How to Avoid Contractor Scams

To be clear, the majority of contractors are hardworking and honest people who are great professionals to work with. However, there are some scams that are commonly reported to the Better Business Bureau.

Like they say, it’s better to be safe than sorry. Whether you need a contractor for some work you’re doing to get your home ready to sell, to fix up a foreclosure you just bought with our help, or some additions you’re adding to your new home, take a quick read through this article to make sure that you don’t fall prey to these scams.

If they need all or most of the money up front

While your immediate thought might be that of course, you would never give a large percentage of the money up front, this is actually the most common scam that’s reported to the Better Business Bureau.

The thing is, contractors don’t just perform work for you. They also have to buy all of the necessary materials, rent machines and equipment, and other exceptions that is different from just paying employees. The contractor explains this to you, and it sounds reasonable. So, people willingly give up 50% of the project up front and save the other half for a well-completed job.

However, this now gives the contractor two options to be untrustworthy. One: he can just take the money and leave. This is less common because you likely live in the same community, and in today’s world of online reviews, it’s harder to escape.

The second opportunity for a shady businessman is that he can do subpar work and go over your scheduled time because if you already have given him thousands of dollars, chances are, it’s going to take quite a lot to fire him.

If your contractor truly does good, regular work and pays his bills, he’ll either have a good business plan to pay for the necessary equipment and materials or suppliers will provide these on credit.

This means that you should never pay more than 10% of the total amount of the job or $1,000, whichever one ends up being less. In fact, this is even the legal maximum in some states. It gives contractors some upfront capital for materials (which shouldn’t be necessary) and establishes the fact that you are a series customer to a busy professional.

If you don’t add it all to the contract

After you make an initial written agreement with a contractor and he starts working, things might change a little bit. Whether you noticed that you’d actually like a slightly different upgrade here or he suggests a nice extra touch there, these last-minute details are sometimes agreed upon verbally.

After all, you’ve already completed the contract, your verbal agreement was very clear, and he seems like a great guy. Unfortunately, your contractor is under no legal necessity to complete these verbal agreements whether you paid him extra or not.

Even if he is truly a great guy who would honor these agreements, numerous other problems could take place. Say, for example, he has to take time off work for a personal emergency and his company finishes up the job. If they’re unable to reach the original contractor, there’s no way for them to know that you have paid for extra services.

This is advice true both for contractors and everything else that’s important: always get it in writing. If you’re revising a contract that was already written, add any missing items and put your initials and ask the contractor to initial each change.

This is the only way you can have legal protection if things are completed as agreed.

There were some problems they didn’t expect

I hate to add this one because after working with real estate for some many years, I know that unforeseen consequences happen extremely regularly. However, some contractors could use this fact as a way to get more money, even when it’s not fully necessary.

Your contractor might inform you that they ran into some problems that couldn’t have possibly been predicted, making the price of the job shoot way up. Like I said, he might be being fully honest because this kind of thing can, unfortunately, happen.

To find out if your contractor is being honest, you can get an outside inspector to come take a look. If you need help finding a good inspector, you can take a look at our other article on the subject.

Even if the problems are legitimate, it’s also possible that the contractor gave you a low offer that you would agree to, knowing they could greatly raise the prices later.

In order to make sure that you don’t fall prey to this scheme, make sure your contract contains a procedure in case these events do happen and you need to adjust the order, a mini contract that includes a work description and fixed price for anything that could need to get added to the job in progress.

Additionally, make sure to conclude that the extra work can only proceed after the change order is signed by both of you. This way, you’ll be protected both from unforeseen consequences and an unscrupulous contractor.

Now you know

The thing is, most contractors are excellent businessmen who want to help make your home great. Another way you can make sure that you get an honest business owner is by asking them for references and checking out their licensing info.

But, now that you’ve read this article, you know the scams those unlikely few might pull, and, if you get unlucky enough to run into one, you won’t be fooled.

If you need help finding a great contractor in the East Tennessee area, please give us a call at Priority Real Estate and we’ll help you out.

Michele Karl is the Owner/Broker of Priority Real Estate. She can be reached at her email at [email protected] or give her a call at her office at 865-577-6600.

Will my property rise in value?

You might have heard that buying a home is always a smart investment because the value always rises over time, but is this really true?

Well, certainly home prices go up because of inflation, but you have to look at some more context to understand if your home’s value can rise over the rate of inflation.

If you’re buying your house as a primary place to live, it’s almost always a good decision. However, if you’re thinking about buying an extra investment home, read on to understand if it will rise in value.

The physical structure will depreciate

When investors talk about the home’s value appreciating they are usually referring to the land. The home itself will have more problems the older it gets, such as leaky drains, potential structural issues, and more.

The house requires average maintenance, design updates to keep it in style, and more. In fact, the Internal Revenue Service (IRS) knows that homes depreciate and allows you to note the depreciation for tax purposes.

However, the land won’t have these same problems. Focusing on the land and its location is what is going to get you a solid, smart investment with the highest rate of return.

Of course, this isn’t to say that the property doesn’t matter at all. If you’re looking at selling an investment home, it needs to be in good condition and look well kept-up. And, of course, as the price of the land in the area rises, so will the price of your home.

However, when choosing an investment home, location is typically more important than the house itself.

The land will appreciate

Have you ever heard of an investor buying a degraded home, tearing it down, building a new one, and still making a profit when they sell it? That’s because the land and location were more important than the actual physical structure on it when purchasing an investment property.

Of course, you need to crunch the numbers to be certain that the cost of buying the home, property, and repairs will still be able to give you a profit when selling, but the bottom line is that the location matters more. That is why a beautiful house in an unpopular area might cost hundreds of thousands less than a destroyed property in a popular zone.

Land follows the normal rules of supply and demand. Because demand continues to increase with the population and there’s no way to produce more supply, land in a good area is often a stable investment.

As we know that the value will increase, we just need to understand by how much. To understand if where your potential investment home will go up in value, you need to look at the location and the future potential in this area.

Location, location, location

If you’re buying your investment to live in, it can be hard to give up the perfect house in exchange for a smaller or less beautiful home in a different area. However, if you want to maximize the investment opportunity of being a homeowner, this is the best decision.

Force yourself to look past many of the physical aspects of the home when deciding on which to purchase, and instead zone in on how the location will affect your return.

I do want to stress, though, that you should hire a contractor or someone knowledgeable in the field to understand exactly how much the repairs will cost. Even if the home is in a good area, it’s not a smart buy if you can’t afford the necessary repairs.

If the home is structurally sound and just has a few beauty problems, many of these can be fixed on your own, especially with all the DIY help out there today. Location is the most important aspect, but make sure you consider all the costs before committing to a home that needs work.

What to look for in the location

The home’s location within a home’s neighborhood matters. For example, if your potential investment property is located on a cul-de-sac or dead end, this location is more desirable within neighborhoods with others. This is because there is less traffic and is typically safer for children.

Don’t forget that smaller or less attractive homes can potentially get you much greater returns on your investment. Don’t be fooled by that beautiful looking home for a great price, and take a look at the prices of homes around it as well.

Another tip is that you should look at the area’s future development plans before buying an investment property there. Is a nice, new shopping mall moving in close by? That’s great. Some other structures, though, could decrease the area’s potential value.

It’s also important to look at its proximity to other amenities, such as grocery stores and more. If your investment property is located near a great school system, the value will probably continue to climb.

How to choose?

Essentially, it’s very important to look past how beautiful a home is. If it’s in the wrong location, it likely won’t rise in value beyond inflation. However, if it’s in an area that is near many amenities, good schools, and has new stores and shops opening up left and right (or planned for the near future), it’s likely a good investment decision.

Make sure you understand the full costs before buying and don’t get any investment properties that are too costly or difficult to repair, or else you might not be able to keep your property long enough to see it appreciate.

The most important things to remember are that the physical structure will depreciate in value, but the land will not. So, as long as the numbers work out, choosing a less attractive home in a better location is always the smarter decision.

If you want to track housing appreciation in your area to get a better understanding, you can visit the site of the Federal Housing Finance Agency (FHFA). After you’ve found the area you want to buy an investment property in, Priority Real Estate can help you find the perfect home.

Michele Karl is the Owner/Broker of Priority Real Estate. She can be reached at her email at [email protected] or give her a call at her office at 865-577-6600.

 

Your Guide to Buying Foreclosures

So, you’re trying to get into real estate investment and you’ve heard foreclosures are a great deal. Maybe, instead, you’re looking to buy a new house and don’t mind putting in some TLC before you move in.

Either way, finding a great foreclosure can save you tens of thousands of dollars if you know what you’re doing.

What exactly is a foreclosure?

Well, technically, there are four different types.

Pre-foreclosure

This is also sometimes called a short sale. As you might understand from the name, this is actually right before the house is foreclosed on. The family no longer has the ability to make the payments regularly, so they make an agreement with the bank to sell to property for at least the amount that is owed on it.

You’ll help the owner avoid a huge hit to their credit score while also paying a price that is typically lower than market value. The cost is also lower pre-foreclosure than post many times because the lender doesn’t have to pay any of the costs associated with the process of the foreclosure.

Like most foreclosures, the home is sold as-is and each original lender has different requirements for how you can buy the property. Some require all cash, some accept a high down payment, and others accept more typical loans.

True of almost all foreclosures, being sold as-is means that you cannot make the sale contingent on everything passing the home inspection. This also means that you are disqualified from a lot of the typical loans.

Off to Auction

If the home has passed the first stage without selling, it goes through foreclosure and off to auction. It is much riskier to buy a home at auction because you cannot certainly know that the property doesn’t have liens or encumbrances.

In addition to this fear, you typically cannot see the inside of the house and don’t have the right to inspect the property, so you don’t know what condition it’s in. At the auction, it’s almost certainly cash-only, so you’ll have to come prepared with a cashier’s check, willing to take on the unknown for a great deal.

Real Estate Owned (REO)

This is by-far the most common way for people and small investors to buy a foreclosure as it’s easier and safer. If, for whatever reason, the home doesn’t sell at auction, the lender now takes full possession.

While you usually won’t get as good of a deal as you could at auction, the much-improved safety of buying this house is well worth the price increase. And, of course, you wouldn’t buy a foreclosure if it wasn’t a good deal, anyways!

Foreclosures are usually priced to bring in a modest profit for the lender but low enough to sell rather quickly. Typically, after the lender takes control of the property, the house will be investigated for liens. Sometimes, lenders are even required to pay these.

Like the other types of foreclosures, REO homes are almost always sold as-is. A common way of buying these homes is either with cash or an investor’s loan, but it is impossible with the traditional home-buyers loans.

The lenders will usually work with specific real estate brokers directly to sell the foreclosed homes, like us here at Priority Real Estate.

Government Owned

This is another popular way of buying a foreclosure. A popular site that we work with directly is  Hud Home Store. Homes are sold as-is and the paperwork required is a bit different than buying other types of homes, so make sure you have a realtor that knows the intricacies.

It’s possible to find great deals with government owned foreclosures, just as with REO foreclosures.

How to buy a foreclosure

We talked a little bit about how to buy each type of foreclosure above, but here we’re going to focus on the safest and most common way to buy a foreclosure. These are homes that have gone past the pre-foreclosure and auction stages.

  1. Get pre-approved

You might think the first step would be to find the house, but that’s not actually true, especially for foreclosures. If you find a foreclosed home way below market price in great condition, you can bet many other investors in your area have as well.

If you haven’t gotten pre-approved, not only can you not be certain that you can afford the house you want, but you have to wait for the lender to approve you before you can submit your offer. By that time, the house might’ve already been taken.

  1. Find a realtor that works directly with the banks with foreclosed homes

Most banks have specific real estate companies or brokers that they work with for selling their foreclosed homes. These agents are experts in their field, and thus selected to represent the bank.

They know the ins and outs of all the paperwork that has to be completed, the exact method for when offers are looked at, which properties that are about to go on the market, and if they’re a good deal or not.

If you’re preapproved, these agents can take you around to all the foreclosures within your budget, as well as alert you the second that new homes are on the market.

Luckily, if you live in East Tennessee, I work directly with HUD and Chase banks and can find you the great deal you’re looking for at Priority Real Estate.

  1. Make the offer!

Once you’ve found the house (or houses) you want to buy, it’s time to put in your offer! Here, again, you’ll need a knowledgeable real estate professional because the requirements can vary by bank and government agency.

If you aren’t paying by cash, you’ll usually need a specific loan that lets you buy the house as-is. These details would likely have been worked out with your lender before this point. Many banks don’t allow you to make the sale contingent on the home inspection, so make sure you’ve already checked out as much as possible!

Sometimes, the seller will wait a certain number of days the look at all offers (such as HUD does). Additionally, they could have multiple offers so it will come down to “highest and best,” meaning that multiple offers will be looked at and the highest and best will be accepted. Others it will be like a normal home sale where they can accept, reject, or counter your offer.

As long as you have an agent that understands the bank’s rules about making offers on foreclosures, like us at Priority, you’ll hopefully have bought your first foreclosure. Good luck!

Buying your first investment property

Working with HUD homes and foreclosures, I see many people buying rental properties. There are typically three main groups that come wanting to invest in a home.

One group has years of experience and does this for a living. A second group is knowledgeable first or second-time buyers who have taken the time to understand the ins-and-outs of this business before jumping in.

The third group might be you if you aren’t careful. They heard from their friend that buying a house to rent out is a smart move, but didn’t do much research on their own. They have some money in savings and decide to dive head-first into unknown territory.

Chances are if you’re reading this, you’re already steps ahead of group three. While there is more research that has to be done on your own, such as exactly what loans you qualify for and housing trends in your specific area, read on for tips that will help every first-time rental property buyer.

Where’s the money coming from?

When you look at buying an investment property, you’ll realize that you’re presented with very different options when it comes to loans. While there might be better offers to those buyers who are planning on living in their home, don’t get too discouraged.

There are many types of loans you can get for investment properties as well. These types of loans, though, generally require a higher down payment and have higher interest rates.

If you have enough money set aside and are looking for a great investment to put that money into, great. Go ahead and skip the rest of this section. Otherwise, keep on reading.

If you don’t have enough money for a large down payment, it’s time to consider an investor. The details of the investments they make greatly vary and depend both on the person and your relationship with them.

Typically, though, they will pay for the house themselves and take a percentage of the profits each month. You, then, work as a type of property-manager in this case. You’ll find the renters, take care of any problems that arise, and rake in your percentage of the monthly payment.

Clearly, you will get more of a profit if you invest your own money. Then, you also don’t have to work out any questions of ownership. It’s also important to consider, though, that this poses more of a risk. Later, we’ll discuss if the risk is worth it for you.

Calculate all of your expenses

Of course, you’ll figure out your loan payment before you buy a home. But what else do you need to know?

First, if this is your first rental property, it’s probably best to stick to a home that doesn’t have much to fix. If you happen to be a contractor, feel free to take on what you feel comfortable with. Otherwise, wait until you find a home at a great deal that doesn’t take much work.

If you’re unsure where the best locations are or how much you should be paying when you buy an investment property, Priority Real Estate can help all those in East Tennessee. Otherwise, ask a real estate professional that you trust.

So, once you’ve finally found a home you’re interested in, the real work begins.

First, determine the total price you will be paying to purchase this home. Then, you’ll likely need to work on small things, like repainting the walls or fixing the stove. Add all these renovation costs in.

After this, understand how much you expect to get from a monthly rent. You can do this by looking at other rentals in the area with similar square footage. The next amount you need to add is the monthly taxes you’re going to pay on this property. Remember, taxes can be more for an investment home than a primary home 

Don’t forget to add the cost of insurance if you’re planning on buying it. Then, estimate annual maintenance and add in a few months of not having renters, as it might not be swept off the market immediately.

After you’ve figured out how much money you’re really going to need for this home, go to a lender to determine the type of loan you can get. From here, put pen to paper to see if you can pay your loan, or even more than what is due each month, and still make a profit.

Make sure all of this, such as how quickly you could get a renter or the money set aside for maintenance, isn’t too much guess work. If you’re unsure about the rental market in your area, as a real estate professional and make sure to that the contract is contingent on a home inspection.

If all the numbers work out, though, you might just be on your way to your first rental property!

Can you handle renters?

There’s just one more fact to consider. Unless you have enough money to spare on a property manager, you’re probably going to have to interact directly with your renters.

Many of the people who are going to be living in your rental property are wonderful families who you’ll be happy to host for many years until they decide, for whatever reason, to move. The reality of the situation, unfortunately, is that this isn’t always the case.

Maybe after months of not paying their rent, you’re forced to evict someone. You go to the house one day after giving them the notice to see it deserted, left in complete disarray. The refrigerator is missing, the walls are yellow from smoke stains even though the contract specifically said “no smoking,” and the carpets are covered in cat urine.

If you talk to people who rent out homes for a living, you know that this has happened to almost all of them at least once.

Another scenario is when renters try to take advantage of you. You’re a kind and understanding person, so when your renter is late on their rent, you tell them to just pay when they can. This drags on for months and months because you’re too afraid of being mean to your renter, but you’re worried about making your own payments because of it.

While the majority of people in the world are good, you renters might not always be. It’s important to realize before you buy your first rental property that you will have to be ‘the bad guy’ occasionally. Are you ready for that?

If you are and all of the numbers from the previous section add up well for you to buy a rental property, go for it! It’s truly a great investment opportunity that could bring you relatively stable monthly income for the rest of your life.

If you need help finding a home in East Tennessee, contact me.