mortgage, ranging from 10 to 30 years
  • Reduced private mortgage insurance (PMI)

This is as far as I’m diving into it but Dave Ramsey’s site continues to talk about:

  • What are the different types of conventional loans?
  • How you qualify for a conventional loan?
  • How to get a conventional loan you can afford?

Q: Do you buy your houses as is or after inspection?

Her go to option is “as is” but when you’re walking the house and you think your repairs are going to require a contractor which might outweigh the resale benefits then pass on it. The whole idea is not to have to get a loan and go through the bank. Pay as much as you can upfront with a lawyer. If you go through a bank they will require you to get an inspection which costs more money.

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With her 7 residential and 1 commercial property Dora makes a year income of $150,000 with $30,000 worth of taxes. Now I don’t know about you but I could use that kind of money! So blessed to have been able to sit down with her and pick her brain. Thank you Dora!

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