Sunday, March 22, 2015

The Land Hunt - Let's Start with Financing, Part 2

By now, you've read enough blog entries to figure out that I think your financial health is very important if you're going to buy property. Whether it's your first house or a second home or land, money matters. You don't have to be rich, you just have to be responsible. Part of being responsible is about being honest with yourself. What does your financial situation look like today? What will it look like after you sign those closing papers?

Super simple. If your finances look like crap right now, they're going to get flushed if you buy property. So, maybe it's not time. But maybe you're not sure... Do this exercise:

My Net Worth

Why do this? Because the bank will make you do it anyway. If you default on your mortgage or land loan, they want to know you have something of value. Why? Because they'll slap a lien on it if they have to! Basically, we're talking about collateral. Or net worth. The good news? You don't have to have a bunch of cash in the bank to buy land. The reality? You DO have to have something you could sell to make some cash available. This is a ridiculously simplified explanation, but you get the drift. And to be clear, I'm writing for the novice. Young folks looking to establish themselves. You old farts can go listen to Dave Ramsey or something.

Make a grid or chart, and start listing what you owe, and what you're worth (what you're worth will include equity in existing property, cash in the bank, life insurance, savings, retirement, etc.). Your worksheet could look something like this:

Although you can't cash out Life Insurance if it's a Term Policy, and you wouldn't want to touch retirement, list them anyway. I hope it never happens, but should you die, those policies and accounts can pay off your loan.

Oh my God, Christy, you're morbid!

I'm a realist!  It's never too early to make a will. If you start buying property; including a home, get yourself a will! Make sure you spell out exactly who gets your stuff!  If you have a spouse or kids or partner, make sure they inherit your property!  If they are the beneficiaries of your life insurance and retirement money, then they'll use it to pay off the property. I do not want to die and leave Tammy strapped with all of the bills - including mortgages and land payments.  Do get over your immortal self and make sure your worksheet includes money that only pays out if you die.

So... do this little exercise. If you have a positive number in the bottom right cell, and it's bigger than a land payment, you're lookin' good!  Stay tuned for tips on how to find the perfect property!

No comments:

Post a Comment