Due On Sale Clause

A due-on-sale clause helps protect the lender, or mortgage holder, from the risk that the ownership may be transferred to a new owner upon sale of the property.

Because of the due-on-sale clause, when you sell your house you cannot transfer your mortgage to the buyer. You must use the sale proceeds to pay off your mortgage, and the buyer must obtain a new mortgage. If it were not for the due-on-sale clause, the mortgage could be assumed by buyers who might not otherwise qualify for the loan.

Under the 1982 Garn-St. Germain Act, lenders cannot enforce the due-on-sale clause in certain situations even though ownership has changed. If there is a divorce or legal separation and ownership between spouses changes (for example, the property was jointly owned and becomes owned by a single spouse), the lender cannot enforce the due-on-sale clause.

The same is true if the owner transfers the property to his or her children, if a borrower dies and the property is transferred to a relative, or if the property is transferred to a living trust and the borrower is the trust’s beneficiary.

Short Sales

Short sales are purchases negotiated with the owner and lender(s) before foreclosure. Typically the purchase price negotiated is less than the balance owed on the property.

For investors, short sales present an opportunity to buy real estate below market value and help borrowers to avoid foreclosure.

Carlisle Mitchell - Houston - Judicial Foreclosures

Carlisle Mitchell - Houston - Judicial Foreclosures.
Judicial Foreclosure is a foreclosure proceedings in which a mortgage lacks the power of sale clause. In such an instance, many states require the foreclosure to be processed through the state's courts. If the court confirms that the debt is in default, an auction is held for the sale of the property in order to acquire funds to repay the lender.

This differs from non-judicial foreclosures, which are processed without court intervention.
Many states require judicial foreclosure to protect equity the debtor may have in the property. Judicial foreclosure also serves to prevent "strategic disclosures" by unscrupulous lenders.

In instances where the sale of the property through the auction does not generate enough funds to repay the mortgage lender, the former homeowner will still be held liable for the remaining balance.

Carlisle Mitchell - Houston - Homeowners Insurance

Carlisle Mitchell - Houston -
Homeowners Insurance. Homeowners Insurance is a form of property insurance designed to protect an individual's home against damages to the house itself, or to possessions in the home. Homeowners insurance also provides liability coverage against accidents in the home or on the property.

In the U.S. there are seven forms of homeowners insurance that have become standardized in the industry; they range in name from HO-1 through HO-8 and offer various levels of protection depending on the needs of the homeowner.

While homeowners insurance covers most scenarios where loss could occur, some events are typically excluded from policies, namely: earthquakes, floods or other "acts of God" and acts of war.

For people who live in certain parts of the country, adding an extra policy for earthquake insurance or flood insurance can be a good idea to offer further home protection and peace of mind. Some homeowners insurance is designed for renters, typically HO-4 or "renters insurance", and only covers possessions within the home and isolated events not covered in the property insurance held by the owner.

Renter's Insurance

Renter's insurance is a form of property insurance that provides coverage for a policy holder's belongings and liability within a rental property. Renter's insurance applies to persons renting or subletting a single family home, apartment, duplex, condo, studio, loft or townhome. The policy protects against losses to the tenant's personal property within the rented property. In addition, a renter's insurance policy protects against losses resulting from liability claims, such as injuries occurring on the premises that are not due to a structural problem with the property (in this case, the owner's - not renter's - policy would apply).

Increasingly, proof of renter's insurance is required by many landlords. Personal belongings within a rented property are typically not covered under the owner's or landlord's property insurance. For example, if a flood or fire destroys all the personal property within a rented apartment, the structure would be covered under the landlord's policy, but the personal property would only be covered through a renter's insurance policy. Without this coverage, the tenant would be responsible for the loss out-of-pocket.

What is a Balloon Payment?

Balloon Payment - An installment payment which is larger (most often much larger) than the other scheduled payments. It is usually the last payment. If a note is written for $50,000 at a fixed 9.0% rate of interest with payments based on an amortization schedule of 30 years and a balloon payment due in 5 years, the first 60 payments will each be $402.31 (the normal payment for a 30 year loan at 9.0% interest) and the last payment will be $47,940.15 which will be the outstanding balance remaining after the 60th payment.

Assumable Mortgages

Assumable Mortgage - An existing mortgage which allows the next purchaser of a property to be liable for the payments and other obligations of the note and mortgage.

Depending on the type of loan, the assumption of the obligation by this next purchaser may or may not require a qualification and approval process and may or may not release the original mortgagor (borrower) from further liability.

A written release from the mortgagee (lender) is required to relieve the original mortgagor of responsibility.

Multi Property Sales

When a buyer purchases more than one piece of property at once, the purchase is recorded as a multi-property sale. Multi-property sales may take a variety of forms, such as a buyer purchasing a single-family home and an adjoining lot to create a single, larger property, or purchasing multiple units in one condominium building.

Since properties of different values can be purchased under a single transaction, multi-property sales may not provide a good apples-to-apples benchmark for property values when conducting a comparative market analysis.

Capitalization Rate (Cap Rate)

Capitalization Rate (Cap Rate)
A ratio used to estimate the return on investment of a real estate investment property, like an apartment building. It is calculated by dividing the income a property will generate in a given year (after fixed and variable costs) by the purchase price or current value of the property. For example, an apartment building that recently sold for $1,000,000 and generates $100,000 in income after expenses has a capitalization rate of 10%.

Cash-On-Cash Return

Definition of 'Cash-On-Cash Return'
A rate of return often used in real estate transactions. The calculation determines the cash income on the cash invested.
Calculated as follows:




'Cash-On-Cash Return' Explained
For example when you purchase a rental property, you might put down only 10% for a cash down payment. Cash-on-cash return would measure the annual return you made on the property in relation to the down payment.

Assessed Value

Definition of 'Assessed Value'
The dollar value assigned to a property for purposes of measuring applicable taxes. Assessed valuation is used to determine the value of a residence for tax purposes and takes comparable home sales and inspections into consideration. It is the price placed on a home by the corresponding government municipality to calculate property taxes. In general, this value tends to be lower than the appraisal fair market value of a property.

Margin of Safety - Value Investors #1 Rule of Investing

Margin of safety (safety margin) is the difference between the value of a property and its market price.

Application to investing
Using margin of safety, one should buy property when it is worth more than its price on the market. This is the central thesis of value investing philosophy which espouses preservation of capital as its first rule of investing.

The margin of safety protects the investor from both poor decisions and downturns in the market. Because fair value is difficult to accurately compute, the margin of safety gives the investor room for error.

A common interpretation of margin of safety is how far below market value one is paying for a property. For high demand property, value investors typically want to pay no more than 90 cents for a dollar (90% of market value) while more speculative property should be purchased for up to a 50 percent discount to market value (50 cents per dollar).

One Percent Rule

A rule of thumb used to determine if the monthly rent earned from a piece of investment property will exceed that property's monthly mortgage payment.

The aim of the one percent rule is to have the rent be greater or equal to the mortgage payment, so the investor breaks even on the property at worst.

The rule is used for quick estimation, as there are other costs associated with a piece of property that are not taken into account, such as upkeep, insurance and taxes.

'One Percent Rule' Explained
Purchasing a piece of property for investment requires a thorough analysis of future rents compared to the cost of owning that property. Property owners want to maintain a cash flow greater than costs. For example, an investor is looking to purchase a home valued at $200,000, with the goal of renting the home out for income. After placing 20% down, the investor has a mortgage of $160,000. The one percent rule says that the home would have to be rented out for no less than $1,600 per month ($160,000 * .01).