What is a Contingency Contract and Why Should I Care?

You may have heard this term from time to time when others discuss contracts of different types. In a nutshell, a contingency is a condition that must be met for the contract to be valid and enforceable. There are many such conditions that are standard for a real estate contract, as well as many variations that can be added to the Special Provisions paragraph in Texas contracts. In this article I will focus on only one standard one, the sale of another home.

In standard Texas contracts (TREC or TAR forms), the buyer has the right to submit an offer on a piece of real property with a condition that they must sell another piece of property first before they can close on the offer. This is done with a form called "Addendum for Sale of Other Property by Buyer". It is referenced by checking a box on the basic 1-4 Unit Residential Contract form, naming the addendum form as a part of the contract. This form outlines several things:

1. 
   
   It defines the specific address and latest date of sale of the property that the buyer must sell before the next purchase contract is to be completed. If the property does not sell by the date outlined here, the contract terminates and earnest money is refunded to the buyer.


2. 
   
   The seller is still free in this case to accept other offers on their property and the form next outlines the number of days that the contingency buyer has to waive their contingency or the first contract is terminated and the seller is free to sell the property under the terms dictated in contract number 2. In this instance of course, if the buyer chooses not to waive their contingency, contract 1 terminates and all earnest money is refunded to the buyer. If the buyer does waive their right to contingency, the seller must move towards closing with buyer 1 and that buyer now must buy whether the contingent property sells or not. In order for the buyer to waive their contingency, additional earnest money is defined in the addendum that the buyer must deposit with the title company, showing good faith in both waiving their contingency and showing earnestness in their intent to close on property 1 even though the contingent property has not sold.

This option is a great power tool for people that are involved a trade-up or trade-down situation with their current home. It does not bind the seller in that they can continue to seek better deals that can be negotiated after accepting the contingency contract. Further it allows for exit of a buyer who may choose not to waive their contingency when and if the seller gets a better deal from another buyer. It is thus fair to all parties although it may not seem so if you are on one side or the other.

When in a seller's market, sellers are less likely to accept contingent contracts and buyers are more likely to present them. In a buyer's market, this tends to happen more since buyers are worried about selling their current property and sellers are generally eager to get any contract, even if it has a contingency attached to it.

If you have further questions, contact us through our websites at:

http://www.TheHBHGroup.biz/ or http://www.TheHBHGroup.com/

or call our office at (512) 439-3772 or toll-free at (877) 268-1877.

Remember that real estate transactions can be very complicated and using an experienced REALTOR is a great way to protect yourself and know ALL your options in each situation.

Managing Your "House Money"

Did you know that the average American, relocates to a new home about every 5-7 years? This is one reason why a home is such a great investment, because you carry that investment's gain from home to home over your lifetime. But what if could continue to gain the value on that investment over your entire lifetime? If you moved every 7 years and lived in homes from ages 24-64, you would have purchased 7 homes over your life time and by the end of that period at least four of them would be paid off! If you set the discipline for yourself to lease every home you lived in after you move out, what could that mean to your family financially?

I just ran some quick calculations with my spreadsheet software and found the following to be true. Assuming a 5% annual appreciation growth rate (conservative to say the least), over a 50 year period:

1. You would have acquired 7 homes in your portfolio.
2. The homes would be worth over $8MM.
3. By just paying pretty close to normal 30 year fixed mortgage payments, your equity would be running about $6.25MM.
4. You would be generating over $800K/year in cash flow (income).

So would you say that adding this financial discipline to your budget would be a good thing for you? Just imagine, passing down an inferitance of this sort of value to your children in their 40's as well as teaching them to do the same with their real estate investments.

Call us The HBH Group for more detail or plan to attend one of our Buyers or Investors Seminars soon. You can reach us at (512) 439-3772 / (877) 268-1877 / or see our websites at:

http://www.TheHBHGroup.biz/ or

http://www.TheHBHGroup.com/

Why Should I Need an Option as a Buyer?

I am often asked this question by buyers and it amazes me that people don't naturally see the benefit of an option out of a real estate contract. After all, having a few days to "really" make up their mind on a contract is a real power tool to a buyer. Further, the option offers the buyer time to perform the needed due diligence on one of the largest purchases that an average person will ever make.

The option clause was added to our contracts in Texas many years ago simply to put the buyers more at ease. If you are not aware, real estate contracts in Texas do not qualify for the 3 day right of rescission rules that apply to bill of sale and retail purchase agreements. For this reason, the option clause was added to our real estate contracts by the Texas Real Estate Commission (TREC) and the Texas Association of REALTORS® so that buyers had a way out for any reason or for none. This right is purchased with a sum of money and MUST be in the hands of the seller within 48 hours of the execution date on the contract.

I repeat, that this is a HUGE power tool for a buyer in the state of Texas. It offers the buyer time to get the property inspected by a TREC-licensed real estate inspector. During the option period, the buyer has a great amount of leverage with the seller to negotiate needed repairs. This is a great opportunity to get repair costs negotiated and all this prior to closing.


Other buyers (particularly investors) use the option period to make offers on MANY properties at the same time in order get the best deal on one or two of them. This is a common practice (much to the chagrin of sellers), but is another method for controlling the buying process. In this case, the buyer may end up incurring a few dollars in option fees on those the contracts that they opt out of, but they can keep the best deal or deals they were able to negotiate. Many of the investors that work with The HBH Group use this method with great results.

If you have further questions about the option process or any subject that we can help you with, please call our offices at (512) 438-3772 or check out our website at http://www.TheHBHGroup.biz/ where you can get more information on buying and selling or leasing and managing real estate.

Why Real Estate is Such a Great Investment to Reduce Taxes

At the HBH Group, we are frequently asked why we work with investors. The answer to that question is that we "create" investors from our clients. When we teach you how you can save significantly on your tax load AND gain great returns on your investment funds through appreciation, rarely do we have a client that doesn't want to get involved in real estate investing. In this installment of the BLOG, I thought it would be a good idea to teach you, my readers some of the major tax benefits to investing in real estate. Here are some of the major reasons why this is such a great way to invest your funds and save taxes too:

1. Individuals who purchase real estate rental properties, who actively participate in the decision making process, such as determining who the tenants will be and what repairs should be made, may be able to reduce their taxable income by up to $25,000 per year under existing tax taws. The active real estate investor may deduct up to $25,000 per year on schedule E for such items as depreciation, negative cash flow, maintenance, repairs, interest, taxes, and trips to the property. This could effectively reduce the investor's taxable income by as much as $25,000. The potential savings in the 28% bracket would be $7,000. An investor in the 31% tax bracket would save $7,750. The savings would even be greater if the investor has a state income tax, as most state income taxes are based on the federal tax returns, which would be reduced also.
   
2. The $25,000 annual tax deduction is the maximum allowable each year no maker how many Investment properties are owned; this amount is reduced for taxpayers who have over $100,000 in adjusted gross Income. For every $2,000 over $100,000 of adjusted gross income, the $25,000 limit is reduced by $1,000. If, for example, the investor's adjusted gross income was $1 10,000, he would only be entitled to a maximum of $20.000 per year. The entire $25,000 would be eliminated for the investor who has an adjusted gross income of $150,000. Hence, these investors would be buying the real estate investments for the potential appreciation and/or income which they can generate.
   
3. Real estate investment property is a field where a substantial number of existing homeowners could be sold on the idea of purchasing rental real estate if shown by their real estate agent how to obtain good rental properties. In fact, hundreds of people each day purchase tape courses from late night infomercials, showing them how to purchase rental properties with little or no money down. The purchasers of those courses are shown that buying real estate investments can help generate large monthly incomes, build huge net worth's and shelter taxes. Some of the participants end up quitting their jobs, as they can earn substantially more from buying rental properties than what they have been doing. As mentioned above, this is a focus area of business for the HBH group. We have the expertise in acquisition and management services of rental property. Don't rely on late night TV to "buy" some, not all of the knowledge you need, instead leverage our experience to your advantage!
   
4. One age old objection to owning real estate investment properties is dealing with tenants. That is, collecting the rent each month and having to locate new tenants to replace the old ones. There are several ways to deal with this. First, consider having a company such as HBH Management manage your properties for a small monthly fee. We can also lease manage the properties for you, finding you good, qualified tenants and managing all interactions with those tenants; you simply pick up your check from your mailbox! Another option is to purchase real estate as co-owner with a relative. One relative can act as the owner-occupant/tenant. The other relative can act as the owner-investor. Each party would own a percentage of the property, such as WSO. The owner-occupant relative would put up 50% of the down payment, pay 50% of the mortgages payment and pay a rent payment to the owner-investor to offset the owner-investor's 50% of the mortgage payment. This arrangement reduces the owner-occupant's cash outlay, helps him qualify and will allow him to purchase a nicer home than he could afford on his own. The owner-investor gets the same tax deductions he would if he had purchased a rental property, but he has a permanent tenant, his own relative, who will eventually buy him out. But as an active real estate investor, they may be entitled to up to $25,000 in yearly deductions.
   
5. Another derivation of this idea is for parents to purchase condos or townhomes for their college age children when they go off to college. The parent can then employ the child as a property manager for their investment, pay them a salary (tax deductable) which can be used to pay their tuition and books.

Of course, The HBH Group can't give you tax advice, just ideas to discuss with your CPA, so please consult a tax professional regarding these ideas before putting your plans into action. Or feel free to call us and set up an appointment and we can connect you with reliable tax professionals to assist you in making a plan to shelter income through real estate investments.

For More GREAT Real Estate News...

See our websites! We have a wealth of all sorts of information plus a significant amount of search tools, etc. to assist buyers and sellers in the market place. Here are the links to our sites:

http://www.TheHBHGroup.com/

http://www.TheHBHGroup.biz/

We have several more websites in the works for you now, plus we are daily posters on numerous other sites on the web. In fact, our property listings are now seen on over 40 real estate related websites! By the way, last year the National Association of REALTORS® published a report that stated that 86% of the people who purchased property in 2007, found that property on the Internet. The web is the new classified ad of this millenium.

If you or someone you know needs to sell commercial, residential, or farm & ranch properties, please refer them to us. We can get their properties noticed within the new age of real estate marketing with our expertise in the web and web-related technologies!

FHA/VA - The New Sub-Prime?

Well you would have to be a hermit not to have heard all the fallout the last 12 months from the destruction of the sub prime lending industry. Last Spring, during one week I heard there were 6 different lenders that went bankrupt within that seven day period! Unfortunately, the sub prime debacle had some bad effects on our market overall, extending a period of price aggressiveness beyond all comprehension, putting many real estate markets around the country out of the affordability reach of most buyers. This has in many ways exacerbated the slow down in the real estate industry by now severely limiting the number of qualified buyers in most markets around the country.

Hooray for the feds! They have once again come to the aid of the common man by relaxing some of the stringent requirements around FHA and VA loans in order to stimulate the real estate buyers to stay in the market and the strategy IS working. Last week, they also increased the FHA funding limits within the Round Rock area to $288,750 which will pave the way to more expensive housing now being funded by FHA, so the move up that you have been desiring may now be possible! FICO credit scores all the way down to 580 are eligible for the best FHA rates. FICO scores as low as 550 will be considered for a slightly higher rate. This also makes it possible for a lot more homeowners to refi into a great FHA rate.

There's every reason to believe 2008 will be a great year for Real Estate in Central Texas. There is a pent-up demand for housing in Central Texas that has to break loose soon. The local economy is booming, and people are moving here in ever increasing numbers. The overwhelming majority of borrowers can get financing when it's time to buy a home. And we all know what a wonderful place this is to live. So my advice is make that move NOW.

The buyer activity seems to be increasing!

I went to hear Gary Keller (aka Keller of Keller-Williams Realty) speak a week or so ago on the state of real estate in the Austin area. It is true that we have felt the impact of the national downturn in the real estate market over the past few months. Inventories of homes on the market have been increasing. Prices are falling all over town (although not NEARLY as dramatically as in other areas of the country). All of these things have been signalling a shift back towards a buyers market, although many sellers have never figured that out yet! Nevertheless, it was getting pretty hard to find a motivated buyer in our market. Most of the agents that work with me were reporting that although they were able to get buyers to look, they were not making offers and that is what really fuels the market and initiates a sale.

Well I am here to report that things may be changing already in our market. When listening to Mr. Keller speak a few weeks back, he expressed that he felt we would be in for a slow or stagnant 2008, with recovery starting in 2009. In the past couple of weeks, I have been working with some out of town investors, attempting to purchase a few investment properties (this is my specialty, since I also have a property management company under my brokers license that is not affiliated with Keller-Williams). I am here to tell you that there ARE buyers in the market! Every one of five properties that we were making offers on, had multiple buyers making offers on them, many ABOVE full price. That really doesn's sound like a buyer's market to me. In fact, this blog entry is written to note that I am seeing STRONG trending towards another shift back towards a seller's market.

The next question would be "Why?" I suspect that we are starting to see the "Wait and see" buyers jumping back into the market due to the raising of mortgage rates. In the past three weeks the rates have gone up nearly a point from almost record lows a month ago. I beleive this has fueled the interest in buying now vs. later. In fact, I have had several calls from buyers in the last two days asking my opinion about where the mortgage rates are headed and both have called one of my mortgage broker contacts immediately to get the application process started to buy now before the rates price them out of the home they really want.

So why am I making this point? If you read my blog or my websites, I hope to get your attention that the picnic may soon be over. If you are needing to upsizew, downsize, buy and investment, buy your college student a condo, etc., take my advice and move quickly. If rates move up much more, things will stagnate probably, but why take that risk? Higher rates will simply limit your buying options now and in the future. If rates slide back down, I suspect that we are heading back into a sellers market, where prices will start back up again. Call my office to get us started on your next real estate purchase today. There may never be a better time!