Flipping houses can be a very lucrative endeavor. There are many different strategies that can be utilized to buy a house. Regardless if you will buy a house and get a mortgage on it or if you pay cash for it, you need to be able to understand how mortgages work and how you need to structure deals so financing will be available. Even if you pay cash for your purchase, when you go to sell the property, the buyer will need to get a mortgage. Knowing how mortgages work, what the different terms means and how someone qualifies for a mortgage, can make the difference between escrows falling thru or closing.
There are few terms that you need to know that will assist you to understand the whole process:
Appraised Value: This the value that a real estate appraiser things the property is worth.
Comps: In order for an appraiser to determine the value of a property, he needs to identify comparable properties or comps, that are similar to the subject property and then compare them. Since 2 houses will never be absolutely the same, the appraisers job is to make adjustments on any differences between comps and the subject property. So comps are similar houses in the immediate area that will be compared with our subject property.
Tax Assessors Value: Each house is required to pay property taxes to the county or city that the property is located in. The way these taxes are determined is by taking the value that the assessors office has assigned to the particular porperty and multiply it by the tax rate. These values are often very wrong. In an appreciating market, these values will be a lot lower then the real appraised value. IN a declining market, these values will many times be higher then their appraised value. Never use the Tax Assessors Value as a way to calculate the true value of a property.
Mortgage or loan: A loan to finance the purchase of real estate, usually with specified payment periods and interest rates. The borrower (mortgagor) gives the lender (mortgagee) a lien on the property as collateral for the loan.
LTV: This term stands for loan to value. It is a ratio, or a percentage and it compares the loan on a property to the value of the property. So if someone buys a house for $100,000 and gets a loan for $80,000. The LTV is 80%. That means that the loan is equal to 80% of the value of the property or purchase price, whichever is lower! Something very important to be aware of. If you purchase a property that lets say is worth $125,000 but you are buying it for $100,000, for LTV purposes, the LTV will be based on the purchase price. So if you are planning on getting an FHA loan at 96.50% LTV, the value that will be used is $100,000. On the flip side of that, if you buy a property for $100,000 but the appraised value comes in at $90,000, the LTV will be calculated of the $90,000. So, keep in mind that for LTV purposes, which is used by all financial institutions, the value is the lower of appraised value or purchase price.
Topics: Flipping Houses, Mortgage, Mortgage Terms, Real Estate Financing
